Canada - Construction surge may lead to finance bottleneck

CANADA: Canada is on the cusp of a surge in project construction that will not only more than double its total installed capacity over the next few years, but also significantly increase its profile in the broader wind-energy marketplace.

"We expect the market to really grow, both in terms of megawatts and in relative significance to the US, to account for roughly 20% of the North American market by 2015," says Matthew DaPrato, a senior analyst with consultancy IHS Emerging Energy Research. "That is up from an average of 10%."

The growth spurt started last year, with construction of 18 projects totalling a record 1,250MW. The 2011 total was nearly double the 690MW installed in 2010 and marked the first time Canada installed more than 1GW of projects in a single year. DaPrato expects the country to have its best year ever in 2012, with more than 1.7GW of new wind likely to come online. For the next four years, he says, installations are expected to average 1.5GW a year.

The heightened level of construction activity, combined with several gigawatts of solar and small hydro projects - also under contract to be built in roughly the same time frame - could lead to some financing challenges for the industry.

"There will be a high volume of projects coming down the pipeline over the next three to five years," says Michael Weizman, a partner in the Canadian energy law group at McCarthy Tetrault. "I think it will put a lot of stress on the financial markets."

Timing will be a factor in how well lenders are able to cope, says Bill Sutherland, senior managing director of project finance at Canadian financial services firm Manulife Financial. Permitting delays for wind farms contracted under Ontario's feed-in tariff (FIT) programme have meant that an expected flood of projects looking for capital has slowed.

"It really depends on how quickly the gates are opened on the FIT projects," says Sutherland. "There could be a large number of them and that could cause a bottleneck. We've got some very large projects in Quebec that will demand substantial capital as well."

However, Canada's growing demand combined with market uncertainty in the US is helping to bring new players into a financing mix. Japanese banks have come into the market in a big way and Canadian banks are showing increased interest in the sector, says Sutherland. Canadian pension funds and major financiers such as GE Energy Financial Services and Siemens Financial Services are also showing interest, he adds, and while there has been a retreat by European banks in the face of sovereign debt issues, there are still some willing to take slices of deals.

One area of emerging concern for both developers and their lenders is how the new wind capacity will be managed on the grid. "The growth has been so rapid that I think in many jurisdictions you are seeing an effort to have market rules and procedures catch up a little bit with the increasing role that wind and other sources of variable generation are playing," says Robert Hornung, president of the Canadian Wind Energy Association.

The results of that work could have significant implications for the sector. Rule changes being contemplated in Ontario, for example, have raised the spectre of increased curtailment of wind generation. Making sure the rules work for wind is a major priority for the industry, says Hornung.

"In the short term, it has an impact on the economics of projects," he says. "In the longer term, it all comes down to what the ultimate size of the market will be."

Once the current build out of wind is over, the big question facing the Canadian industry is what comes next? "There is very little guidance coming out of some of the provinces and there is, in many cases, little reason to be optimistic that they will continue to turn to wind in a significant way," says DaPrato.

Plummeting natural-gas prices are expected to make traditional generation attractive, while in major markets like British Columbia and Quebec, DaPrato expects hydro to remain the dominant technology choice.

"With wind's costs coming down, there is room for it to fit," he says. "But these are very hydro-heavy systems with established players that are very comfortable developing and owning and operating large hydro plants. That's really the challenge for wind over the long term."

Ontario is grappling with lower demand, surplus supply, transmission bottlenecks and revisions to its FIT programme, but DaPrato expects it to continue to be a bright spot. It has a plan to bring wind on its system to about 7GW by 2018 and "we expect it to continue to award FIT contracts over that time frame to build towards that goal," adds DaPrato.

Alberta is also a province with interesting potential, says DaPrato. Strong demand growth is driving the need for new generation, he says, and with the province's very strong resource, "wind does stand to be pretty competitive in Alberta's power market".