“You cannot go wrong by using existing resources for as long as they are economic and by valuing people and their pocketbooks.” Dawn Farrell, the CEO of TransAlta Corporation, told a room filled with energy professionals that great value can be found by focusing on a few essential principles in the power sector. In an eye-opening speech delivered to the APPrO conference November 13, Ms. Farrell outlined 12 “Lessons from the trenches,” sharing key insights from more than 30 years in the electricity business. Although Ms. Farrell was careful to stress that these lessons were her own personal opinions, it’s clear they grew out of experience gleaned from her career in the energy sector.
The investment climate for energy is changing dramatically, to the point that traditional approaches to financing power projects may not work well in the years ahead. A general shift to shorter term contracts could change key parameters for competition. Despite these changes, Ms. Farrell said, it still makes sense to focus on reducing consumer costs, stabilizing the environment for investors, fostering competitive behaviour and extending contracts for existing assets where possible.
Stressing her key message, she said, “The only thing I know for sure is that – regardless of electricity policy, market structure and changes in technology – one can never lose site of the only thing that matters – which is low prices for consumers. … Customers want electricity to be cheap. Not affordable, not reasonably priced. Cheap.”
Although it may seem like familiar territory, a lot of value is available from existing assets. “Re-contracting existing assets – whether they are held by government agencies or private companies – can reduce prices, lower risk and create reliability. Ontario has some of the most cost-effective generation in Canada – fancy new market structures are not necessary for extracting value from this reality. … Contract extensions are smart and should be part of a pragmatic package of ensuring low prices for customers.”
Well-meaning experts have worked hard to create competition in the power sector. While some important market functions have been cultivated, it would be a mistake to overstate the accomplishments. She said, “Electricity Markets are in fact – not markets! They are administrative constructs with lots of complex regulatory rules and provisions.” Practically speaking, she argued that “[P]olicy makers must demand that the institutions and the players lay out how their construct and their rules will attract new investment, promote innovation and lower prices for consumers over the long run.”
Reiterating her central message, Ms. Farrell encouraged everyone in the industry to “make sure that every change to the system results in lower prices for consumers.” The complete text of Ms Farrell's remarks is reproduced below.
Notes from The Trenches: 12 Lessons from 30 Years in the Electricity Business
Presentation by Dawn Farrell, President and CEO, TransAlta Corp.
From the APPrO 2018 conference, November 13, 2018
Good morning everyone and thank you to the organizers for the opportunity to address this audience. This morning I’d like to share with you a few thoughts on what I’m calling “Notes from The Trenches: 12 Lessons From Over 30 Years in the Electricity Business.”
These are very personal views based on experiences that range from negotiating rates packages with regulators, making investments as a regulated utility, negotiating IPP deals as a non regulated electricity company, building over 2000 MW’s of behind the fence generation for direct customers, starting and running an energy marketing business, moving through de-regulation, changing the path of TransAlta significantly in response to aggressive climate change policy that includes carbon taxes, an uneven playing field incenting renewable generation and an early and unexpected phase out of coal, and working recently to transition the Alberta market from an energy only market to a capacity market.
I have been in the trenches for over 33 years now and the only thing I know for sure is that – regardless of electricity policy, market structure and changes in technology – one can never lose site of the only thing that matters – which is low prices for consumers. That will be the underlying theme of my story today.
So let’s get started.
Lesson One. The cost of electricity generation technology rose constantly from the early 1900s to about 2000 – economies of scale pointed to larger and larger plants with significant dollar investments. A coal plant that cost $400 million in 1970 cost $1.8 billion by 2010 and it wasn’t just inflation that created this change. Today – people are building relatively small nuclear facilities for astronomical prices. 30 years ago – all electricity generation decisions were 30 to 100-year bets. Today – a 30-year bet is likely to bankrupt customers and contribute to energy poverty. Today – costs are falling for the first time ever.
Ontario signed renewables contracts for wind and solar at $150 to $400/MWH. Alberta today is signing wind contracts at $30 and developers in the US are building solar for $18/MWH. Anyone who commits to 30 to 50 years of pricing over $80/MWH is committing consumers tomorrow to recovery of stranded costs. As prices for intermittent generation falls and advances in storage and fast ramping gas increase – contract lengths for all generation must shorten.
Customers today, don’t want to take on the risk of decades-long contracts unless they themselves are making 20-year bets. Today we can match a behind the fence co-generation contract to the life of a mine or a chemical plant for a large industrial customer. But we cannot and should not convince a residential customer to sign up for 50 years of coal, gas, nuclear, wind or solar. No residential or small commercial customer should be forced to take on certain future stranded costs.
Today – there is no practical market structure or regulatory regime that deals with falling prices of intermittent renewables generation and the coming advances in storage technology. They are yet to be invented and I’m hopeful that Ontario will be one of the first places to recognize this reality as it moves ahead both utilize the existing assets that it has in place and bring on new assets in response to growth.
Lesson Two. Most customers – big or small – want to be environmentally responsible. They have different views on what green is – many customers see natural gas as clean and many see renewables as green. All consumers want to be involved in the transition to fully green and very few consumers want to pay more to get there faster. Customers will allow the use of thermal to balance the intermittency of wind and solar if it keeps prices low. However, they also want to see power companies incented to invest in new and cleaner forms of generation and storage. They are not sure if carbon taxes are the right way to get this investment – they don’t like carbon to be taxed and go to general revenues. But they are contented to have some sort of fee for carbon if they can see new technology as an outcome of paying those costs.
In my view – paying carbon tax does not clean up a coal plant! For our company – we are transitioning our coal plants to gas so that we can provide firming capability to cheap and abundant renewables. Our coal to gas investments are a response to what we see as energy and environmental values that are here to stay.
Lesson Three. Customers care enormously about prices. Specifically, and not to put too fine a point on it, they want electricity to be cheap. Not affordable, not reasonably priced. Cheap. They will pay fees for cable, phones, data, streaming movies – but if you suddenly find your electric bill at anything over about $250/month – you are in deep trouble!
Cheap electricity will always be in vogue. Cheap electricity is a birth right and it’s an entitlement. Using prices to get people to consume less will never work. It means something to an economist – it’s theoretically correct – but practically – if you use price to ration electricity – you do it at your peril. And justifying high electricity bills so that you can hold onto old and expensive technology will never work. The industry, our AESO’s and our policy makers have to make sure that every change to the system results in lower prices for consumers. And when investors can see that a technology lowers the bill for customers – that is what will give them confidence to invest.
Lesson Four. People will value the use of subsidies to incent new technologies as long as they cannot see a relationship between the taxes they pay and the use of those technologies in the system. And, producers will ask for subsidies well beyond when they are necessary. The subsidies that were handed out over the past 20 years to bring on wind and solar, worked extremely well and we now see wind and solar prices well below what anyone would have ever imagined. Governments no longer need to hand out long term contracts for wind and solar – they’ve done their job and the private sector is now taking over.
We are seeing a lot of commercial and corporate clients that want wind and solar and they are contracting for 12 to 15 years to have these contracts in their portfolio. This is the market working and this should be celebrated. But governments need to know when to stop subsidizing and when to step aside and let the market take over. This requires deliberate decisions if you honor the pocket books of hard working people.
Lesson Five. Low prices and cheap power are good for economic growth. All advanced economies benefit from low energy prices. What’s good for consumers is also good for economic growth. Economic growth allows us to provide jobs and creates taxes for hospitals and schools. Economic growth creates prosperity. Electricity is the veins that moves blood to the heart of the economy. Abundant and low costs always matters.
Lesson Six. Power is always political. People believe that basic services like water and power should be free and, only begrudgingly pay a nominal amount to get them. But electricity is as close to a common good or a right as you can get. For this reason, the views of the public must be central to electricity planning, right from the start. Understand that, and you will create market structures and regulatory regimes that work over the long term.
Lesson Seven. Infrastructure – and by extension prices – costs more the longer you wait and the more complex your regulatory environment is. Stakeholder opposition will run up the project development tab in a blink. Land values come into play at every turn. Delays cost billions and they reduce the competitiveness of our economies.
Which means governments must be very thoughtful about decision rights if they ever want to see large infrastructure built in this country again. Unforeseen hurdles can be immensely costly, economically and politically. Private sector investors simply will not take risks in the current environment.
Lesson Eight. NIMBY is often not about environmental issues, it is more often about land values. NIMBY will never go away. So, even as regulators and policy-makers rethink the scope and legal requirements of stakeholder engagement they must acknowledge that there will always be opposition to development if it affects the market value of adjacent property. If we lean into this – we may come up with new mechanisms for compensating and sharing the costs and benefits of infrastructure development.
Lesson Nine. Private sector capital is essential if you want to continue to invest in electricity infrastructure in the future. Private investors do not expect certainty and they do take risks. But arbitrary rules, that come from out of the blue and that pull the rug from under their investments – will stop investors from bringing their capital to our party. Today – it’s difficult – if not impossible to attract private sector capital to electricity companies in Canada as we are now in a situation where extreme views of what electricity policy should be have turned risk to uncertainty. If an investor cannot price a risk – they pull their money and put it somewhere else. So creating policies that keep prices low, impacts on the environment minimal, and room for technological innovation is an imperative.
Lesson Ten. Electricity Markets are in fact – NOT markets! They are administrative constructs with lots of complex regulatory rules and provisions. There is no one-size-fits-all! There is no such thing as a capacity market or an energy market. No group of economists have come up with a market structure that can account for the complexity of mixing different forms of generation with different contracting requirements and different resource advantages. What works in Alberta will not work in Ontario.
How to allocate capital to very different forms of generation with very different attributes requires careful discussion between policy makers, AESO’s, customers and investors. Sudden changes in the rules will scare away investors. And at the same time, the lack of an ability to change rules quickly, will saddle customers with future costs that can never be paid off. So talking markets when there is no such thing is nonsense. What instead must happen is policy makers must demand that the institutions and the players lay out how their construct and their rules will attract new investment, promote innovation and lower prices for consumers over the long run. Policy makers must say no when the industry creates structures that increases prices to consumers. They must play for consumers and their pocketbooks.
Eleven. Hybrid regulatory structures can work. Ontario is our case in point. Re-contracting existing assets – whether they are held by government agencies or private companies – can reduce prices, lower risk and create reliability. Ontario has some of the most cost-effective generation in Canada – fancy new market structures are not necessary for extracting value from this reality. At TransAlta, we have created significant value for over 1000 MW of our customers by simply extending contracts for 10 years at good prices. Contract extensions are smart and should be part of a pragmatic package of ensuring low prices for customers. What works for the regulated assets here in Ontario – works for the private players as well. The key is to make bets over 15 years – not 30 or 50 – so that consumers have the chance to be involved in future lower cost and greener energy as it comes to the market.
Lesson Twelve. Market based constructs take many forms and can bring choice and flexibility. Blind allegiance to any market structure as the answer is impractical. Practical application of market-based principles for allocating scarce capital resources by institutions that have the support and confidence of all political parties – regardless of philosophy – is the most likely to give the people what they want – abundant electricity at low prices. Iif you respect people and their pocketbooks in this equation – you simply must find pragmatic solutions and support institutions that care passionately about prices. AESO’s across North American must have a duel mandate – reliability and lowest possible prices for consumers. Both/and – not either or.
Lesson 12 is really top of mind for me these days. A policy context that leverages off existing resources, incents new technologies, honors the pocket books of consumers and creates enough certainty for investors for them to bring their dollars to the game is possible. As government changes here in Ontario and as there is a need to both pay for the past and set up for the future – I hope some of these lessons can be useful observations on how you continue to evolve the system here. You cannot go wrong by using existing resources for as long as they are economic and by valuing people and their pocketbooks in your equation. You can go wrong by sticking to ideology and creating ongoing and unnecessary chaos.
With that I’ll close and I hope that my comments help set a strong context for discussion, debate and implementation of strong policies that will serve customers and attract investors.
Thank you.