Powering Up: New Directive Advances Alberta’s Geothermal Regulatory Framework

On August 15, 2022, a key missing element of the regulatory framework for the development of commercial electricity producing geothermal facilities in Alberta was addressed by the release of Alberta Energy Regulator (AER) Directive 089: Requirements for Geothermal Resource Development (Directive). The Directive provides guidance on the requirements for applications for the construction and operation of geothermal facilities. This bulletin outlines the overall scheme for geothermal development in Alberta now that applications can be made for geothermal facilities.
 
While the AER’s press release on the Directive declares the geothermal regulatory scheme complete, uncertainties around issues such as royalties and public land dispositions remain.

BACKGROUND ON GEOTHERMAL POWER

The completion of the geothermal regulatory regime will allow for the advancement of new energy development opportunities that are in line with Canada’s “net zero” objectives, which include a commitment to net-zero greenhouse gas (GHG) emissions by 2050 and a net-zero electricity grid by 2035. Meeting these goals will require the development and deployment of low- or no-GHG energy sources. While wind, solar and natural gas, with and without carbon capture, are projected to be the primary near-term contributors to these net-zero goals in Alberta, geothermal should not be overlooked.
 
Geothermal energy, unlike some other renewable energy sources, can be used for baseload power generation. Baseload power requires a consistent and reliable source of energy. Geothermal power plants can operate continuously at up to 98% capacity. Therefore, unlike intermittent and variable wind and solar energy, geothermal facilities harness the heat from the earth’s core that is a constant source of energy. This constancy avoids the need for storage to account for the intermittent production of electricity using wind or solar.
 
While there are several types of geothermal facilities, the general process involves injecting water into deeply drilled wells and using the earth’s core to heat the water and create steam. The steam powers a conventional turbine to produce electricity. Most commercial scale geothermal facilities include production and injection wells, a gathering and injection system, a power generation plant and an electricity transmission line. Since the wells used in geothermal energy production are drilled using technology similar to that used in Alberta’s oil and gas industry, Alberta’s extensive oil and gas expertise lends itself to geothermal energy development.

REGULATORY FRAMEWORK FOR GEOTHERMAL IN ALBERTA

Geothermal facilities in Alberta are regulated under the Geothermal Resources Development Act (GRDA). The GRDA aligns with the framework for hydrocarbon development in Alberta, having similarities to the Oil and Gas Conservation Act. Pursuant to the GRDA, “geothermal resource” is defined as the natural heat from the earth that is below the base of groundwater protection. Hence, the GRDA regulates geothermal development below the base of groundwater protection, the approximate point where underground water turns from fresh water to salt water (see GRDA, section 1(1)(d); Water Wells and Ground Source Heat Exchange Systems Directive, section 1.2(2)(c)). Generally, the temperatures necessary to produce geothermal electricity can only be found below the base of groundwater protection. Therefore, the GRDA effectively applies to all commercial geothermal projects with the potential to generate electricity.
 
The GRDA sets out the regime for both the rights to geothermal resources and the approvals necessary for geothermal facilities.

Rights to Geothermal Resources and Surface Rights

The GRDA amended the Mines and Minerals Act (Alberta) to make clear that the mineral title owner has the right to explore for, develop, recover and manage the geothermal resources associated with those minerals (see Mines and Minerals Act, section 10.2, as amended by GRDA, section 31). Geothermal project proponents must, therefore, acquire mineral rights in order to harness geothermal energy.
 
In Alberta, the majority of mineral title is vested in the Crown. The Government of Alberta has not disclosed whether they intend to charge a royalty on geothermal energy production, leaving a significant financial question unanswered for developers. However, the Government of Alberta has released information on their administration of geothermal resource tenure through Mineral Rights Information Bulletin 2022-02.
 
For standalone geothermal wells, the applicant must have a geothermal resource tenure lease from the Government of Alberta or documented authorization obtained from the freehold mineral owner(s). If an applicant wants to conduct geothermal exploration or development activities under an existing mineral tenure lease, it must be done as co-production. Applicants are required to hold the subsurface rights to develop the geothermal resource before applying for a geothermal well licence.
 
The Government of Alberta has prescribed nine sections (nine square miles or 23.3 square kilometres) as the maximum geothermal lease size. The leasing system largely mimics that used for conventional oil and gas leases.
 
The term of a lease for geothermal exploration and development is dependent upon demonstrated progress in exploitation of the resource and is divided into three principal phases:

1. Initial Term: The initial term of the lease is five years. During this period, efforts must be undertaken to establish that a geothermal project is under active development. The project proponent must show evidence of onsite physical work to demonstrate the geothermal resource and technical viability of producing geothermal energy to be granted an intermediate term lease.

2. Intermediate Term: The intermediate term of the lease is five years. By the end of the initial term, the project proponent is required to demonstrate that the geothermal lease is productive — in other words, it is generating energy derived from the leased geothermal resources.

3. Continued Term: This final term of the lease is indefinite, so long as Alberta Energy is satisfied that the geothermal lease is productive.

From January 2022 until July 2022, there have been 71 applications for geothermal tenure. Of these applications, one lease was issued in April 2022 and 26 leases were issued in June and July 2022.
 
In terms of surface access, the Surface Rights Act does not apply to any type of power plant, including geothermal plants. The act also does not apply to the wells that would be required to harness the geothermal energy the power plant requires to function. Rather, applicants must acquire the necessary land rights from the owners of the lands where the geothermal development will be located by agreement.
 
If the application involves public lands, the applicant must apply for and be granted a public land disposition that may require the consent of any prior disposition holder of those lands (such as a grazing lease holder) in compliance with section 9(1)(e) of the Public Lands Administration Regulation. While there are currently no public land disposition types specifically applicable to geothermal facilities, in amendments to AER Manual 012: Energy Development Applications: Procedures and Schedules (Manual 012) made concurrently with the release of the Directive, the AER indicated it is willing to work with project proponents to accommodate geothermal activities within existing public land disposition types.

Approvals for Geothermal Facilities 

The AER is the regulating body for geothermal development under the GRDA for the production of electricity, while Alberta Environment and Parks continues to regulate shallow geo-exchange projects solely for heat exchange (see GRDA, section 1(1)(g); Geothermal Resource Development). In order to develop a geothermal electricity project, project proponents must be granted a licence from the AER to drill or construct and operate a geothermal well or facility (GRDA, section 7).

Additionally, geothermal facilities that produce electricity require Alberta Utilities Commission (AUC) permitting and must undergo the Alberta Electric System Operator's (AESO) process for connecting to Alberta’s interconnected electric system. Geothermal power plants may be exempt from the AUC application process if they are less than one megawatt in size. The AUC oversees the power generation industry in Alberta and issues permits to construct and operate power plants. AUC Rule 007: Applications for Power Plants, Substations, Transmission Lines, Industrial System Designations, Hydro Developments and Gas Utility Pipelines applies to geothermal facilities listed thereunder as “other power plants.”

AER Regulation

The geothermal facility licence application framework is provided by the Geothermal Resource Development Rules, released on June 21, 2022, the Directive and an updated section in Manual 012. This framework is largely based on and incorporates that for the development of oil and gas resources, with some notable elements as follows:

• Similar to oil and gas developments, applicants cannot start any site preparation, construction or operation before receiving AER approval. However, surveying the site is permitted (GRDA, section 7; Directive, section 2.2).

• Application requirements, including licence eligibility, participant involvement activities, and emergency preparedness are directly incorporated from the requirements for other kinds of resource development overseen by the AER (Directive, sections 2.4–2.6).

• Geothermal licence holders are subject to the AER’s holistic liability assessment regime, including licensee management and liability assessment (Directive, sections 2.9–2.12). The AER will holistically assess a licensee’s capability to meet its regulatory and reclamation liability obligations throughout the geothermal development lifecycle. The multifactor assessment considers, among other criteria, aspects such as financial health, estimated total licensee liability and licensing eligibility under AER Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals. The assessment ensures responsible management by the licensee of its collective liability for wells, facilities, pipelines and sites. For further information on the AER’s licensee liability framework, see our May 2021 Blakes Bulletin: Alberta Energy Regulator Introduces New Requirements for Acquiring and Holding Energy Licences and Approvals.

• Unlike other commercial scale renewable electricity infrastructure, geothermal facility operators, with approval from either the AER or AEP, are able to obtain an overlapping use exemption from reclamation obligations, in some circumstances, regardless of the size of the geothermal facility. Such an overlapping use exemption exempts a facility from obtaining a reclamation certificate for land as otherwise required by the Environmental Protection and Enhancement Act, but only where other “specified land” activity, such as oil and gas development, is taking place. This exemption is usually not available for large renewable facilities (producing more than a microgeneration facility or with a total footprint greater than one hectare). However, the exemption is available for geothermal facilities (Conservation and Reclamation Regulation 15.1(1)(vi)(B)), likely because many geothermal facilities are more readily collocated with active oil and gas facilities.

LOOKING AHEAD

Geothermal energy production is more capital intensive as compared to wind and solar energy. However, geothermal energy production boasts several promising attributes that sets it apart from other non-emitting and renewable resources. Beyond its reduced surface impact, which makes it desirable for co-development opportunities on leased lands, geothermal power production has two significant advantages: it can be used for baseload requirements and can be deployed when other intermittent renewable sources are unavailable resulting in higher prices for power.
 
It remains to be seen whether Alberta’s regulatory regime, largely based on the schemes for conventional oil and gas exploration and development, will enable new or established industry actors to seize the opportunity of geothermal energy production. In particular, the overlapping jurisdictions of the AUC and AER may cause some difficulties, and the adaptation of the public lands disposition system to geothermal development remains a work in progress.
 
While these regulatory issues, the upfront cost of geothermal facility development and silence surrounding the royalty regime may cause geothermal investors to take pause, continuous and reliable renewable sources of energy are hard to find. Investors will certainly weigh these risks against the ability to recoup costs through strategic participation in Alberta’s competitive electricity market.
 
We will continue to monitor developments in the geothermal sector both within and outside Alberta. 

If you have any questions regarding the geothermal regulatory framework in Alberta or business opportunities in the geothermal sector, please contact:

Lars Olthafer        +1-403-260-9633
Matt Hammer      +1-403-260-9672

or any member of our Energy Regulatory group.