development. Continued rapid growth is not yet a foregone conclusion
xxxxWith a record-shattering 1083 delegates -- up 59% on 2004 -- and a list of exhibitors nearly three times as long as any previous year, the Canadian Wind Energy Association's 21st annual conference left little doubt that the country's wind power market is on the cusp of exponential growth. But even as speaker after speaker added up the opportunities during the four day event in Toronto, delegates were also treated to some sobering reminders that now is the time to get the fundamentals right if the industry's progress is to match its promise.
From the tone of presentations during the conference's jam-packed schedule of three-track concurrent sessions and informal discussions in the crowded exhibition hall, it was evident that the wind industry's major players -- and the profusion of newcomers who came to Toronto during October 16-19 looking for a piece of the action -- view that promise as considerable. Canada's ratification of the Kyoto Protocol, combined with a federal incentive program that extends to 2010, provides the kind of long term, stable policy support that "brings a lot of confidence" to the market, said GE Energy's Simon Olivier.
Targets and tenders in nearly every Canadian province are expected to push the country's installed capacity from its current 590 MW to more than 7500 MW by 2013, meaning wind will generate 15-20% of all new electricity expected to come online over the next ten years. "That, more than anything, is a signal that wind energy is a serious part of Canada's electricity sector going forward," CanWEA president Robert Hornung told delegates. More than one speaker pointed out that Canada's massive reservoir-based hydroelectric resource, which currently supplies 62% of the country's electricity, provides a unique opportunity to integrate large amounts of wind power into the power system, while others told delegates that the country's extensive wind resource, large land base and relatively few "not in my backyard" problems provide a broad foundation on which to build.
"Overall right now, as General Electric, we see Canada as being one of the best places to build wind projects today and we are very optimistic for the future of wind here," said Olivier.
At the same time, however, delegates were warned they should not let their optimism blind them to issues with potential to seriously set back the industry's growth. "I think while the industry is poised for a boom, there is an alternative view that we all have to consider," said Fred Gallagher of Calgary-based company Vision Quest Windelectric, a veteran developer and the country's leader in installed capacity. "What I'd like to talk about are some of the elephants that are dancing on the table that we're not facing as an industry right now. I hear the whispers in the hall, but I don't hear them being boldly discussed in the conference."
One of those elephants is production from wind power stations that is not measuring up to modelling estimates, said Gallagher. During the first nine months of 2005 in Alberta, he said, several wind farms operated at an unexpectedly low 25% capacity factor, while the province's average sat at an equally disappointing 29%. It was a concern also raised by Jimmy Royer of Natural Resources Canada (NRCan), a federal government department, who told delegates the 14 projects currently receiving payments under the Wind Power Production Incentive (WPPI) program are operating at an average capacity factor of 32%, well below the average 40.5% predicted by their developers.
The problem from the government's perspective, said Royer, is that the WPPI program has already set aside funding based on the higher capacity factor estimates. If the trend continues, he said, NRCan could find itself at the program's end date with millions of dollars of unspent money that could have gone to support other projects. As a result, he added, the government is considering placing a capacity factor cap on future WPPI payments.
The problem from the industry's perspective could be even more fundamental than that, said Gallagher. Overly optimistic developers, and the fact that Canada does not yet have a lot of production that can be used to calibrate resources estimates, are factors. But at least part of the problem, he argued, can be traced back to how production was modelled in the first place. "We've done a lot of work to try and understand what the differences are and we're not finding the answer in the existing science, quite frankly. We think there is a flaw somewhere in the existing science on production predictions."
Major component failures and what Gallagher described as growing quality control problems with turbines are another significant concern for an industry already fighting a perception problem in the rest of the electric industry that wind is unreliable. "We're getting rapid product cycles, so there is not the opportunity to really test a lot of these products thoroughly before they are widely marketed. In fact, what we're seeing is a lot of situations where products are getting out into the market and problems are having to be dealt with after the fact," he told delegates. "I think this is leading to an unexpected rise in service costs, which is going to affect your pro forma. All of that drops to the bottom line -- and the consequences are really not yet being recognised."
In fact, said Gallagher, the single digit equity returns that are becoming common as developers compete for power purchase agreements leave "no margin for error" in dealing with any of the risks inherent in developing wind projects, an argument bolstered by consultant Andrew Chant of Ortech Power, who demonstrated to delegates how the "terra incognita" of post-warranty maintenance costs and lower than expected output at a typical 100 MW Ontario wind farm could rapidly eat away at equity returns. But increasing bids high enough to get "the 12, 14, 15% rate of return that you really need" to balance the risks, he said, quickly puts projects out of the running.
For Gallagher, the message is clear. "If we are talking about single digit returns at the outset on the pro formas of these projects, I think there are going to be a lot of disappointed people in this industry and I think there are going to be a lot of financiers who are going to go the other way," he said. "I, for one, do not believe that single digit equity returns make any sense at all. I think we have got to face that reality and deal with it."
Another reality facing Canadian wind developers, however, is that cost matters to the utilities buying the power. SaskPower, Saskatchewan's government-owned monopoly utility, recently complete a system impact study that identified 500 MW of wind that could be economically integrated into the province's 3500 MW grid, in addition to the 172 MW expected to be online by the end of the year and the 8 MW currently in contract negotiations. But one of the hurdles to developing it, said the utility's Ted Quade, is the big jump in turbine prices over the past year.
"As long as natural gas costs keep going up and the marginal generation on our system is dispatchable natural gas, wind has a home. However, if the cost of the equipment rises faster than the cost of natural gas, wind doesn't have a home. That is about a clear and blunt as I can put it," he told delegates. The utility had been expecting the recent run up in gas prices to drive more wind development, but that has not happened. "This came as a bit of a surprise," said Quade.
For Vestas, which is supplying 563 MW of projects recently completed or under construction in Canada, the price increases were needed to ensure it sees its own reasonable return. "We've been very clear that some of the projects we have undertaken in North America have been at prices that are not sustainable. That, combined with very sharp increases in commodity prices, mean prices have to increase," said Doug Duimering of Vestas Canada. "I think the industry as a whole needs to have financially strong suppliers to provide reliable equipment and be there to do the service."
In a market set to grow by leaps and bounds, the continent-wide concern over turbine supply was another question very much on the minds of delegates. But it is one for which manufacturers, said GE's Olivier, have no miracle solutions. The on-again, off-again US market has "burned" several North American component suppliers and has made turbine makers reluctant to commit, for the long term, to building new production capacity to supply projects they have not yet sold.
The promise of a more stable Canadian market has helped prompt GE to work to expand its supply base, he said, and decisions like the one made by North Dakota-based DMI Industries, which used the conference to announce its plans to expand its tower manufacturing operations into Ontario, are good news for the industry. "We have to see more of these suppliers stepping up and making these decisions," said Olivier.
At the same time, though, the nature of Canada's growth makes Germany's Enercon, one of the world's top five wind turbine suppliers, wary about stepping in too quickly to fill the gap, said the company's Michael Weidemann. "What we see today is that we have a very hot market, but we have a tender-driven market. It is a politically driven market. Right now we have a lot of tenders, but it could be different two or three years from now." Enercon's home market in Germany is based on standard offer contract prices for wind power, which are stipulated long term by government.
The driving force behind the tenders, however, actually bode well for the continued stability of the Canadian market, CanWEA's Hornung said. Provinces and utilities are driven by a range of factors, from climate change and clean air concerns to rural economic development, fossil fuel price mitigation and energy security. "There are diverse drivers for wind energy development in Canada, and that diversity is actually one of our strengths," he said. "It means there isn't one reason people are pursuing these things and if all of a sudden that reason disappears it's going to stop."
In fact, delegates heard most provinces have launched studies to determine how their grids would handle sizeable proportions of wind power penetration. Already announced purchase plans will bring Quebec to 10% by 2013 and, with research underway to see how that can be increased, the province plans to release a new energy strategy by the end of this year that "will indicate the government's approach to wind energy for the 15 to 20 years," said the energy ministry's Rene Paquette.
Manitoba, which already has more than enough electricity to meet its needs to 2020, is wrapping up a system study examining the integration of 1000 MW of wind into its 5000 MW hydro system, where it wants to use its reservoirs to store and reshape the wind for export to other markets, particularly in the US. Alberta has completed the first phase of its own impact study that suggests operational issues will start appearing by the time wind's penetration hits 10%, said the Alberta Electric System Operator's John Kehler. He pointed out there are already enough projects in the interconnection queue to reach that mark. "We're going there and beyond, so mitigating solutions are required and we're working with our industry on that." Saskatchewan, said Quade, found no technical roadblocks to penetrations as high as 30%, but found the "economics start falling apart pretty rapidly" after the level of wind on its system hits about 20%.
On the east coast, a recent study by the New Brunswick System Operator concluded that 1000 MW of wind capacity could be accommodated in the three maritime provinces if it is geographically dispersed. Prince Edward Island's Energy Minister, Jamie Ballem, told delegates he believes taking a regional approach will allow his province fully exploit its resources: "With 140,000 people and a peak demand of 200 MW, PEI is never going to do anything by itself, but if we become part of a 6000 MW Maritime grid then why can't we have 400-500 MW?"
Ontario has a target of 10% renewables by 2010, most of it likely to be supplied by wind, and has started consultations expected to boost that even higher. "We are drilling down quite a bit and hopefully in short order we will have a much better picture of the feasibility of wind over the next five or ten years," said the Ontario Power Authority's Amir Shalaby. "We're going to learn as we go. We are going to discover what our operating problems are, the predictability of the resource, how it works with everything else we've got."
The role of wind on the grid is an issue that has taken on a new urgency as governments and utilities start to see it as a potentially major player, delegates heard. At least three provinces have already developed specific interconnection requirements for wind and others are likely to follow quite quickly, said Garrad Hassan's Nigel Scott. The concern is that the industry will be faced with different sets of rules in every jurisdiction, a situation that "makes life for manufacturers very difficult and makes life for developers very difficult as well," he said.
CanWEA is trying to tackle the problem by developing a new national grid code for wind, but the challenge is to find a way to get it adopted. The provinces control their own electric systems, which tend to have stronger ties with US markets than with each other. As a result there is no national regulatory body through which national standards can be set, said Scott. CanWEA could try going through the North American Electric Reliability Council, he said, but what is decided there could have an impact on the US wind industry.
Beyond grid interconnection, delegates heard, Canada's wind industry is facing a familiar list of challenges it will have to resolve if it is to meet, and go beyond, the wind power targets now in place, including developing clear transmission policies, efficient environmental assessment processes, effective markets for emissions credit trade, knowledgeable financiers, appropriate taxation levels and a skilled workforce. "We have tremendous opportunity in Canada right now, but it still is an opportunity. We still have to make it work," said Hornung. "One of the most important changes in the last couple of years is we have a lot of support from governments and an increasing number of utilities. So when we meet these challenges, it's going to be easier to bring people together and work to resolve them."