Alberta Renewable Energy Carbon Offsets - The Electricity Grid Displacement Factor

Notable Announcements

Prior to the end of 2020, two notable announcements were made that will have a material impact on the economics of renewable energy projects located in Alberta, Canada.

The first announcement came from TransAlta and Capital Power, two of the major coal-powered electricity generators in Alberta, stating their plans to phase out all coal-powered generation, either through plant retirements, or coal-to-gas conversions, by 2023 – substantially earlier than the government-mandated retirements scheduled for 2030.

The second announcement came one week later from the Federal Government, stating that the Liberal government plans to increase the price on carbon from $30/tonne in 2020 to $170/tonne in 2030 under the Greenhouse Gas Pollution Pricing Act.

What is the Electricity Grid Displacement Factor?

The Electricity Grid Displacement Factor (EGDF), which can be better understood by referring to it as the Electricity Grid Carbon Displacement Factor, represents the amount of carbon that a renewable energy project is credited with displacing for each Megawatt Hour (MWh) of electricity generated in Alberta. With the accelerated phase-out of coal-powered generation in the province combined with a significantly higher price on carbon, the EGDF will likely decline at a faster rate than previously expected.

Why is the EGDF Important?

Forecasting the rate of change to the EGDF in Alberta provides a better understanding of the economics for renewable energy projects, and can better inform project development and acquisition decisions. This is because the amount of carbon a renewable energy project is credited with offsetting per MWh of electricity generated, combined with the market value of those carbon offsets, determines the revenue renewable energy projects can generate from the sale of carbon offsets.

What are the Impacts of the EGDF on Project Economics?

Holding the price on carbon constant, a lower EGDF would result in lower revenue for renewable energy projects from the sale of carbon offsets. However, it has been announced that the Federally-mandated price on carbon will rise to $170/tonne in 2030.

The question then becomes, will the announced increase to the price on carbon offset a forecasted decline to the EGDF? The answer is simple: it depends. It depends on: your views pertaining to the market price for carbon rising as currently announced; the rate at which renewable energy projects are commissioned, coal-to-gas conversions occur, and energy storage projects displace peaking gas projects; as well as a host of other variables that will play out over the years ahead.

With varying opinions on the future mix of electricity generation sources in Alberta and the rate at which these sources of electricity generation will change, it is paramount that renewable energy project developers and investors both understand and have the ability to adjust the underlying assumptions present in any EGDF forecast that they use. This enables them to conduct sensitivity and scenario analysis around the key variables that drive the forecast, making an informed decision based on a range of outcomes that they believe to be most likely.

How is the EGDF Calculated?

The current EGDF figure was published in the Carbon Offset Emission Factors Handbook in 2019 as part of the Alberta Government's TIER (Technology Innovation and Emissions Reduction) regulation.

Simply put, the EGDF is calculated as follows:

EGDF = (50% x Build Margin) + (50% x Operating Margin)

Build Margin: Total associated greenhouse gas emissions for projects commissioned during the data period (measured in tonnes of CO2e), divided by the total energy produced for projects commissioned during the data period (MWh).

Operating Margin: the annual percentage of time that each source of electricity generation is the marginal price setting technology in Alberta’s hourly auctions, multiplied by the weighted average emissions intensity for each source of electricity generation (measured in tonnes of CO2e).

For projects that displace grid electricity with distributed renewable electricity generation located at the point of electricity consumption (behind the meter projects), an upward adjustment factor is applied to the calculated EGDF to account for the line losses that are avoided as a result of not having to transport the electricity through transmission and distribution wires. This adjustment factor is a product of the calculated losses from the transmission and distribution systems during the data period.

The EGDF listed in the 2019 Carbon Offset Emission Factors Handbook - 0.53 tonnes of CO2e/MWh for grid-connected projects – will be updated in 2021 and every two years thereafter (in comparison to the previous review cycle which occurred every five years). This increased review frequency is intended to make the grid factor more responsive to the current composition of electricity generation sources in Alberta. To maintain a window of certainty for project developers and investors, the same EGDF applies to all projects that are commissioned within a period of two years after the EGDF is first approved and published.

Key Takeaway

The EGDF will likely decline at a faster rate than previously expected as a result of:

1. Accelerated coal retirements, which will likely increase the percentage of the Operating Margin comprised of lower carbon-emitting gas-powered generation;
2. Increased carbon pricing, which improves the economics of renewable energy projects and will likely increase the percentage of Build Margin comprised of zero carbon-emitting renewable energy projects; and,
3. The revised EGDF calculation methodology, which shortens the calculation period from a trailing 5-year to a trailing 3-year calculation interval.

Monitoring relevant announcements pertaining to all sources of electricity generation in Alberta, and quantifying the implications of these changes to the EGDF over time, is a key component for understanding the revenue that renewable energy projects can generate from the sale of carbon offsets, and ultimately, the economics of renewable energy projects in Alberta.

Scott Martin is a Principal at Zenith Power and can be reached at [email protected] for a discussion about how Zenith Power can help your team model and implement a carbon credit monetization or offset acquisition strategy.