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Canada

Utility accepts victor for wind supply -- Cut throat Nova Scotia auction widely criticised by bidders

Nova Scotia Power has chosen a local company to supply it with 100 GWh of wind power a year, bringing to an end a selection process that took 18 months to complete. The investor-owned monopoly utility is now negotiating the details of a power purchase agreement with Nova Scotia's Renewable Energy Services Ltd (RESL). At the same time it is negotiating sale of that power to a "potential large customer," says Nova Scotia Power's Michele Peveril. Peveril will not name the customer, but it is well known that the federal government is in the market for green power for its facilities in the province.

RESL's Brian Watling is short on detail until the power purchase agreement (PPA) is finalised. But he says the wind farm, expected to be about 30 MW, will be in the south of the province. The company is looking at wind turbines with capacities of 1.5 MW and larger. "As soon as the PPA is in place, all of the rest of the blocks fall together," he says. "We proceed to the financing, we proceed through the baseline engineering and the detailed design, with an expectation that the bulk of the capacity should be online before the end of this calendar year."

Development funds

RESL, which formed three years ago, expects at least part of the project's equity to come from individual Nova Scotia investors. The company has created a series of nine development funds -- dubbed Scotian Wind Fields -- which operate within specific regions of the province. The funds are administered through community boards. The idea, says Watling, is to "set up a number of wind field corporations which have very particularly Nova Scotian tax advantages."

Investments in the funds receive a 30% investment tax credit and can be held in the investor's registered retirement saving plan (RRSP), deferring income tax payments on the money until it is withdrawn. For residents who live outside the Halifax area, the provincial government will guarantee 20% of the investment against loss for the first four years.

When RESL started, says Watling, its corporate goal was to develop 100 MW of wind within five years, with 40% of that financed through the equity participation of private Nova Scotians. "Every year in Nova Scotia, $650 million goes into RRSPs. So the question is, under current market conditions, how much of that money will flow into wind turbines," he says. "This contract has taken it from concept to reality. Hundreds of thousands of dollars were attracted to the concept. We expect millions of dollars to be attracted to the reality."

Controversy

Nova Scotia Power selected RESL after conducting a binding online reverse auction in October, a method that some bidders, including the winner, say is inappropriate for buying wind power. Seven companies participated in the auction, bidding against each other in five separate lots covering contract terms from five to 25 years.

It is a system difficult to apply to wind projects, says Vision Quest Windelectric's Jason Edworthy, because at the early stages of development there are a variety of variables and unknowns, such as municipal taxes and interconnection costs, that make it impossible to get an accurate comparison of projects and price. "How do you normalise it so everybody can give you one price, at their busbar or whatever, so everyone is talking apples to apples?" he asks. "If this was just a commodity that didn't have all these variables, if it was just bolts, there is nothing wrong with this process. That is not what this is though."

The auction system, Edworthy adds, ignores factors beyond price, such as experience and expertise. It could potentially harm Canada's fledgling wind industry. "It drives us and the industry to cut each other's throats," says Edworthy. After participating in the auction, a marathon session that lasted more than 11 hours, Vision Quest believes some participants underbid themselves. "In all cases, in our opinion, the top two bids were below anything anyone could reasonably do," he says.

Details kept quiet

Watling will not reveal the price or the term of the deal RESL is finalising with Nova Scotia Power, but he says the company is prepared to follow through. "We're confident that our bid price is a good price and we can make money. It is that simple," he says. "We are not entertaining, at any point along the line, taking some sort of loss leader contract."

Watling, however, agrees the process was wrong for wind power, especially in a market, which, until proposed reforms open the field to more competition, is dominated by a single monopoly buyer. "We felt, and continue to feel, that the reverse auction process is more suitable to a more mature market."

Peveril says Nova Scotia Power is pleased with the results of what she admits is a "unique" approach for buying green power. "We believe it has brought us to a point where we can work with a quality partner in RESL." After receiving proposals last year, she says, the utility wanted to see if it could do better on price with an auction. "Our goal was to come to the lowest cost possible to the end customer. And it was competitive, for sure."

The utility has received feedback from the bidders, she says. "I think it would be fair to say that we would take what we learned, good and bad, and for future potential development of renewable energy those would be good learnings for us. At this point we've certainly been satisfied with the approach and will continue to walk through the process and see if it all comes to fruition."

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