Will This Merchant Transmission Investment Pay Off?

The Montana-Alberta Tie Line (MATL) has been fully operational since September 18. MATL is a 230 kilovolt, 345 kilometer long power transmission line that connects the Alberta Electric System Operator (AESO) to the NorthWestern Energy  (NYSE: NWE  )  power grid system at Great Falls, Montana. What is different about this line is that it is built, owned, and operated by an investor-owned public company, Enbridge (NYSE: ENB  ) , as opposed to a public utility or government cooperative. 

Enbridge moved into the electric transmission arena with its 2011 acquisition of Tonbridge for $20 million.  It had to pay a 116% premium over Tonbridge's pre-deal closing price on the Toronto Ventures Exchange to seal the deal. Enbridge also agreed to repay about C$50 million of Tonbridge's debt, negotiate a $150 million loan with the Western Area Power Administration of the U. S. Department of Energy, and incur another $150 million to complete the 300MW Phase 1, and build out the 550MW Phase 2 of the MATL project. With all of that Enbridge can now call itself a "merchant" power line owner and operator.

What does it take to be a Merchant Transmission owner?
Alberta will always need to import electricity to meet current and anticipated unmet demand. Montana is electrically (nearly) isolated from the Columbia power grid, but has a strong renewable energy standard with wind in the portfolio. Montana is ranked No. 1 in the U.S. for wind power potential, especially in western Montana where the MATL is sited. Wind farm owners need a grid connection to remain viable. The tie-line is a win-win-win for wind farm owners/investors/developers, the Alberta electricity market, and for renewables development in Montana. Is it a win for Enbridge too?

MATL is Alberta's first merchant intertie and the province's first interconnection to the U.S. Alberta electricity consumers will not bear the cost of constructing or operating this line. Enbridge is financially liable for all aspects of the line. One of the major blocking issues is securing rights of way for construction. Enbridge has capability and experience with gas and liquids pipe rights-of-way, and all of the local requirements, sensitivities.

As with any infrastructure project there are always local snags. This time it was the definition of eminent domain. On May 12, 2011 Montana Governor Brian Schweitzer allowed Montana House Bill 198 (HB 198) to become law by not vetoing it. The law allowed MATL to be labeled a public utility project thus allowing MATL to annex private property for the transmission right of way. Without this law, MATL could not have completed Phase 1 300MW or continue construction to 600MW of capacity, which Enbridge did on September 18, 2013.

How does a merchant transmission owner/operator get paid?
The value of the line is embedded in the spread of electricity prices between the system marginal price (SMP) of the Alberta Electrical System and Montana: more accurately, between Alberta Electricity System Operator (AESO) at the north end of the line, and the NorthWestern sub-station in Great Falls, MO.  How AESO sets the pool price is critical for MATL's profitability.

The Alberta pool price is determined by the highest priced generator dispatched to meet the demand for electricity. Generators can submit hourly offers to the AESO that include the amount of energy they will provide at a specific price. The AESO's automated Energy Trading System arranges all the hourly offers from generators from the lowest to the highest price. The AESO system controller dispatches generating units in ascending order of price until the demand requirement is satisfied. The highest priced unit dispatched is the marginal unit and its offer price sets the system marginal price for that minute. The hourly pool price is the simple average of all system marginal prices in the hour. This price can sometimes reach the legal limit of $990/MWh, or be as low as $0/MWh which would mean that very inexpensive hydro and wind, and low industrial, commercial, and demand would have been bid into the market. The merchant transmission owner would buy power in Montana and sell it in Alberta to get at the value of owning the tie-line.

We can illustrate the MATL transmission cash flow by using some simplifying assumptions. The MATL operator might buy power at $30/MWh in Montana, and sell it to the AESO at the SMP, say $50/MWh. The operator would keep the $20/MWh spark-to-spark spread less any operating costs (say it averages $1/MWh) for an operating margin of $19/MWh. Suppose that 300MW of capacity on the line are used for 6,000 hours a year. That would give the operator $19/MWh spread times 300MW capacity times 6,000 hours or $34.2 million per year, every year on average for let's say 10 years. If equity owners require 10% to compensate them for the risk of putting their money into the Enbridge MATL investment, the Enbridge $150 million equity stake would begin to yield dividends at about year 6 into the life of the MATL investment.

What does the future hold?
We are watching the Alberta-Montana spark-to-spark spread closely for Enbridge and for NorthWest Energy. More is happening in the Montana-Dakota energy market as well: The Bakken shale deposits are contiguous to the Alberta shale oil. Power, natural gas, liquids, and crude oil are inextricably wound together. That's a portfolio with various energy exposures worth investigating further. And that's just the upstream – MATL and midstream pipe and power lines are another story to continue to tell...

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