Continent's first FIT lures producers

CANADA: Round one of contract awards in North America's first comprehensive feed-in tariff (FIT) programme shows the scheme has created an attractive option for wind power producers seeking deals in a time of low power prices and sinking demand, experts say.

But how Ontario, the first administration on the continent to offer a full-blown FIT, handles the next phase of its renewable energy strategy will determine whether it can maintain investor interest.

The Ontario Power Authority (OPA) offered power purchase agreements (PPAs) to 184 renewable energy projects in April. This included 48 wind farms with a combined capacity of 1.5GW, about 63% of the 2.4GW that was issued contracts.

The winning bidders include some of the most recognisable names in wind, including Florida-based NextEra Energy Resources, Chicago's Invenergy and UK-based International Power.

"The fact that those players are getting significant capacity and are investing in that market is encouraging for Ontario," says Tim Stephure, an analyst with Massachusetts-based Emerging Energy Research (EER). "It has attracted some of the biggest."

The interest in Ontario is understandable, says Stephure, when you stack the province's FIT programme up against market conditions in the rest of North America.

A newly released report from the US Federal Energy Regulatory Commission found that wholesale electricity prices in the US fell by more than half last year, driven largely by a drop of more than 50% in natural gas prices. Demand fell by 4.2% in 2009, the most severe decline in 60 years and the first time in that period that demand had fallen successively over two years (Windpower Monthly, May 2010). This, says Stephure, has made it very difficult for wind producers to get PPAs and has led some major players to cut build expectations.

By contrast, FIT pays a guaranteed rate of C$0.135/kWh for a set term of 20 years. "These projects, with those two things in hand, will be much more likely to get financing because the economics of the project are in place," says Stephure. "For the players who got contracts, this is an incredibly favourable programme and one that they will be encouraged by."

Unclear future

The key question facing the Ontario market now is what will happen with the 6.5GW of projects that did not get a contract in the first round, more than 5.5GW of which are wind. European jurisdictions that have implemented FITs generally back them with very long-term, very aggressive and very binding targets that give certainty for investors, says Stephure - something that is missing in Ontario.

"They have the price structure in place that provides economic incentives that work for the industry, that allow them to make a reasonable profit off their development activities," he says. "The other half of the equation, however, isn't quite there. That long-term view still isn't quite as clear as the industry would probably like."

Transmission is one of the biggest uncertainties facing developers. The projects that got the green light in the first round used up all available capacity in the province, leaving the rest to undergo an economic connection test (ECT) to determine whether it is economical to build additional transmission infrastructure to connect them to the grid.

The test, developed with stakeholder input, is likely to run from May until August or September, and a decision on transmission upgrades to be undertaken is expected in the first quarter of 2011, says Ben Chin, the OPA's vice-president of corporate communications. After that, he says, the ECT will be run every six months to determine further reinforcements.

Some urgency

Getting new transmission permitted and built is never a fast process, says Stephure. "Those queues tend to be sort of a wind developer purgatory where they're not sure, and uncertainty is very difficult for companies to manage. Developers can only wait so long for things to happen. So the ability for Ontario to really boost up its system quickly and to ensure that more of these FIT contracts are awarded will be important to keep the industry interested in Ontario and keep some of the bigger players there prospecting sites and wanting to be active."

International Power Canada won almost 76MW worth of wind contracts in the FIT's first round and has another 423MW awaiting the first ECT. David Timm, vice-president of strategic affairs, agrees quick action on transmission will be key to keeping investors in the market. His company is also looking for long-term market signals from system planners on questions like expected demand growth in the province and how it will be met.

"There are a number of markets where investment can flow," says Timm. "Ourselves and most of the other players are competing for that investment with other business units within our companies, so I think there has got to be a lot of positive signals within the next few months in terms of how the Ontario market is going to move forward."

A potentially negative signal could be how capacity is allocated on the one major transmission project that is under way in Ontario. Government-owned grid operator Hydro One expects to begin construction this year on the 3GW Bruce-to-Milton line, a 180-kilometre, double-circuit 500kV line that cuts through a prime area for wind development. Yet, when it comes into service by the end of 2012, half the available transfer capacity will go to refurbished nuclear generation in the region, and the other half to renewable energy projects, 1.2GW of which will be located in the Bruce region on Lake Huron and 300MW in south-western Ontario.

With just over 1.6GW of projects in Bruce and 2.1GW in south-western Ontario on the ECT list, the new line is sorely needed. But the concern for developers is that a big chunk of its capacity could be taken off the table under the terms of a deal between the provincial government and a consortium led by Korea's Samsung C&T Corporation (Windpower Monthly, March 2010). The consortium plans to build 2GW of wind and 500MW of solar in five phases of 500MW each by 2016. The province has already reserved 500MW of currently available transmission capacity for the first phase and appears to be also looking to set aside space on the Bruce-to-Milton line for Samsung's second phase of development. That would again bump some developers who might have expected to get contracts down the connection queue.

"I think it is a pretty rational forecast to say that Samsung's Phase 2 is certainly going to be part of Bruce-to-Milton," says the OPA's Chin.

On the other hand, he says, the need to accommodate future phases of the Samsung agreement could push transmission build into areas that might not otherwise have passed the ECT. "For Samsung's competitors it is a mixed blessing," Chin says.