Uncertainty over government electricity policies and the energy transition are spooking the market, driving an undervaluation of Calgary-based independent power producer TransAlta Corp. TA-T, says the company’s chief executive.
TransAlta announced a $150-million share buyback program Friday to help turn that around, and share prices climbed by around 6.2 per cent in response, to $10.08. The company also reported a loss attributable to common shareholders of $84-million compared with a loss of $163-million a year earlier.
Falling power prices have conspired with regulatory uncertainty on three fronts to shake investor confidence, chief executive John Kousinioris said in an interview: the federal government’s proposed clean-electricity regulations and, in Alberta, the government’s market structure review and its ban on renewable project approvals.
Mr. Kousinioris said people are expecting the industry to do a better job of growing renewables to meet decarbonization goals, but he stressed that has to be done “in a way that makes economic sense and is set in a timely way with appropriate returns.”
Market uncertainty has affected companies across the power sector, but TransAlta is more exposed given its huge footprint in Alberta, where a series of reviews of the electricity market are together set to reform the province’s power grid and regulatory regime. Premier Danielle Smith has also mused about pulling electricity back under government control.
Asked how TransAlta would protect the value of its Alberta portfolio were that to happen, Mr. Kousinioris told analysts on an investor call Friday that the government stepping in to create generation is “very much an extremist scenario.”
“When we look at our investment decisions, when we look at the optimization of our fleet going forward, it doesn’t candidly feature in our assessment,” he said.
Late last year, TransAlta announced a $658-million acquisition of Heartland Generation Ltd. and its power-generation business in Western Canada, a deal that requires approvals from the B.C. Utilities Commission, the Federal Energy Regulatory Commission (FERC) in the U.S., and Canada’s Competition Bureau. Mr. Kousinioris told analysts that B.C. has given it the green light and he’s expecting that approval from the FERC is imminent.
The Competition Bureau is the most significant hurdle.
TransAlta is already the largest generator in Alberta, and the deal will give it another 1,844 megawatts of gas-fired generation in Western Canada, mainly in the Prairie province. As such, the bureau is assessing how the deal would affect power pricing.
Mr. Kousinioris said in the interview he thinks the impact will be limited given the record amount of natural-gas generation additions slated for Alberta’s grid early this year. But with the provincial government in the midst of a review of the power system, he acknowledged that the marketplace is undergoing something of an evolution.
The Heartland deal comprises various coal-to-gas and cogeneration plants, including “peaking assets,” which run when they’re needed to provide baseload power when renewables aren’t producing electricity.
It also includes the proposed Battle River Carbon Hub, Heartland’s ambitious plan to convert the Battle River Generating Station, a legacy coal-fired generation facility, to a clean-energy production hub involving hydrogen and carbon capture and sequestration.
The Battle River project is “pretty cool,” Mr. Kousinioris said, and speaks to how new generation options are evolving and entering the market.
Even as TransAlta chases a 2045 net-zero target, Mr. Kousinioris said the value of the natural-gas-heavy deal lies in the important role the assets will play in securing reliable power in Alberta over the next decade.
A reliable grid became top of mind for Albertans in January, when it struggled to meet demand for power during a brutal cold snap. The Alberta Electric System Operator, which regulates the grid, warned residents to reduce power consumption to stave off rotating blackouts, and the provincial government triggered Alberta’s emergency alert system, urging residents through their cellphones and televisions to limit electricity use immediately.
It highlighted the political debate over the reliability of the system and the feasibility of reducing its carbon emissions to net zero.
“One of the things we found in January here in Alberta was how reliability is an issue,” Mr. Kousinioris said.
“We talk about that three-legged stool of the evolution of the marketplace – of affordability, reliability and decarbonization or clean generation. You need all three, but if one leg is broken the whole thing is broken.”
TransAlta is banking on assets under the Heartland deal being needed for two things: to underpin industrial power needs into the 2030s, and have the peaking plants kick in when the wind isn’t blowing and it’s not sunny.
“I think they will be needed until storage or hydrogen or SMRs or carbon capture or whatever the technological pathways are – and I think it’ll be all of the above, candidly – are going to come in and be feathered into the system to make it cleaner and equally reliable as it is today.”