By COLLIN GALLANT on January 24, 2024.
City power profits could plunge by 2030 and huge reserve funds built up by energy revenue may be needed to weather the transition to a low-carbon energy landscape, Mayor Linnsie Clark told attendees at the annual State of the City lunch on Tuesday.
The event is held each year to highlight city actions over the past year and sketch out priorities for the year ahead.
Both are underscored by the power utility, said Clark at the annual Kiwanis Club and Chamber of Commerce event at the Medicine Hat Lodge.
Last year, City Hall fended off widespread discontent over power prices by cutting local rates, handing out millions in utility credits and ordering a review of the power business.
That review, and a separate “Clean Energy” strategy that could suggest landmark projects in wind, solar and carbon capture – all at substantial cost – will determine the future of Medicine Hat’s 118-year old power business, said Clark.
“One of the top priorities of council is to carefully energy transition as we face the reality of a changing energy market directed by the Clean Electricity Regulations,” Clark told attendees, and that forecasts show “cash flow across the organization will be negative and stay negative for the second half of this decade.”
“We need to be prepared for the investment that will be required … whether we agree with the pending regulations or not, it’s the reality we are facing,” she said.
That could be addressed by capturing CO2 at the existing power plant and storing it underground at a city-led carbon hub.
Or, the city could build a large renewable generation facility, but either option “would easily add up to hundreds of millions of dollars,” she said.
“Yes, we own a commodities business and were are profitable at present, but we have to remain sustainable and find a way to stay competitive in a future clean energy market,” she said. “If we don’t, we’ll risk the revenue we enjoy today and be stuck with reclamation costs that threaten utility customers and taxpayers.”
Clark also touched on priorities of addressing housing affordability, social problems in the city centre and economic development initiatives.
But discussion of the clean energy regulations and end-use of city reserves was a departure for Clark and council that suffered heavy criticism last summer when record profits were blamed for high power bills.
“I’m the first to acknowledge it’s difficult to reconcile record earnings with rising utility bills, even though a significant portion is sales to the grid,” said Clark. “Residents are justified to ask the questions.”
The 2023 utility business plan states the power generation unit could still bank $80 million in profit next year, bringing the three-year total above $250 million. That’s even with lower local pricing enacted as a response to widespread protest last summer.
But, city forecasts predict lower export revenue after 2024 when new gas-fired plants and more renewables supply the Alberta grid with cheap power.
Medicine Hat would likely have to match or beat provincial pricing locally, and falling profits could be coupled with the need for major investment.
“The truth is the problem doesn’t have a clear answer at this time,” said Clark, adding renewable options don’t provide on-demand power production to meet demand – a requirement under the city’s power franchise – and developing CCUS technology is not yet meeting proposed requirements.
“Both are very expensive. But we’ve been diligent in building our financial reserves to meet obligations … what we’ve done less well is communicate what (the funds) are for.”
The city’s reserve balances were expected to end the year at a healthy $788 million in total, including the near $200-million Heritage Savings reserve that bears interest and subsidizes the municipal budget as a tax offset.
Another $200 million sits in the city’s capital project reserve, and another $294 million in unrestricted cash, used in the past to pay for well-abandonment but could also be used to bring on a new low-carbon generation source.
Money will also be required to decommission the river valley power plant when steam turbine operations become unprofitable.