Decision to Terminate DCG Credits Could Impact Renewable Energy Projects in Alberta

This blog was prepared with the assistance of summer law student Scott MacKenzie.

Customers may end up paying less for electricity, but a recent decision from the Alberta Utilities Commission (“AUC”) could have a chilling effect on the development of renewable energy projects in the province.

On June 7, 2021, the AUC released decision 26090-D01-2021, an important ruling for Distribution-Connected Generators (“DCGs”) across Alberta. DCGs are small electricity generators (80 megawatts or less) connected to low-voltage, local distribution networks. These generators are not connected directly into Alberta’s electricity transmission grid. DCGs sell electricity to utility companies, which in turn sell the electricity to ratepayers.

Provincial utilities ATCO Electric Ltd., ENMAX Power Corporation and FortisAlberta Inc. have long been granting Distribution-Connected Generation Credits (“DCG Credits”) to DCGs. These credits are intended to compensate small generators that are not connected to Alberta’s transmission grid for supplying electricity to utilities. Utilities ultimately pass the cost of DCG Credits on to customers.

In its decision, the AUC determined that DCG Credits lead to electricity rates that are neither just nor reasonable for ratepayers, and ordered that DCG Credits be reduced by 20% per year until they are fully phased out by January 1, 2026.

Background on Alberta’s Electrical Grid and DCGs

Alberta’s energy system is designed to provide the lowest-cost electricity available to its ratepayers. Section 121(1)(a) of the Electric Utilities Act, SA 2003, c E-5.1, requires the AUC to ensure that tariffs between electrical utilities and their customers are “just and reasonable.”

Utilities buy electricity and then resell it to their customers. The tariff customers pay is intended to reflect the cost a utility incurs to buy electricity off the grid and transport it to customers. Transmission fees are also charged to improve, maintain and operate Alberta’s transmission grid, which transports large amounts of power over long distances. The large, high-voltage powerlines that connect power plants to substations are part of the transmission grid.

The transmission grid differs from the distribution grid, which consists of smaller powerlines designed to carry lower volumes of power on a local scale. For instance, the low-voltage powerlines that carry power to residential homes are a part of the distribution grid. The distribution grid is not designed to carry large volumes of power or high voltages, nor is it designed to carry electricity across long distances.

DCGs, unlike most electricity generators, are connected to distribution grids. They tend to be smaller generators and only operate within their respective distribution grid. Many alternative energy generators, such as solar power and wind generators, are DCGs.

DCGs allow utilities to serve their customers with power while avoiding transmission costs, since the power provided by DCGs does not travel through the transmission grid. In return for not using the transmission grid, some utilities pay DCGs a DCG Credit. These credits are intended make up the difference between what the utility would have paid for electricity off the transmission grid what it actually paid by using the DCGs’ power. Utilities pay for DCG Credits by passing the cost on to customers through tariffs.

The AUC’s Decision

The AUC had to determine the following two issues:

  1. Do DCG Credits result in a just and reasonable tariff for ratepayers?
  2. Are they in the best interests of Alberta’s electricity market?

The AUC determined DCG Credits do not result in just and reasonable tariffs for ratepayers because they increase costs of electricity and do not provide ratepayers with any net benefit.

The AUC also determined DCGs aren’t in the best interests of Alberta’s electricity market, but to understand why, it’s important to understand how the Alberta Electric System Operator (“AESO”) works.

The AESO is charged with buying, selling and distributing electricity from generators to utilities and, ultimately, to customers. It also is in charge of developing and paying for Alberta’s transmission grid infrastructure.

Under section 14(3) of the Electric Utilities Act (Alberta), the AESO cannot operate on a profit or loss. For this reason, it charges utilities transmission fees to pay for the transmission grid’s maintenance requirements, infrastructure developments and any sunk costs. When utilities use DCGs to provide power to their customers and avoid transmission costs, the AESO does not receive payment for the maintenance and development of the transmission grid, which results in an operating loss. Because the AESO cannot operate on a loss, it charges utilities quarterly “true-up” fees to cover the loss.

Just like the cost of DCG Credits, the cost of true-up fees are passed on to the utility’s customers. In the end, ratepayers end up paying transmission costs twice: once in the form of a DCG Credit and again in the form of a true-up fee. The AUC noted the problem is compounding: the AESO, looking to avoid operating losses and charging true-up fees, increases transmission fees, making transmission fee avoidance and the use of DCGs more attractive to utilities, resulting in even higher fees being passed on to ratepayers.

During the AUC proceedings, proponents of DCGs argued that DCGs do provide benefits to ratepayers because they reduce the load on transmission lines (which have physical limitations on the amount of electricity they can carry), and therefore increase Alberta’s total electrical system capacity. The AUC, however, identified problems with these arguments.

Even if DCGs, by reducing the load on transmission lines, resulted in decreased maintenance and upkeep costs for Alberta’s transmission line system, the AESO still needs to pay for the sunk costs of investments in the transmission grid. This essentially guarantees that the AESO will always need to do some level of “truing-up” after DCGs are used.

Additionally, the AESO cannot currently measure the savings DCGs provide by reducing the cost of maintenance or upkeep on transmission lines. In the end, the AESO assumes DCGs provide no benefit to the transmission grid and trues-up the total amount of avoided transmission costs.

In addition, the AUC noted that capacity is not a major issue in Alberta. DCGs, in the view of the AUC, are attempting to solve a problem that ratepayers do not really have.

The AUC raised two additional concerns regarding the fairness of DCG Credits.

First, DCG Credits are not available to all power generators, thereby creating an unlevel playing field. DCGs fortunate enough to receive DCG Credits may be able to unfairly undercut power generators that cannot receive DCG Credits when transmission costs are high. Indeed, a generator that cannot receive the credits might actually be able to produce cheaper electricity for ratepayers.

Second, DCG Credits change the outlook and strategy for investors in Alberta’s electrical grid. DCG Credits may encourage investors to focus on strategically investing to claim DCG Credits, therefore discouraging potential investments in cheaper or even more sustainable electricity that would be interconnected in the transmission line system.

In the end, after determining that DCG Credits do not lead to just and reasonable rates for ratepayers, the AUC ordered that utilities phase them out. Utilities must reduce DCG Credit payments by 20% of their current rate per year, beginning on January 1, 2022, until they are fully phased out by January 1, 2026.

Potential Impact

While the AUC’s decision may reduce electricity rates for ratepayers, it could potentially dissuade investment in Alberta’s electrical grid.

Not only will this decision make it more difficult for current DCGs to operate profitably, but it may also be viewed by some investors or project developers as creating instability or unpredictability in Alberta’s electrical grid. For instance, several current DCGs may have decided to establish their operations in a certain location within the province due to the potential for receiving DCG Credits, which impact their bottom line.

By deciding that the AESO did not, and could not, measure the benefits that DCGs provide to ratepayers by reducing strain on the transmission grid, the AUC made a statement about the type of transmission-grid benefits it considers quantifiable.

The short-term effect of this decision is that the AESO’s inability to measure the benefits DCGs provide has become a cost for DCGs through no fault of their own, possibly reflecting a lack of effort on the AESO’s part.

In the longer term, this decision may have a chilling effect on the development of smaller-scale alternative energy projects in Alberta, and potential development of microgrids that supply locally sourced energy to municipalities or First Nations.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.