August 4, 2023 | By Brady Chapman, Marissa Schippanoski, Austin Sevalrud, Kevin Mehi, Chad Eggerman

The Government of Alberta issued an order to pause the approvals of new power plants in the province, specifically to address what the Alberta Utilities Commission (the “AUC”) has stated to be a recent “historically high volume of new renewable (wind and solar) and thermal power plant applications”.  The moratorium on power plant approvals will be in place until February 29, 2024. During the moratorium, the AUC will conduct an inquiry into the impact renewable development has, or could have, on agricultural land, crown land and viewscapes across Alberta. The inquiry will also assess electricity system reliability and consider the implementation of mandatory financial security for renewable projects in Alberta to address projects’ decommissioning and reclamation obligations.

The moratorium impacts various stakeholders, including landowners, developers, consultants and investors. For renewable energy developers, the move creates uncertainty and potential delays in project timelines. Since the decision was made, renewable developers have lamented the lack of consultation before the pause was declared. Many developers invested substantial resources and time into preparing for or processing AUC power plant approval applications. The sudden halt is likely to create financial losses and added development and legal costs for developers, and delayed payments and further uncertainty for landowners. Many fear that that decision could chill future investment and the pace of development in Alberta’s renewable energy sector.

This article overviews the Government of Alberta’s decision and examines some commercial and legal implications of the decision for participants in the renewable energy industry in Alberta. The key takeaway being that regulatory change can happen at any time, and sometimes without consultation, which underscores the importance of flexibility in development agreements to account for unforeseen changes.

Background

Generation of electricity in Alberta has been deregulated since a major restructuring to the electricity sector in 1996. Under Alberta’s Hydro and Electric Energy Act (“HEAA”), the AUC is prohibited from considering the need for generation when deciding whether to approve or deny a power plant application. Instead, new generation is meant to be driven by supply and demand of electricity and the marginal price that generators expect to receive for producing electricity.

Under the Alberta Utilities Commission Act (the “AUC Act”) and the HEAA, the AUC is responsible for approving power plant developments in Alberta having regard to the social, economic, and environmental effects of the proposed power plant. The AUC has broad discretion to determine the process and information required to make its determination on these issues. To date, the AUC has followed a well-established procedure set out under AUC Rule 007 which has undergone several changes in recent years to adapt to changes in the power industry, such as increased renewable electricity generation and energy storage, and to respond to the Government of Alberta’s mandate to cut red tape and streamline regulatory approvals.    

Notwithstanding the broad delegation of these powers to the AUC, Section 75 of the AUC Act provides cabinet with the ability to regulate and restrict the AUC’s authority and functions. It is under this power that the Government of Alberta has ordered a halt to the AUC’s ability to approve power plant applications in the province and directed the AUC to conduct an inquiry into the “economic, orderly and efficient development” of electricity generation in Alberta.

Driven by market changes and the global push to reduce or offset emissions, Alberta’s de-regulated power generation market and abundant wind and solar resources have made Alberta an attractive jurisdiction for Canadian and international renewable power developers. The AUC has faced a significant increase in volume of power plant applications in recent years, particularly for wind and solar. And, more recently, Alberta has seen sophisticated intervener groups in AUC proceedings raising concerns about cumulative environmental and social effects of Alberta’s renewable power build out. While the AUC has not been persuaded of cumulative effects arguments to date, it has applied greater scrutiny to power plant applications generally and has recently denied several applications for environmental reasons.

Environmental and social effects aside, the Alberta Electric System Operator (“AESO”) is responsible for planning and operating Alberta’s electricity transmission system and has been working in the background to modernize its tariff and interconnection process. The approvals pause is backed by the Minister of Affordability and Utilities, suggesting that concerns over transmission costs and capacity may also have played a role in the government’s decision even though it falls outside of the scope of the AUC’s inquiry.

While the decision to institute a moratorium came as a surprise to industry, the current Alberta government’s desire to impose additional requirements on renewable power has not been a secret. For example, a call for additional reclamation requirements was foreshadowed by Premier Danielle Smith’s mandate letters to cabinet ministers in 2022 and 2023. Including in her November 2022 letters to Minster of Environment and Protected Areas, Sonya Savage, and to Minister of Energy, Peter Guthrie, directing that they “develop a plan to improve reclamation certificate issuance and bring reclamation requirements for renewable energy sources in line with the rest of the energy sector.”

Renewable energy projects must already comply with reclamation obligations, including various obligations established by more recent amendments to Alberta’s Environmental Protection and Enhancement Act that came into force in 2018. However, there is currently no requirement for owners of renewable energy projects to post financial security to guarantee their ability to fund these obligations, nor is there a liability management framework or collective industry fund to deal with stranded assets as there is for the oil and gas industry (which, for clarity, is regulated by the Alberta Energy Regulator under different legislation). That being said, the environmental and financial liability for the renewable sector is currently orders of magnitudes smaller than it is for Alberta’s oil and gas sector. Further, in the renewable sector reclamation obligations are often privately negotiated between project developers and landowners, so it remains to be seen what the Government of Alberta intends when it states that reclamation requirements need to be “in line with the rest of the energy sector”.

Although controversy over increased renewable electricity generation is not new and changes to the regulatory framework are to be expected, the immediate six-month halt to the AUC’s ability to approve solar and wind power plant applications comes as a surprise to many and will undoubtedly create hardship for developers and other stakeholders.

The Power Plant Approval Moratorium

So, how exactly was the moratorium instituted and what is included in the moratorium? On August 3, 2023, the Government of Alberta issued two orders in council: Order in Council 171/2023, which directed the AUC to conduct an inquiry into certain issues related to electricity generation in Alberta; and Order in Council 172/2023, which passed the Generation Approvals Pause Regulation  (the “Regulation”). The Regulation prohibits the AUC from approving new power plants producing renewable electricity until it expires on February 29, 2024. The Regulation applies to electricity produced from a renewable energy resource as defined in Alberta’s Renewable Electricity Act (i.e., hydro, wind, geothermal, solar and biomass).

There are limited exceptions to the moratorium, such as small power plants (less than 1 MW), isolated generating units (generating units providing electricity to remote communities or industrial areas), micro-generation units (generating units that are less than 5 MW and not connected to the grid), and certain amendments and time extensions for existing or approved but not yet constructed power plants. The definition of renewable energy resource and the limited exceptions indicate that the government intended to primarily target utility-scale wind and solar projects.

Order in Council 171/2023 directs the AUC to conduct an inquiry to address several issues related to power plant development and provide a report to the Minister of Affordability and Utilities by March 29, 2024. The AUC must inquire into the following:

• development of power plants on specific types or classes of agricultural or environmental land;
• the impact of power plant development on Alberta’s pristine viewscapes;
• implementing mandatory reclamation security requirements for power plants;
• development of power plants on lands held by the Crown in Right of Alberta; and
• the impact the increasing growth of renewables has to both generation supply mix and electricity system reliability.

During the moratorium, the AUC is tasked with providing procedural fairness to applicants affected by the approvals pause. Hours after the Orders in Council were passed, the AUC issued an announcement seeking public comments on three options: complete abeyance, partial abeyance, and approval hold only. The complete abeyance option means that no new applications will be accepted during the pause period, and existing excluded applications will be put on hold, with no further steps taken to complete their records or issue decisions. The partial abeyance option would allow the AUC to proceed with existing applications up to the point where the written evidence is complete, after which the applications will be placed on hold until the pause period expires. This option may provide some relief to developers with advanced-stage applications. The approval hold only option would allow the AUC to continue processing new and existing excluded applications without issuing any approvals until after the pause period. Many developers and stakeholders anxiously await to see what approach the AUC will proceed with.

Commercial and Legal Considerations

While the intent behind the moratorium appears to be to buy time for the government to implement policy improvements, the uncertainties and knock-on effects arising from the decision create significant legal challenges for various private parties.

1. The Extent of Changes Remain Unknown – More Questions than Answers

The most immediate concern is uncertainty regarding the extent of changes to come. The information released to announce the mortarium has made it clear that stakeholders can likely expect potential land use adjustments to safeguard valuable agricultural land and the introduction of mandatory reclamation and decommissioning security regimes for renewable projects.

It remains unclear how widespread the changes will be beyond what has been publicly stated. There is a large nexus of laws and policies already in place governing the development of renewable projects, including, without limitation, environmental laws, municipal bylaws and transportation laws. A plethora of assessments must be undertaken by renewable project developers before even reaching the AUC power plant approval application. For example, under the current application process, developers must complete glare and noise impact assessments, wildlife surveys and environmental studies. Under the current process, all these various evaluations inform how developers site projects and make up a substantial portion of the information that is provided to the AUC for a power plant approval application. One concern is whether the changes to be made will result in an overhaul of the ancillary laws and policies underlying these various assessments, which could cause further confusion or delays beyond the anticipated six-to-seven-month moratorium.

Industry will need to consider potential delays that may also be caused once new rules are released. It will take time for developers, consultants and advisors to learn any new rules and regulations. Once the new rules are issued, the influx of work for new or existing projects in Alberta may result in capacity issues for developers and their ability to engage with knowledgeable and experienced consultants and advisors to assist in navigating new legal regimes or policies.

In general, there are more questions than answers based on the limited information that has been released. Many questions loom large about the extent of any changes: Will any of the changes be retroactive and disrupt projects with existing approvals or require reassessments of previous evaluations for existing projects? Will local municipalities and landowners acquire new powers that reshape established development processes? How long will it be before the industry has clarity on any changes, seeing as the report from the AUC’s inquiry is not due to be delivered until March 29, 2024?

2. Specific Land Issues

In Alberta, most utility-scale renewable projects are built on private land pursuant to privately negotiated option to lease and lease agreements. These agreements are often structured in stages that align with the stages of development. Typically, an option to lease and lease agreement will be broken into at least two stages. Firstly, the agreement will include an option or due diligence period where a developer is provided access to potential lands and permitted to conduct crucial site evaluations to determine the viability of the lands, begin project siting, and undertake other assessments required for permitting applications. Secondly, the agreement will have a lease period that commences once the project is fully permitted, and construction commences.

Option or due diligence periods usually only last a few years before developers need to either abandon the project and terminate the option to lease and lease agreement or proceed to enter into the lease term and pay the landowner a higher rental amount. Rental payments during the option or due diligence period are typically much lower than during the lease term in recognition that the project is still in the assessment and pre-development stage.

A major concern with the current moratorium is how it will impact project timelines for projects in the early development and permitting stage. It is not uncommon for developers to be working within tight timelines in the option or due diligence period to complete all site assessments, project sitting, and project permitting work before the option or due diligence period ends. Developers will need to consider how this moratorium impacts their anticipated development timelines and whether the delays will impact their ability to complete all required work within the existing option or due diligence period. Developers may want to review their land agreements to assess what remedies they have available to extend or modify an option or due diligence period.

The possibility of legislated reclamation and decommissioning security requirements may add an additional complication under option to lease and lease agreements. Many landowners have already negotiated their own reclamation or decommissioning security requirements into option to lease and lease agreements. Existing provisions may or may not contemplate government-mandated security requirements. There are also many option to lease and lease agreements that will not contain reclamation or decommissioning security requirements.

To be proactive, developers should review their option to lease and lease agreements to determine whether their existing agreements include reclamation or decommissioning security requirements. If such provisions already exist, developers should begin considering how any legislated reclamation and decommissioning security requirements may interact with the privately negotiated provisions. For example, does the existing provision contemplate potential legislated requirements, or is it possible that a developer will be left with two conflicting or duplicative requirements? It may be possible for developers to get ahead of potential issues through amendments to existing option to lease and lease agreements or by amending existing template agreements to address any potential conflicts. Developers will also want to have legal counsel review applicable suspension, termination and force majeure clauses in existing executed agreements in force with landowners and third parties providing services related to the lands.

3. Other Contractual Issues

Aside from land agreements, the mortarium may also impact various other development, financing, or consulting contracts that developers enter into prior to the AUC permitting process. It is not uncommon for renewable project development, financing or consulting agreements to be based on or tied to project milestones or preestablished timelines. Disruptions to renewable project schedules can trigger a cascade of effects on various stakeholders based on various agreements. For example, contractors or consultants with milestone-based compensation agreements may need to recalibrate their timelines and terms. Lenders may also need to undertake new financial and risk assessments based on delayed development timelines for early-stage projects they committed to finance. A delay of six-to-seven months could impact procurement costs or even impact potential project revenues, such as the number of offsets projects which will be able to be created based on an electricity grid displacement factor, which informs the number of offsets that a renewable project can produce, which is scheduled to decrease yearly.

Prospective purchasers of projects may also need to reconsider their valuations of a target taking these factors into account and the fact that they may be required to post financial security for the acquired assets. Provisions may need to be considered in the relevant acquisition agreement to address future security obligations, particularly if such a requirement applies retroactively.    

To navigate contractual uncertainty, parties will need to closely examine existing contracts and any applicable provisions, such as a Force Majeure, Change of Law, Suspension, and even Termination clauses. Understanding these clauses may be crucial in determining available options in response to the moratorium or in negotiating amendments to existing agreements required due to the moratorium.

Embracing Flexibility Amid Uncertainty

The Government of Alberta’s moratorium on power plant approvals underscores the importance of building flexibility into development contracts. Development-related agreements must account for unforeseen challenges and ensure that contractual commitments can be met despite evolving circumstances. This will be particularly important for stakeholders continuing to develop renewable projects over the coming months as industry waits for new rules or regulations to be released.

The decision to institute the moratorium without consulting industry serves as a reminder to not only renewable project stakeholders, but also to stakeholders in other industries, about the importance of having well-drafted, flexible agreements. The Government of Alberta’s decision is viewed by many as unprecedented but could set a precedent for how future governments decide to change legal regimes in other industries. Participants in other industries should consider reviewing their existing agreements, and particularly Force Majeure, Change of Law, Suspension and Termination provisions, to ensure they remain flexible should they ever find themselves in a situation similar to the one that renewable developers and stakeholders now face.

DISCLAIMER

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice. The viewpoints expressed herein are not the views of any client of the firm. Do not rely on any information in this article without first obtaining legal advice. Contact Procido LLP (www.procido.com) if you require legal advice on the topic discussed in this article.