Big delays for Quebec tender projects -- Start-up Quebec turbine company gets a break from GE pullout

Fledgling Quebec turbine manufacturer AAER could soon be finalising its first major order. The break for AAER results from the cancellation last year of a contract for GE to supply turbines to the 100 MW Mont-Lois project, one of eight selected by Hydro-Quebec in its first wind power request for proposals (RFP) in 2004. GE Energy was to provide turbines to all of the winning projects, but Victor Pergat from Toronto-based Northland Power, which owns the Mont-Lois project, says the turbine supply contract was cancelled last year.

"It was one of those things where they said they cannot supply and we negotiated, and there was an agreement on exactly how many turbines we would acquire and when. Mont-Louis was just not in the picture," says Pergat. GE's Kristin Schwartz declines comment. "It is GE corporate policy to not discuss customer transactions or contracts publicly. We are committed and continue to work to help meet Canada's growing energy demands," she says.

AAER, which is gearing up to bring its first turbines off the production line at its Bromont factory before the end of this year, last month announced the signing of a "reservation agreement" with Northland subsidiary Mont-Louis Wind LP for 61 of its 1.65 MW turbines. The units are to be delivered in the third quarter of 2010. Pricing and other terms and conditions will be worked out in the final turbine supply agreement, which Northland and AAER expect to execute within 120 days. But AAER estimates the final sale price will be C$142 million.

Finding replacement turbines for Mont-Louis is not a simple matter because the contract with Hydro-Quebec requires that 60% of the project costs be incurred in Quebec's Gaspésie region. AAER's factory is outside the area covered by the local content requirements, but Pergat says the turbine maker has a plan to acquire components from within the Gaspésie area.

Gaspésie content

"They are working on it and it looks like it is coming together," says Pergat. "On our side, of course, we want to see who the suppliers are and that they meet the requirements."

Northland had two successful bids resulting from Hydro-Quebec's 2004 RFP. The 150 MW Jardin d'Éole was to have come online by December 2007, but by the time Northland got all the necessary permits in place it was too late to get the turbines for 2007. It did strike a deal with GE for delivery of 85 of the manufacturer's 1.5 MW turbines to be delivered in 2009 and construction of the roads and foundations is underway.

By the time Jardin d'Éole begins commercial operation by December 1, 2009, it will be two years behind schedule, exposing Northland to late delivery penalties of C$55 a megawatt per day, to a maximum of C$3 million. The company will also have to pay penalties for reduced energy deliveries because the project will now come in at only 127.5 MW. Northland is hoping to eventually expand it to the full 150 MW, says Pergat, although there is no specific plan in place right now to find the "missing megawatts."

Canadian made

For AAER, the Northland deal provides "important validation" of the company's turbine technology and production capacity, says chief executive Dave Gagnon, who started AAER back in December 2000 with the goal of producing a Canadian-made wind turbine. The company signed a technology transfer agreement with Germany's Fuhrländer AG in 2004 and a licensing agreement with American Superconductor Corporation's Windtec subsidiary in 2007.

All the components are being made in Quebec, except for the parts that make up the drive train. For those, says Gagnon, AAER decided to stick with proven suppliers to the industry. The generators are coming from Austria's Elin EGB Motoren GmbH. "In the future, we will consider producing those here. But in the beginning we didn't want to take this kind of risk. We wanted to use experienced suppliers to have a good result for our customers," he says. "For the drive train, we were very careful because it is linked totally with our reputation."

AAER plans to manufacture five turbines this year, says Gagnon. Four 1.5 MW units will go to three projects in the US, while its first 2 MW turbine will be installed at a site in Criel-sur-Mer, France.

Grow production

"We want to start with this number for this year to ensure we have a good learning curve and to adapt our people," says Gagnon, likening AAER's strategy with Gamesa, which produced three turbines its first year and is now among the top equipment suppliers in the world.

AAER's plan calls for the manufacture of 90 turbines next year and 200 in 2010. "For phase two of our business plan after 2010, with another investment we can grow the production to 600 wind turbines here in our factory," claims Gagnon.

He says AAER is currently at various stages of discussion and negotiation with potential customers for 8000 MW worth of turbines. Originally the focus was on smaller developers and projects, he adds, but now some of the largest developers in North America are showing an interest. "That is where we have progressed very rapidly in the last eight months," he says.

While it is true that potential customers want to see an AAER turbine up and operating, says Gagnon, he believes his choice of proven technology will help it carve out a place in the market. The Fuhrländer turbine has been a production series machine in Europe for a number of years.

Hydro-Quebec, Gagnon points out, accepted AAER as a bidder in its recently completed call for 2000 MW of wind and its turbines passed utility tests simulating their behaviour on the grid. The company has also tried to ensure that banks will feel safe lending to projects that use its turbines, which is often a hurdle for industry newcomers, by securing warranty insurance.

Jumpstart failed

In its response to Hydro-Quebec's 2000 MW call for projects issued in late 2005, AAER partnered with developers for 2106 MW worth of bids, but did not win any contracts. It was a big blow when the results were announced earlier this year (Windpower Monthly, June 2008), admits Gagnon, not only to the company's hopes that it could jumpstart its business with a share of the contracts, but also to its stock price.

On April 30, five days before the results were announced, its shares were trading at a 52-week high of C$2.10 on the TSX Venture Exchange. After the winning bidders were announced, they tumbled and are now trading in the C$0.25 range. Gagnon thinks while the market may have been trading high in the lead up to the Hydro-Quebec announcement, its stock valuations are now too low. "I'm very confident the market will recognise our effort in the next months. The milestone for us is to start production and deliver our turbines."