Bill Sutherland, senior managing director of project finance at Manulife Financial, says: "My guess is that there is probably a C$15 billion debt requirement over the next four years. There is not enough capacity to satisfy that. There might be C$8 billion in capacity, but certainly not C$15 billion."
There has been a huge surge in the number of signed renewable energy purchase agreements in the past eight months, with the Ontario Power Authority selecting 184 large-scale projects totalling nearly 2.5GW in the first round of the province's feed-in tariff programme and BC Hydro signing contracts for 27 projects totalling 1.2GW. That new generation comes on top of pending projects from earlier procurements by utilities in a number of other provinces.
In wind energy alone, there is more than 8.7GW scheduled to come online across the country by 2016. And there are still some requests for proposals out in the market that will add to that total.
Life insurance companies like Manulife have been key lenders to the Canadian wind energy industry, says Sutherland, but they have only so much money to invest. While banks raise the money they want to lend by borrowing from other banks, Manulife can only lend from its own coffers. "We are actually lending or investing the reserves we have to hold against our insurance and wealth management liabilities," says Sutherland. "There are only so many dollars in the pantry."
Canadian banks have not played a major role in the renewables sector to date and, although they can be brought in to future financings, according to Sutherland it will not be enough to fill the gap.
"It has been a bit of a joke that Canadian banks do not like lending money. They are now forming project finance groups and seem to have an interest in it, but there is not the evidence that they are willing to go longer term or they are willing to go large bite size," says Sutherland.
Most of the Canadian bank deals done to date tend to carry terms in the threeto five-year range, he adds, compared to the 20-year debt institutions like Manulife are prepared to provide to project owners.
Foreign banks, active internationally in the wind sector, were working their way into the Canadian market, says Sutherland, but disappeared when the financial crisis hit in late 2008. "They are now coming back, but there are fewer of them," he says.
Potential capital sources
One potential source of new capital for the sector, though, could have its roots in that same crisis. Canadian pension funds have "massive capital available" that they have historically preferred to put into equity investments, says Sutherland.
"Go back prior to the crisis and you could never get them interested in the debt side," he says. "They are very interested in debt now because I think their equity portfolios did not perform well."
Earlier this year, Manulife arranged a C$179 million financing for Invenergy Wind's 78MW Raleigh wind project in Ontario, leading a syndicate of lenders that included Ontario Pension Board Investments. The company has also had strong interest from other pension funds as they too look to diversify their investments, says Sutherland.
"They do not have the experience and we will have to lead them into it, but I think that, really, is what will make the difference," he says.
In addition to the Raleigh deal, Manulife closed a C$194.5 million financing this year for Boralex's 90MW Thames River wind project in Ontario. The company invested C$88.5 million, with the remainder provided by a syndicate of Canadian life insurance companies. Sutherland says Manulife is working on another four Canadian and one US wind financing, most of which were expected to close before the end of September, with others to follow.
Sutherland's team, which has been together 12 years and was a pioneer in North American wind energy financing, has arranged or participated in 32 wind financings encompassing more than 50 projects with a total debt requirement of C$2.3 billion. Manulife's own investments in wind total about C$1.4 billion.