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CANWEA Conference Report: A flourishing Canada grabs the spotlight

CANADA: Canada's wind industry is poised to enter the strongest and most sustained period of growth in its history. Meanwhile, a sluggish US market is shifting investor attention to opportunities north of the border. Against that backdrop, the mood at the Canadian Wind Energy Association's (CANWEA's) 26th annual conference was justifiably upbeat.

CANWEA 2010 was a magnet for almost 3,000 delegates
CANWEA 2010 was a magnet for almost 3,000 delegates

The prospect of thousands of new megawatts to be built over the next five years, however, was not enough to quell concerns among the record 2,865 delegates and 244 exhibitors regarding where the market is headed over the long term.

"Things have been on this long, slow burn for a while," said Mark Tonner, managing director for Canada at GE Energy Financial Services (Geefs). "I think it's been in the last year or two when there has been such a quieting-down effect in the US that everyone is now focusing on Canada."

There is plenty of activity encouraging that interest, delegates heard. Provincial governments and utilities are aiming to bring Canada's installed wind capacity from about 4GW today to 12GW by the end of 2015. More than half the wind farms required to reach that mark already have power purchase agreements in place, and a number of procurement processes that will add to that total are either under way or in the offing.

"We're going to be busy for the next little while," CANWEA president Robert Hornung told delegates at the November 1-3 conference in Montreal.

The long-term contracts and high investment-grade counter-parties found in the Canadian market provide a "huge gravitational pull" to equity investors like Geefs, said Tonner. That is particularly true when compared to the US, where fierce competition for a limited number of purchase contracts is fuelling a "constant race to the bottom" when it comes to power pricing and developer returns, added Richard Ashby, chief financial officer for RES Canada. "What's been a clear advantage for Canada is the relative certainty of offtake compared to what we see in the United States," he told delegates. "We're very happy to be in Canadian market."

Hold your horses

While Ashby's enthusiasm was shared by panellists across the spectrum from construction contractors to wind turbine suppliers, the discussion also made crystal clear that the certainty extends only so far.

"What we're all going to benefit from over the next few years is work that was done two, three, four, five years ago to set the framework for the market as it is now," said Mike Crawley, president of power generation company International Power Canada. "Beyond 2015, it becomes a very, very unclear picture as to what market there will be."

The industry, said Crawley, needs to be working now to set the stage for the next generation of wind development. Otherwise, he warned, "we could end up risking falling off a cliff and having nothing for several years".

CANWEA used the conference's opening session to kick-start a discussion that it hopes will lay a foundation for growth in the event's host province of Quebec. By the end of this year, Hydro-Quebec will have awarded power purchase agreements to all of the projects it needs to meet the province's current target of 4GW of wind by 2015. "For wind energy developers, this means that the Quebec market now appears to be closed," Hornung told an audience that included Nathalie Normandeau, the province's deputy premier and natural resources minister.

Signal failure

A new strategy is needed to keep the investment flowing, Hornung said. He unveiled an industry proposal that would see the province add 8GW of wind capacity to its grid between 2015 and 2025. The issue, however, is not confined to Quebec. "In most of Canada, we do not have signals yet from governments that indicate that there will continue to be a market for wind energy, from a policy standpoint, beyond 2015," Hornung said. "We need to change that."

A lack of clarity around the role of federal government going forward also poses a significant challenge, said Hornung. Natural Resources Canada's EcoEnergy for Renewable Power programme, which offers a C$0.01/kWh production incentive for the first ten years of a project's life, expires at the end of March. Jimmy Royer, the scheme's senior technical advisor, confirmed for delegates what has been evident for months.

"There is no new programme being developed at this point," he said. "Whether or not there will be something else in the future or whether there will be other activities surrounding wind, especially to help the industry, this has not been decided."

Investors look to national governments to help provide strategic direction for the industry, something that is missing in Canada. "There has to be a long-term view on what you are doing with green energy across the country. There needs to be leadership starting with the federal government and then on through the respective provincial governments so that you don't get this boom-and-bust market," Tonner said. "I think one of the challenges right now in Canada is getting a framework that is sustainable and predictable so we can gear up for continuing investment."

Climate action

A critical contribution the federal government can make to building that framework is concrete action on climate change policy, something the governing Conservatives have avoided as they wait to see what strategy the US, as Canada's largest trading partner, adopts. "The biggest single thing the federal government can do to help drive this sector is put a price on carbon," said Crawley.

Federal government can act as a catalyst for growth in other ways as well, delegates heard. On the infrastructure side, said Crawley, it can play a part in improving the weak interconnections between Canadian markets by working with the provinces on the development of an east-west grid. This would facilitate electricity trade across jurisdictional boundaries and allow system operators in each region to draw on a larger pool of generating resources, in turn helping balance increasing supply of wind power.

Similarly, panellists argued, federal government's role as regulator of international transmission lines and its jurisdiction over international trade gives it a role to play in ensuring access to what more than one speaker described as "juicy markets" in the US for wind energy.

Eager to serve

Any plan to substantially expand Canada's wind energy market in the long term has to include exports, said Rob Schaefer, vice-president of commercial operations and development for TransAlta Corporation, the country's largest operator of wind plants. "I think we can't not do it," he remarked. "The US is ten times our size. We have great resources in Canada and we are not going to exploit them entirely for ourselves. We're a small, diverse, spread-out population, so it makes all the world of sense to build in Canada to supply the US."

Martha Wyrsch, president of Vestas Americas, drew a parallel with Canada's natural-gas industry, which began its push into the US market in the 1950s. "That was a critical opportunity that Canada exploited appropriately. The same is true with wind energy. We need to take advantage of a market that is hungry for the power and find ways to get it down there."

In fact, delegates heard, Canadian jurisdictions are increasingly looking south as they consider the future of renewables resource development. Long-term export sales to meet an anticipated annual demand of as much as 800TWh in the western interconnection - which includes all or part of 14 US states, two Canadian provinces and a small chunk of Mexico - are an integral part of British Columbia's new Clean Energy Act. The four Atlantic provinces, blessed with enormous wind resources but hampered by a limited domestic load, have been working to open markets in the heavily populated US Northeast. Quebec is looking to expand its presence in that region as well.

Realising ambitions

There is a lot of work to do to make those export ambitions a reality, said Hornung, not the least of which is making sure US jurisdictions, also looking to the wind sector for local jobs and investment, are receptive. Also important is that market rules do not raise barriers to the free flow of electricity. "It's an area that creates a lot of uncertainty for us," said Seth Dunn, global renewables policy team leader for GE Energy Infrastructure.

The tendency towards protectionism, however, is something to which Canada itself is not immune. Domestic content requirements in both Quebec and Ontario are part of a worrisome global trend that will ultimately prove unhealthy for the industry, panellists agreed. Manufacturers need to be allowed to compete freely in all markets to bring down costs and spur innovation, said Christian Kjaer, CEO of the European Wind Energy Association. "That is what we need to take on the real competition, which is other power-generating technologies," he said.

DEBT SHORTAGE OPENS PLAYING FIELD STRATEGIC PARTNERSHIPS - KEY TO FINANCING PROJECTS

The Canadian wind industry is seeing capital return to the sector in the wake of the financial crisis. But long-term debt is still limited, exposing developers to increased risk and nudging some projects onto the auction block.

Wind producers with 20-year power purchase agreements are looking for 20-year debt, key financial players told delegates at the Canadian Wind Energy Association's annual conference. Right now their only alternative is the consortium of Canadian life insurance companies that have long been major lenders to the sector. European banks, which fled the market when the financial crisis hit in 2008, are starting to come back and willing to lend for as long as 15 years, but their capacity is limited. Canadian banks will see projects through construction plus a couple of years, but that puts owners back in the market to refinance their projects in three to five years.

"If you want to put on long-term debt without taking refinancing risk, you are going to have a challenge," said Richard Ashby, chief financial officer for renewable energy developer RES Canada.

The larger the project, the more difficult it has been to get the funding in place. "Once you get beyond a couple hundred million dollars, it's hard to get the rest of the book filled out," he said.

The good news is that transaction sizes are starting to increase, helped by the fact that Canadian pension funds are now making their first moves into the market (Windpower Monthly, October 2010).

"Had we been talking a year ago, I would have said the maximum transaction size might be just a notch under C$200 million ($197.7 million). I think we could probably put together an institutional financing of up to C$350 million now," said Bill Sutherland, senior managing director of project finance at Manulife Financial.

Where the bigger bottleneck lies, he added, is in the number of deals that can get done. Sutherland's team has the money and human resources to put together five or six transactions a year, far below the demand in the marketplace. After the Ontario Power Authority awarded contracts to 184 large-scale renewable energy projects in the first round of the province's feed-in tariff (FIT) programme earlier this year, said Sutherland, "we were being approached by everyone and we probably turned down 40 or 50 projects".

Ontario represents only part of debt demand in Canada. Another 5GW of wind is set to come online between now and 2015, with more to come. There are also hundreds of megawatts of solar and run-of-river projects scheduled to come online in the same timeframe. The total debt requirement, Sutherland thinks, will be about double what existing lenders to the sector can supply.

The competition for capital means that lenders are focused on the highest quality projects. Given the state of the market, even a tiny problem with any project does not bode well, said Michael Weizman, a partner in the energy law group at McCarthy Tetrault. "Lenders will want to move very quickly to projects that can proceed."

The situation is likely to fuel more consolidation in the industry. "We are seeing more indications, certainly in Ontario and the FIT programme, of merger and acquisition activity to come," said Weizman. "I think a lot of the smaller players who find it difficult to access debt capital, who don't have mature relationships with the lenders, will find themselves looking at selling their projects."

The growing list of projects for sale is not limited to Canada. Over the past 18 months, Calgary-based Solas Energy Consulting has reviewed more than 65 projects totalling about 8GW for potential buyers. About half were in Canada and the rest in the US - although not all are on the market due to financing issues, said managing director Paula McGarrigle, adding that the tight capital market is playing a big role.

Calgary-based gas pipeline giant Enbridge is one of the players on the buying side of the equation. The company is looking to put together a C$6 billion renewables portfolio across North America and is seeking to build strategic relationships with developers. Waqar Zaidi, who heads Enbridge's renewable energy business, believes it is a model the industry must embrace if it is to close the financing gap. "In the end, if you truly want to build this out, I think developers need to find partners early on".

GE Energy Financial Services has been talking to potential partners as it looks to build on its US$6 billion renewable-energy portfolio, says Mark Tonner, managing director for Canada. He said this field would need to diversify beyond the current stable of insurance firms.

"These are big household names that are trying to enter this space. It's the Toyotas of the world and the Googles," he said. "There are investors who have big balance sheets and appetites to play in the space. So there will be a shift."

FALLOW PERIOD - WINTER BRINGS UNCERTAINTY OVER INCENTIVES

As the deadline for completing projects under Canada's soon-to-expire renewable energy incentive programme approaches, administrators are growing worried that millions of dollars of funding could be returned to government coffers if wind developers cannot finish commissioning in time.

Government agency Natural Resources Canada (NRCan) has signed agreements to provide a production incentive of C$0.01/kWh to a hundred projects, said Jimmy Royer, senior technical advisor for the government's EcoEnergy for Renewable Power incentive programme. So far, though, only 72 have come online.

The remaining 28 projects, with total capacity of 1.18GW, have yet to be commissioned. As well, NRCan is in negotiations to provide funding to a handful of other projects totalling about 200MW. Any of these projects not in service by the end of March will forfeit the money.

"The funds will go back to Treasury Board and will be lost to the renewable-energy programme," Royer told delegates at the Canadian Wind Energy Association's conference in Montreal last month. "Are we concerned? We are."

Part of the concern is that developers are now moving into the more unpredictable winter construction season. But Royer said the industry has met the challenge before. Last year, 24 projects were commissioned between October and March.

The vast majority of EcoEnergy megawatts still to come online are wind projects. But the wind sector was also the biggest beneficiary of the programme, receiving 74% of the total C$1.4 billion in funding and accounting for 79% of the 4.5GW of capacity receiving the incentive.

Poor FIT

When new feed-in tariff (FIT) contract awards will be made in Ontario is increasingly becoming a political question as the October provincial election draws closer, Valerie Helbronner, a partner with the law firm Torys, told delegates.

The Liberal government launched the programme last year. Since then, it has faced mounting criticism from the Conservative opposition, which is blaming rising power prices on the premium-priced contracts, and from a vocal and well-organised anti-wind lobby with a strong presence in many key electoral districts.

"A lot of backbenchers in the Liberal caucus are saying they don't want to see any more announcements on wind contracts before the election, thank you very much, because it is not going to help them win," Helbronner said.

More than 5.5GW of wind is in the FIT queue, awaiting a so-called economic connection test (ECT) to determine whether it makes sense to build new transmission to connect them to the electricity grid. The first ECT was expected to start in August but was postponed. Wind will have to wait.

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