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Rule change creates chaos in Ontario -- Trouble over fixed price contracts for small scale development

Sudden and unexpected changes in the rules governing power purchase contracts for wind power generation under Ontario's renewable energy standard offer program (RESOP) could have grave implications for both the success of the initiative and the business plans of companies participating in it, industry players warn. Companies making new applications for contracts are from now on restricted to channelling no more than 10 MW through any transformer station -- and they may not have any more than 50 MW of capacity under development at any time.

The change to the rules was announced in mid-May by the Ontario Power Authority (OPA), the agency that administers the program. They are designed to force developers of larger scale projects out of the standard offer program and into an upcoming competitive request for proposals (RFP) for 500 MW of renewable energy, currently out in draft form and set to be released in August.

It has been three years since OPA released a renewables tender. When RESOP was launched in the meantime, in January 2007, some developers looking for a market for well-advanced and larger scale wind power projects began splitting them into 10 MW chunks in order to qualify for the program's C$0.11/kWh premium price.

"While there was nothing intrinsically wrong with that in the early process, what began to emerge was that these larger projects were opting for the standard offer program rather than biding their time to become involved in the RFP procurement processes that were really designed for them," says the OPA's Tim Taylor.

Crowded out

The result is that larger players were locking up available grid capacity and crowding out small scale private developers and community groups looking to own wind turbines that RESOP was originally intended to target. Instead, 95% of the 1300 MW of contracts awarded so far under RESOP has gone to commercial wind and solar developers, says the OPA. "We want the big solar and wind boys to play in the large sandbox and leave the smaller sandbox for the smaller guys," says Taylor.

But Sean Whittaker, vice-president of policy for the Canadian Wind Energy Association (CanWEA), says the changes are not a fix. "We know what they are trying to do, but this is the wrong way of doing it," he says. "By making the changes the way they did, they are throwing out the baby with the bathwater."

Sky Generation's Glen Estill is the type of small-scale developer the changes were meant to help. But he believes they could end up forcing him out of the wind development business. "I actually would go so far as to say that if the current rules remain in place I won't have much choice but to stop any future development. I don't see how I would be able to participate."

Sideswiped

Estill's 9.9 MW Ravenswood project, about two-thirds of which is covered by a standard offer contract, was the first new wind farm to come on line under the program. He has another 5 MW contract in the same area awaiting turbine supply and a separate 1.8 MW turbine, installed in 2002, that was included in the program. But it is his plan to build three 10 MW projects feeding into the same transformer station that has been jeopardized by the new rules. "It has basically been sideswiped by these changes," he says.

The project needs to be as large as it is for economic reasons, says Estill. "It requires about a 14-kilometre line extension that the economics of one project would not justify doing. There is some economy to having two or three projects going in at the same time. Not only do you save on crane mobilisation, but also you can sometimes piggyback some of the protection and control costs. And of course you can amortise the cost of the line over three projects," he says. "Given the standard offer is paying what it is, I don't think it can go ahead as a single 10 MW project."

Bidding the project into the upcoming 500 MW RFP is not an option, he adds. "I can tell you right now I will not participate in an RFP. I have tried it and it just doesn't work. I just don't have the wherewithal and the ability to compete on price when none of the system benefits of my smaller projects are recognized."

Whittaker says project aggregation has been key to making standard offer wind power work in an era of skyrocketing turbine and other project costs. "It is really hard to make a 10 MW project work at C$0.11/ kWh. Full stop. The only way you can do it is by bringing projects together so you can get economies of scale in terms of your construction costs, but also in terms of being able to get a hold of turbines. Turbines are not exactly floating around, and it is hard to get five at a time. Fifty is much easier," he says. "Now they have basically killed that. They have made aggregation extremely difficult. You will have a lot more stand alone projects."

If the OPA wants to see small scale projects built separately, it will have to "bump up the price" on offer, says Whittaker.

The real problem

Estill argues the real source of the queue overcrowding problem is not RESOP rules, but the "very conservative" way Hydro One Networks, which operates Ontario's transmission grid and a large part of its distribution system, looks at available capacity on the wires. It will allow projects to connect to an upper limit of 60% of a transformer's rated capacity and to only one of the two transformers that are typically found in distribution substations in the province. "That brings you down to about 30% of the potential," says Estill.

The lack of warning about the changes, argues Whittaker, is "a breach of commercial good faith." And indeed, rumours are circulating within the industry of possible lawsuits arising from the decision. "They are changing the rules midstream with no notification, no consultation and what that does is tells investors to be careful with Ontario," Whittaker says. "You have got an estimated $800 billion that is going to be invested in the wind industry globally from now to 2020. Those investors are looking for stability and certainty and when they poke their heads into a market and see that the main player arbitrarily changes the rules, then that makes them skittish and it makes it harder to attract investment."

That issue was compounded just weeks after the rule changes were announced when the OPA dropped another bombshell. New RESOP projects, it says, will no longer be allowed in a number of key areas where transmission capacity is limited. What is available will be reserved for larger projects competing in the 500 MW renewable energy call and two combined heat and power solicitations also planned for this year. "They've taken the province and shrunk it down to a pretty tiny cube," says Estill.

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