Dial Down Coal. Dial Up Renewables Accelerating The Transition October 2015

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“The Dial Down – Dial Up strategy will enable the province to achieve its GHG reduction targets from coal, protect consumers from price spikes, accelerate new renewables gener-ation, protect jobs and support economic growth.”

3Dial Down Coal. Dial Up Renewables

Immediately reduces emissions by “dialing down” coal-based generation by 20 per cent, starting in 2016.

Dials Up renewables to 25 per cent of Alberta’s energy generation by 2030.

Imposes a hard cap on coal- fired emissions.

Accelerates hydro generation with new capacity and storageon the North Saskatchewan River.

Protects jobs and electricity consumers while supporting economic growth.

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TransAlta’s Policy Proposal

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4Greenhouse gas (GHG) reductions + new renewable capacity

Immediate, measurable environmental impact

Immediate 20% reduction in coal plant output

GHG reduction of 9 megatonnes/year

Protects consumers from price shocks

Delivers backup supports for new renewables growth

DIALING UP RENEWABLES

10% of energy supply in Alberta

25% of energy supply in Alberta

20202030

5Impact of Dial Down – Dial Up

Greatest GHG reductions with lowest consumer impact

By 2030Cumulative reductions (tonnes)

Residential consumer impact

Under a dial-down approach

175M from coal

$42/yrCompared to no carbon policy

The current carbon policy would be converted to a mass-based approach immediately, applying a tonnage cap on coal-based emissions.

Generators would reduce coal unit output throughout the year to operate below their cap

The 20% reduction would equate to compliance with the Specified Gas Emitters Regulation (SGER), essentially funding the value of lost production by generators

Emissions below the cap would create flexible emission reduction instruments, tradeable within and outside the sector

This produces the lowest cost, least impact to consumer costs to achieve tonnage reductions

Current 2021 2026 20300

1,000

2,000

3,000

4,000

5,000

A HARD CAP DRIVES COAL REDUCTIONS

= Megawatts

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Five steps to suc­cessful transition start with coal Dial Down + immediate renewables Dial Up

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7Growth for Greatest Impact

Renewable generation growth aligned with the parallel reduction of coal generation.

The Dial Up target is equivalent to adding 400 to 500 megawatts (MW) of wind equivalent capacity annually.

The renewables target would include existing renewables.

A government agency such as the Balancing Pool would offer long-term contracts for renewables.

Current offset credits under Specified Gas Emitters Regulation (SGER) would be grandfathered.

The policy could provide specific allocations for technologies such as hydro and solar.

Tota

l Pro

duct

ion

(GW

h)

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Renewables Natural Gas Coal

0

10,000

20,000

30,000

40,000

50,000

60,000

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“We are committed to protecting the jobs of our employees during the coal transi-tion, and we look forward to working with environmental groups, communities, the province and our unions on a joint agreement to move forward.”

9Maximizing new renewables investments

The Dial Down – Dial Up proposal has a fixed time­frame for coal plant closures, enabling TransAlta to explore a significant investment opportunity on the North Saskatchewan River.

Instead of using capital to add NOx and SO

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controls to plants already scheduled for shut down – with a maximum 5 to 8 year impact – TransAlta will instead invest in long-term renewable energy

TransAlta would enter into a long-term Power Price Agreement with the Alberta Electric System Operator (AESO) for energy and system support – eliminating the need to compensate generators for early coal-plant closures

A transparent and open process will be used to reach final terms on Power Purchase Agreements (PPA)

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North Saskatchewan River: Potential to quickly Dial Up renewables

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11Harnessing hydro — a potential $1.75B investment

Edmonton

Calgary

Opportunities under evaluation include: Brazeau Forks new hydro (75 megawatts); expansion at existing Brazeau Dam (200 MW); Bighorn Dam (60 MW) pump storage at Brazeau Dam (50 MW). Total: 350-400 MW total hydro expansion on the North Saskatchewan. TransAlta is also exploring at 500 MW solar project in the Wabamum area, site of our current coal mine and plant facilities. To put this in perspective, 100 megawatts is enough to power 130,000 homes a year, depending on the energy fuel source.

Long life, high capacity

Minimal transmission upgrades

Within Alberta Environment’s Protective Notation Zone reserved for hydroelectric development

Provides new employment, including Aboriginal job opportunities

Preliminary feasibility work is under way. Downstream water management and fisheries habitat are part of the overall benefits of hydro, a cornerstone renewable which has greater generating reliability than solar and wind.

Hydro expansion on the North Saskatchewan River, has the potential to quickly dial up Alberta’s renewable generation capacity.

12A leader in renewables, since 1911

TransAlta’s first facility, the Horseshoe Plant at Seebe east of Banff, was built in 1911.

a 21 MW solar project in Massachusetts and a 50 MW wind facility in Minnesota

a 20 MW wind facility at Kent Breeze in Ontario

an 88 MW wind facility at Wintering Hills in Alberta

TransAlta this year also launched Alberta’s first large-scale battery storage project, using Tesla technology

In 2013 we acquired a 133 MW wind farm in Wyoming and completed a 68 MW New Richmond Wind facility in the Gaspésie area of Québec.

The North Saskatchewan hydro expansion on the preceding pages is just one of several renewables projects under consideration.

TransAlta has more than doubled its renewable energy capacity in North America since 2008 to 2,300 megawatts this year, including hydro, wind and solar facilities.

This year alone, TransAlta or TransAlta Rewewables have acquired:

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London Economics International: Research highlights consumer impacts

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14Accelerating too quickly drives up consumer costs

Comparison of Alberta to Case Study Jurisdictions

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Note: retail prices were from spring-summer 2015, and converted to Cdn$ using 9/24/2015 exchange rate. *Ontario’s retail rates are likely to increase in coming years due to FIT and other obligations signed by the government. Source: EIA, ERCOT, Germany Energy Blog, Frauenhofer Institute, CA Energy Almanac, UK Government, UK DECC, Hydro Quebec, BDEW

ALBERTA Texas Ontario California United Kingdom Germany

Policy Assessed RPS FIT Energy Efficiency Carbon Tax FIT

Installed capacity (MW) 16,151 MW 80,149 MW 34,780 MW 78,865 MW 84,987 MW 177,140 MW

Capacity by fuel (Top 3)Coal: 39%

Cogen: 28% Gas: 11%

Gas: 63% Coal: 25%

Nuclear: 6%

Nuclear: 37% Gas: 29%

Hydro: 24%

Gas: 59% Hydro: 18% Solar: 7%

Gas: 40% Coal/oil: 29% Nuclear: 12%

Coal: 28% Solar: 22% Wind: 20%

% industrial load 65% 26% 25% 17% 26% 46%

RESIDENTIAL RETAIL (DELIVERED) PRICE ($CAD) 12.18

cents/kWh15.70

cents/kWh16.5 cents/kWh

22.79 cents/kWh

32 cents/kWh

42.81 cents/kWh

INDUSTRIAL RETAIL (DELIVERED) PRICE ($CAD) 5.9

cents/kWh7.3

cents/kWh9.3

cents/kWh16.1

cents/kWh19.5 cents/kWh

15.1 cents/kWh

Type of wholesale marketSingle clearing price real-time

energy-only market

Nodal day ahead and real-time

energy markets

Single clearing price real-time energy market

Nodal day ahead and real-time energy

markets

Balancing Energy Market

Voluntary integrated spot

market with balancing

mechanisms provided by

transmission system operator

Centrally planned

procurement (many existing

generators also under long- term contracts)

Resource adequacy capacity product

Centralized Capacity Market

New investments generally

remunerated through long term PPAs

Contract for Differences (for new investments, climate

change focused)

London Economics International, a widely

respected firm whose global expertise includes energy policy

and infrastructure, conducted a detailed analysis of the

current state of the renewables transition around the world, and various policy models

for Alberta.

Their work included a study of other jurisdictions that

attempted over the past decade or so to rapidly accelerate their

transition to renewables.

Hurdles included the public’s opposition to rising electricity costs, the cost of government

subsidies or tax incentives that didn’t yield desired renewable growth trajectories for renew-ables, budgets and economies

under pressure, and other financial constraints.

From a consumer perspective, in Alberta where about 38

per cent of our generation is fired by coal, retail electricity

rates this year were just under 7 cents per kWh. At the

other end of the spectrum, in Germany it is now almost

43 cents.

15London Economics International reviewed policies that targeted reducing carbon emissions and policies to increase renewables

This chart illustrates the consequences of a variety of carbon policy approaches

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Cap and Trade Carbon TaxRenewable Portfolio

Standard (RPS)Feed In Tarriff (FIT) Energy Efficiency

Jurisdiction reviewed California United Kingdom Texas Germany Ontario California

Primary Objective

Reduce carbon emissions

Modify behaviour of consumers to use less carbon-intensive fuels (“energy efficiency”) and substitute with

non - or low- carbon options

Increase the development of

renewable capacity

Increase the development of

renewable capacity, with broad diversity

of technologies

Developed to encourage and

promote greater use of renewable energy sources

Reduce system load

Achievement [“pros”]

Reducing carbon emissions

Other markets have joined

Provided for recognition of carbon costs and started the process of reducing carbon emissions

New renewable capacity developed

Usually cost-effective approach as long as target practical and not too many

carveouts

New renewable capacity built

If scale sufficient, can also attract jobs

New renewable capacity built

Steady, sustained consumption reduction in

demand with needed incentives

and monitoring and verification

CONSEQUENCES [“CONS”]

To date, prices at floor prices

Original policy not as effective as

expected due to lack of links to carbon content, and has

required more explicit carbon-based pricing

Low cost focus of many RPS programs

has lead to mainly just wind being developed

Original FIT implementations were expensive and inflexible

Version 2.0 appears more moderate

Program resulted in major increase

in retail rates

Subsequently, caps on total renewable

capacity and decreased rates put in place to moderate

program expense

Although California has been able to

contain costs, in other jurisdictions, subsidies

may be high

KEY TAKE AWAYS

In Alberta the cost of power to consumers and commerce is relatively low, and creates a competitive advantage for us

compared to other jurisdictions.

Poorly implemented renewable policies can lead to unintended

consequences.

This is a big change — and if we don’t do it thoughtfully it will

cost us more than we want it to.

Let’s take the best from other jurisdictions — and stamp it

‘Made in Alberta’.

16Balancing emission reductions, consumer costs & job protection

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*Cumulative GHG reductions assume greater natural gas % replacement early, more renewables % later **Customer impacts can be compared against a business-as-usual cost forecast of $68B over the same period. Includes energy, transmission and all out-of-market costs.

Dial Down – Dial Up Cap & Trade Accelerated Shutdown RPS

GHG reductions (cumulative 2016 – 2030) (net of replacement*)

95 Mt 127 Mt 61 Mt 111 Mt

Cost per tonne reduced (net of replacement)

$72/t $278/t $186/t $206/t

Air quality co-benefits Early reductions Uncertain Later reductions Uncertain

Renewables by 2030 Large ~25% 20% 10% – 15% Large ~35%

Gas replacement Modest gas and delayed Larger than Dial Down Early gas replacementLarge gas requirements to backstop renewables

Customer impacts** $75B $103B $79B $91B

Effects on jobs Small increases relative to BAU Uncertain High impacts Short term gains, Mid term Losses

Market design change requirements Small, Mid term review required NoneMid term need to incent

back stop capacityMarket Failure

Transmission impactsSome Transmission costs

for renewablesSome Transmission costs

for renewablesSmall Transmission impacts Large Transmission Build Costs

Stranded capital NoneCosts will force coal out —

strands capitalStrands capital

RPS allocations will force coal out — strands capital

Investment climate impacts Smooth transitionPolicy impacts existing

investment viabilityBreaks regulatory compact

Creates government debt, changes market, winners & losers

This chart illustrates the comparative advantages of the Dial Down – Dial Up proposal

Dial Down – Dial Up achieves government policy objectives at lowest incremental cost to consumers and the economy

Assessment BAU*Accelerated Retirement

Cap & Trade RPSDial Down – Dial Up

GHG Reduced from 2016 - 2030

New renewable entry by 2030

Total cost to consumers through 2030

Net jobs impact

Overall assessment

CommentsDoes not meet GHG

reduction policy objectivesDoes not motivate

new renewablesMost expensive scenario

Achieves policy objectives at high cost to consumers & economy

Achieves policy objectives at lower cost; achieves

immediate GHG reduction

* Business As Usual

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Protecting jobs, communities and stakeholder interests

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19Protecting jobs and livelihoods

As Alberta’s largest electricity generator, TransAlta employs thousands of people across Alberta. Moving too quickly on accelerating the closure of plants will have a direct impact on their livelihoods and communities.

1,300 direct jobs in plant and mining operations

1,500 jobs in construction and other community-based services

Thousands of indirect jobs in the communities of Stony Plain Parkland County, Wabamun. This includes for example restaurants, housing, grocery stores, banks and other community businesses and services.

20Dial Down – Dial Up supports communities

Jobs and municipal tax revenues

MUNICIPAL TAX REVENUES

More than $13M in communities around our coal and mining operations

PROVINCIAL AND FEDERAL TAX REVENUES

In Alberta, TransAlta’s coal plants today provide more than one-third of the province’s power and are an important part of the province’s economy. The overall impact of TransAlta’s Alberta coal generation and mining facilities, from 2015 to 2020, will include about $2.4 billion in Alberta labour income,

about 5,000 jobs a year; almost $5.4 billion in gross domestic product

a 10B add to the Alberta economy

$4.4 B in labour income (wages)

just under $1.4 billion in government revenue — including $678 million to the Government of Alberta

total federal and provincial tax income: $2.6 billion

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“Other models require substantial new infrastructure while ignoring consumer price impacts. These proposals serve some generators, and leave consumers exposed to price volatility and unreliable supply.”

22Working with stakeholders

Centralia – an historic agreement with environmental groups, unions, communities

In a 2011 agreement with Washington State for an acce- lerated transition for TransAlta’s coal plant at Centralia, we agreed to contribute $30 million to a community investment fund to help with economic development and energy efficiency projects, as well as an additional $25 million to an energy technology transition fund, to be spent on supporting innovative energy technologies. The agreement provided for a clear transition timetable, allowing us to enter into long-term contracts with customers. It gives TransAlta the financial stability needed to invest in the transition to a cleaner energy source. It also provided for a transition that protects jobs and included retraining initiatives. Centralia is also one of the cleanest coal-fired plants in operation today. The plant installed state-of the art controls for mercury emissions in 2012 ahead of the 2015 federal requirements and recycles 80 to 85 per cent of its coal by-products.

A COLLABORATIVE INNITIATIVE

Unions, environmental groups, community and business leaders and the province will be involved in developing a transition agreement that minimizes the impact of the Alberta transition on jobs and communities and ensures affordable electricity for consumers and businesses.

Working with the Pembina Institute in Alberta and other enviromental partners, we believe that we can achieve the same result in Alberta.

We can do what others say can’t be done. Ultimately collaboration and determination to strike the right balance can achieve a lower carbon footprint, a competitive power sector and affordable electricity for consumers and jobs for the future.

23Working with Aboriginal Communities

SUSTAINABLE EMPLOYMENT, CAPACITY- BUILDING, AND COMMUNITIES SUPPORT FOR ECONOMIC DEVELOPMENT

Including:

Capital funding

Sponsorship of schools and cultural events

Support for Aboriginal business development through coaching and mentoring

Aboriginal post-secondary trades bursaries

Reclamation education program for students, teachers and elders

Career experience opportunities for high school students

In 2014, TransAlta proudly achieved Progressive Aboriginal Relations Silver Level designation, one of only 10 companies in Canada to achieve this distinction.

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Preparing for future demand, and understanding unintended consequences of alternative proposals

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2515-year load growth requirements – The Path to Renewables

An estimated $22B in investment is required by 2030 to meet capital investment requirements, including replacement generation and load growth

Natural gas generation is expected to meet the majority of this requirement

Wind investment would be incremental as wind does not provide firm capacity

billion$22 2015 2030

GenerationRetirements

Peak Growth

Peak Growth

GenerationRetirements

26Major risks in other policy options

In Ontario, consumer prices jumped 45% during the accelerated coal closure

TIME-OF-USE (TOU) PRICES

MAY2006

The following chart tracks time-of-use electricity prices since 2006.

10ce

nts

per k

Wh

20

15

5

0NOV2006

MAY2007

NOV2007

MAY2008

NOV2008

MAY2009

NOV2009

MAY2010

NOV2010

MAY2011

NOV2011

MAY2012

NOV2012

MAY2013

NOV2013

MAY2014

NOV2014

MAY2015

O�-peak Mid-peak On-peak

Source: Ontario Energy Board http://www.ontarioenergyboard.ca/OEB/Consumers

%45

27Alternative policy option risks

ON ACCELERATED RETIREMENT

Accelerated retirement of coal units produces reductions less quickly than a dial-down approach, because in most cases retirements would not be implemented immediately.

Accelerating coal retirements by 5 years only achieves 60% of the cumulative emissions reductions as Dial Down.

Accelerated retirement produces GHG reductions at approximately twice the cost as a dial-down approach, resulting in significantly greater consumer price volatility

Approximately twice the impact on jobs than a Dial Down

ON A CARBON TAX ON NEW GAS GENERATION

The impact on consumer electricity prices would be substantial

It is unknown what level of tax would equalize the competitiveness between gas and renewables, and therefore its efficacy is questionable.

ON A RENEWABLE PORTFOLIO STANDARD

High cost to electricity consumer and the economy

Greater net job losses than Dial Down – Dial Up.

Per

unit

cos

t of e

mis

sion

s re

duce

d

over

BA

U (

$/to

nne)

How much will consumers pay for each tonne of GHG emissions reductions over BAU (Business As Usual) levels?

AR = Accelerated retirement C&T = Cap &Trade RPS = RPS DDDU

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+Clear disadvantages for consumers in other proposals

Consumers are not protected from price shocks

Additional transmission investments ($4B-$5B) would likely be required and the need for associated approvals

In contrast, our proposal calls for a paced implementation of renewables consistent with support from baseload sources

It also makes use of existing structural institutions and is appropriate for a competitive market

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“TransAlta believes that a clear and robust Climate Change Strategy for Alberta is both possible and nec-essary, and that it should carefully balance environ-mental objectives with economic considerations.”

IT CAN BE DONE.

30TransAlta’s renewables leadership

many of which continue to operate today. Our Alberta-based hydro facilities have a net capacity of 822 MW and comprise 96 per cent of the prov-ince’s hydro assets, our B.C.-based hydro facilities are capable of delivering 77 MW of clean power generation, and our Ontario facilities have a net ca-pacity of 14 MW. Together, these assets contributed $85 million of comparable EBITDA in 2014.

AND NOW SOLAR …

TransAlta has just announced its first solar acquisition, a 21 megawatt facility in Massachusetts, aligning with our strategy of growing our renewables platform and diversifying our portfolio. The solar facility consists of four ground-mounted projects and four rooftop projects and could lead to similar projects in Alberta.

WIND

TransAlta has 22 wind farms, including 1,021 wind turbines with the capacity to generate 1,522 megawatts (MW) of wind power — this is the equivalent of powering more than one million homes. Wind is now 16 per cent of our total generating capacity. TransAlta was the first large-scale utility company to invest in wind energy, including the first wind projects built in Canada.

HYDRO

TransAlta’s very first power generation assets were hydroelectric facilities built in Alberta,

Canada’s largest wind generator and Alberta’s largest hydro generator