Canada announces production incentive for first ten years of all projects -- Huge budget surprise for wind

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Canada's federal government will spend C$260 million over 15 years to provide production-based incentives to wind power developers, a program it says will "help to provide a long-term stable revenue source" for the industry. A price subsidy starting at C$0.012/kWh ($0.0076/kWh) will be paid to eligible projects commissioned after March 31, 2002 and before April 1, 2007. The incentive will gradually decline to C$0.008/kWh by the fifth year of the program and will be available for the first ten years of a project's life.

Finance Minister Paul Martin made the announcement in his December 10 budget speech, a decision that caught the wind industry by surprise. The budget was planned in the wake of September's terrorist attack on the United States and few observers expected it would contain new spending initiatives beyond those related to national security.

"To do it in a budget like this was extraordinary," says Canadian Wind Energy Association past president Fred Gallagher, who has been at the forefront of the industry's ongoing fight for a federal wind energy policy. "Our feeling was that it wasn't going to happen."

Martin tied the plan to the government's greenhouse gas emission reduction goals. "Recognising that there are few things more basic to life than the quality of the air we breathe," said Martin. "In order to reduce greenhouse gases that contribute to climate change, this budget will fund a new long term program to provide incentives for the production of a key source of renewable energy -- wind power."

Although the specifics of the plan had yet to be released, the budget announcement appeared to almost exactly mirror CanWEA's proposal to the government, except that the association had asked for an initial incentive of C$0.025/kWh, double what has been announced. "I couldn't be more pleased with the approach," says Gallagher. "There's no question the government listened to exactly what we said. The only thing is it's only half of what we asked for and the reason is it probably wants the provinces to do their part." Indeed, the budget papers emphasise this point: "Provincial and territorial governments are encouraged to provide additional support for these wind energy investments," they say.


CanWEA has been caught in a tug-of-war between the two levels of government, says Gallagher, as each waited for the other to make the first move. "Finally, somebody has jumped out and taken a leadership position," he says. "If a province wants activity, it's going to be much more motivated to do something now."

The provinces, which have jurisdiction over electricity markets in Canada, will have to act if the industry is to reach its goal of 10,000 MW of installed wind capacity by 2010, Gallagher says. "I think we're now well on our way to a substantial amount of wind power in this country in the next ten years. What does substantial mean? I still think that 10,000 MW by 2010 is achievable. Is it achievable with only this incentive? No. It's going to require provincial action."

The Clean Air Renewable Energy Coalition (CARE), an alliance of oil companies, environmental groups and municipalities, estimates the new mechanism will help attract about C$700 million in new wind power investment. "It puts Canada on the radar screen for global investors in renewable energy," say Rick George, CEO of Suncor Energy, one of the driving forces behind the coalition.

CARE, however, believes the federal government could do more. The coalition had been pushing for a green consumer tax credit as a way to develop demand. "We do think to get a true market developed for renewables in Canada and a sustainable market over the long haul, you do need to engage consumers in making a choice," says Suncor's Gordon Lambert. "You need to both provide them with the capability to make a choice and then reinforce that behaviour. We weren't successful this time around, but we'll continue to make that case."

Better than PTC

Although also based on the power production from a wind plant, Canada's incentive appears to avoid some of the drawbacks of the US production tax credit (PTC). Smaller US wind power developers without substantial tax liability cannot take advantage of the PTC, forcing them to seek out large, tax-paying equity partners that can. Canada's plan is not tax-based, meaning the benefit flows to all producers, large or small, taxable or not. That, says Gallagher, is "absolutely paramount."

The declining value of the incentive over the five years of the program is also an important aspect of the plan. "It is going to kick-start activity sooner, and it is going to dovetail with natural cost reductions," says Gallagher. It is also, he says, going to help foster the "natural evolution" of the industry rather than a dependence on government subsidies. Gallagher expects by the time the incentive expires in 2007, it will be replaced with some kind of national emissions reduction trading mechanism.

"Here's a policy instrument that will ensure wind energy starts to build momentum in the energy sector within the next five years. But what really will transform this is the whole issue of emissions reduction, turning that into a real policy," he says.

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