The transition away from diesel in remote communities is widely supported and becoming increasingly more urgent in the face of growing energy needs, climate change, and volatile and rising costs. In recognition of these challenges, considerable progress has been made over the past decade to advance renewable energy in remote diesel communities.
While the past decade has shown that renewable energy is key to modern, efficient, and reliable energy systems, it has also exposed a number of fundamental issues at the heart of the economics of clean energy development in remote communities. In particular, the shortcomings of current financial policies have emerged as real barriers.
Continued progress on diesel reduction and clean energy development depends on removing these barriers – and the federal government has an important role in making this happen.
The status quo economics of remote clean energy
Project economics remain one of the greatest barriers to renewable energy development in remote communities. Despite strong interest from Indigenous governments and development corporations in developing community-scale renewable energy as independent power producers (IPPs), many clean energy projects in remote communities struggle to advance because the underlying economics do not work.
Reliance on limited public funding, barriers to accessing financing, and power purchase agreements that do not provide sufficient revenue are some of the most persistent barriers to advancing renewable energy in remote communities. Overcoming these barriers often requires the financial investment of federal, provincial, and territorial governments. Without this support, many projects are not financially viable, slowing or stalling project development entirely.
The price for power does not reflect project realities
A big part of the challenge is the price utilities pay for the electricity generated by IPPs. This price, which largely determines whether a project can succeed financially, is usually based on the utility’s avoided cost of diesel fuel, the cost of delivering the diesel to the community, and in some cases includes a portion of avoided operations and maintenance costs when diesel generator runtime is reduced. In diesel-dependant communities where electricity costs are already high and utilities are not able to offer higher PPA prices, calculating the price for power this way is intended to protect ratepayers by ensuring IPP projects do increase the cost of electricity.
A compelling solution to the challenge of avoided-diesel power purchase agreements (PPA) is a production incentive provided by the federal government. Structured as a per kilowatt-hour (kWh) price adder to IPP power purchase agreements, a production incentive could play an important role in improving financial viability of projects in remote communities. By increasing the long-term revenue stream, a federal production incentive could strengthen the business case of projects, which in turn would improve bankability and help attract private investment, reducing the need for grant funding and better support long-term operations.
Recent research by the Pembina Institute examined this proposition by exploring project-level financial realities as described by Indigenous clean energy leaders and developers in remote diesel communities, with a focus on the extent to which PPA prices based on avoided-diesel provided adequate long-term revenue and meaningful financial benefits for communities.
Our findings consistently pointed to concerns that avoided-diesel PPA prices do not reflect project realities, making it difficult for renewable energy projects to achieve financial viability. The challenges of building and operating energy generation infrastructure in remote communities are compounded by dies avoided-diesel PPA prices that are largely disconnected from actual project costs. As a result, PPA rates are often too low to cover capital and long‑term operating costs or to provide communities with a reasonable financial return on the electricity they produce.
A production incentive to fill the cost revenue gap
Most projects dependent on avoided‑diesel PPA rates struggle to move forward without substantial federal funding for upfront construction and equipment costs. Even with this funding, projects may still face long-term financial challenges over the long term from operating, maintaining and eventually decommissioning the project. With high project costs due to remote locations and project revenues capped by avoided-diesel PPA prices, Indigenous IPPs in remote communities are often left in a position where projects that are technically viable and aligned with community priorities remain financially risky or unprofitable.
This dynamic has important consequences for how (and if) Indigenous communities are able to participate in the clean energy transition. Where PPA revenues are insufficient, communities may be discouraged from pursuing IPP opportunities or required to accept lower economic returns to have clean energy generation in their communities.
To date, the federal government has played an important role in the build out of clean energy projects and the reduction of millions of litres of diesel. However, underlying financial issues persist and the dependence on federal funding programs leaves community-led projects vulnerable to shifting policy priorities and election cycles.
This financial framework to advancing IPPs risks leaving renewable energy development in remote diesel communities in a precarious and unsustainable position over the long term. Addressing this economic gap is essential if the transition away from diesel is to include independent power production in remote communities. A federal production incentive represents a promising policy option to help align project revenues with costs and risks over the long term.
