For the most part, the Canadian Wind Energy Association's 22nd annual conference was a reflection of what president Robert Hornung happily described as a "year unlike any we have seen in Canada before." Nearly 1400 participants, a significantly expanded trade show and stronger international participation made it clear that the tremendous growth of Canada's wind market in 2006 is attracting attention. But even so, much of the debate during the four-day event, held October 22-25 in Winnipeg, was centred on how to keep concerns over issues like rising costs, policy uncertainty, permitting challenges and interconnection issues from throwing cold water on what has become a hot market for wind.
Hornung conceded the point during his status report to the conference's opening plenary session. "It is a report that kind of has a black and a white side. On the good side we have a lot to celebrate in 2006. I want to highlight that and recognise that," he told delegates. "On the other hand, it is also true that we can't be complacent. We still have a number of challenges that have to be addressed."
The numbers leave little doubt that Canadian wind is in the middle of a boom. The industry is on track to double the country's installed capacity in the space of a single year -- and to maintain that momentum with a 2800 MW pipeline of projects that are either under construction or have signed power purchase agreements. For the first time, every province is moving ahead with wind and together they have put in place purchase plans and long term targets totalling 10,000 MW by 2015. That level of development is enough to meet about 4% of Canada's electricity demand, about what natural gas does now. More importantly, it also means wind would account for about 20% all new electricity expected to come online over the next ten years. "We may be only 4% of the total by 2015, but we are playing a much more significant role today in terms of investment decisions by power producers and utilities," said Hornung.
Policy uncertainty
But, as delegates heard repeatedly throughout three days of three-track parallel sessions, meeting those goals is far from guaranteed. As the industry gathered in the Manitoba capital, the future of federal government support for wind power development was unclear. Natural Resources Minister Gary Lunn, who chose to appear at the conference via a one-minute taped video address, failed to change that, saying only that his government is "looking at ways to ensure the development of wind power continues to grow." When Lunn's Conservative party was elected earlier this year, it froze funding for a C$920 million expansion of the wind power production incentive (WPPI) as part of a broader program review. No new WPPI funds have been available since April 1.
"It is a serious issue. We have a number of projects in Canada that actually signed power purchase agreements after the 2005 federal budget was passed on the assumption WPPI was going to be there. In fact, C$2 billion worth of projects are in that situation. The absence of WPPI would fundamentally change the economics of those projects," said Hornung. "Of course, the ongoing uncertainty also sends a negative signal to investors and to provincial governments about the stability of the Canadian market."
For Aidan Cronin, an international policy advisor for Vestas, the treatment of WPPI signals trouble. "It is about sleeping at night, and if I was working in this market and looking at it from a long term perspective, I wouldn't be sleeping that well," he said. "There is no federal leadership and in today's world with energy increasing in importance, it is basically unacceptable."
While Cronin told delegates that the "very, very promising" steps the provinces are taking to support wind development help balance out the federal risks, several speakers cautioned uncertainty exists there as well. Despite the requests for proposals (RFPs) being issued by provincial utilities, "There are very few jurisdictions that have actually laid out a roadmap of a procurement strategy for how they will get to their full target," said Hornung. Understanding how the provinces plan to get to 10,000 MW is a priority, particularly in a time of tight turbine supply where manufacturers are already booking orders for 2008. "As a manufacturer it is key to have enough time to prepare and to put in place the best forward strategy for those RFPs," said GE Energy's Simon Olivier.
It is an issue for project developers as well; throughout the conference discussions, Ontario emerged as a case in point. The province has a target of 2700 MW of renewable energy by 2010, but after signing contracts for 1370 MW in 2004 and 2005, large scale procurement has stopped. A planned 200 MW RFP for projects less than 20 MW in size, announced in April 2005, has yet to materialise. The province has been working on the details of a standard offer contract program, scheduled to be launched last month, for projects of 10 MW and smaller connected to the distribution network. Vision Quest Windelectric's Liz Cussans is predicting a "gold rush" response from developers that would normally be competing to build larger projects.
"It is the only game in town," she said. "None of us see a sort of stable, predictable growing market in Ontario. That is what is forcing the gold rush. There is a lot of pent up enthusiasm, a lot of pent up invested dollars. But there is also fear of the future, so it is all coming into the perfect storm the day the standard offer contract program opens."
Hydro One Networks, which provides transmission and distribution service to most of the province, has been in the eye of that storm for months. Since January it has conducted more than 240 interconnections studies for standard offer hopefuls and expects total applications to hit 600 by the end of the year, said the company's Bob Singh.
Grid concerns
It seems that not all projects looking for a standard offer contract when the program is launched will get one, however. The Ontario Power Authority (OPA), which manages the program, plans to restrict or even refuse standard offer applications in zones with transmission constraints. "Adding wind on the distribution system near where load significantly exceeds supply is a good fit. Generally there are no transmission limitations. Adding wind on a distribution system in an area where supply significantly exceeds the load is not as good a fit," explained Don Tench of the province's Independent Electric System Operator (IESO). "Unfortunately, the good wind regimes appear to be in areas where supply exceeds load."
The frustration among developers was evident as they pressed OPA and IESO panellists for solutions that would allow project development in affected areas to continue without, as one developer put it, "stopping everything dead in its tracks." The issue, however, is not limited to standard offer projects. Nor is it limited to Ontario. As Vision Quest Windelectric's Jason Edworthy emphasised, it is not an issue that is limited to wind. "There is lack of transmission for all forms of generation," he told delegates. "We all know there has been very little investment in new transmission in the last fifteen to twenty years in most jurisdictions and yet our economy has grown, our population has grown and loads have grown. It is time to get bold and brave and build new transmission and do it right." That is especially true, added Brookfield Power's Jim Deluzio, if the provinces expect to have a collective 10,000 MW of wind online by 2015. "That isn't very far away on a transmission development horizon. We really need to be starting the permitting processes now and building more lines now."
The economic equation
Not surprisingly, in a market located just north of an increasingly voracious US goliath, the shortage of wind turbines and their rising costs was very much on the minds of delegates. Few seemed to think a solution is near at hand. "I think it is going to get very tough. Turbine prices are going to continue to rise because of inflation, because of competition for the materials that go into the technology," said Edworthy. Speculators have also entered the fray, added GE's Olivier, driving material costs even higher. "Right now, it is not a very rational market we are operating in. Going forward, we hope that costs will stabilise, driven by R&D work we are doing and by finding alternative components and materials," he told delegates.
As challenging right now is the ability of developers to get their hands on turbines, whatever they cost. The nature of the Canadian market means few companies are in a position to place the kind of large framework orders the big US developers now favour. "If you are a small developer and you want to order five turbines you have a tough time competing against the guy who wants to order 150," said Hornung. The situation, said Deluzio, will help drive consolidation in the Canadian industry, much like it is doing in the US. "We will see a lot of the larger developers merging together and I think we will see greater investment from developers coming from outside of Canada."
Consolidation
That dynamic became obvious in the days leading up to the conference, when Ireland's Airtricity announced its purchase of Toronto developer Gale Force Energy, and at the event itself, where leading players in the US, like FPL Energy, PPM Energy and Babcock & Brown, had a high-level management presence. In large part, their interest in Canada is being driven by uncertainties south of the border, where the on-again, off-again US production tax credit (PTC) is set to expire once again at the end of next year.
"The PTC is a major driver in the US," said GE's Olivier. "Should it come to an end, that is the reason several developers are looking at the Canadian market as a hedge." Another reasons this time around could be that some of those same developers have invested tens of millions of dollars in buying turbines for delivery in 2008, with no guarantee the PTC will be renewed or, if it is, that it will happen in a timely way.
For developers already on the ground in Canada, turbine supply and cost are only two variables in an increasingly complex equation. "We also have increasing costs in other aspects of development. The increasing requirements for environmental assessment, federally and provincially, mean more years of baseline monitoring and more years of follow up monitoring. All of that is very expensive and something our competition does not have to do," said Edworthy. "Also there is an increasing cost for integration into the grid because of the desire for wind to look like firm power when it is delivered to the system operators across Canada."
Permitting challenges
At the local level, projects in some parts of Canada are facing permitting delays or even moratoriums on wind development as municipal governments try to figure how to deal with technology they are not familiar with, and with residents worried about things like noise, visual impact and declining property values. "What we are seeing develop in Canada, slowly but surely, is a patchwork of municipal permitting requirements which makes life more complicated for everyone and doesn't actually generate the best outcomes for anyone," said Hornung. On top of that, an emerging issue is what some panellists described as one-upping, where cautious local politicians take the most stringent requirements that have been set elsewhere around things like turbine setbacks, then make theirs even tighter. "That is a problem and we need to be working with municipalities to ensure we are doing these things based on good information and moving, where appropriate, to some standardisation," said Hornung.
Lars Møller, president of Danish tower supplier DMI Industries, told delegates one of the barriers a relatively young market like Canada faces when it comes to permitting and environmental assessment is lack of precedent. "I think some sort of stability, some sort of default will come. But I think as an industry we need to push very hard on that. It delays projects and it gives you ebbs and flows. The ad hoc requirements you see on projects are a large discouragement for developers."
In Quebec, delegates heard, developers may actually start finding themselves in the unusual position of being in competition with municipalities. There has been a long standing insistence by communities in the province that they benefit financially from projects in their jurisdictions. Hydro-Quebec recognised this in its current 2000 MW request for proposals, which encourages equity participation in projects by municipalities by making it part of the bid evaluation criteria. The government has also promised a future 250 MW RFP for small-scale, community-based projects. Some local governments are partnering with developers in the current RFP, but some are pursuing their own projects in anticipation of the next.
In fact, said Claude Imbeau of the law firm Fraser Milner Casgrain, a recent survey conducted by an association of Quebec municipalities found 90% are favourably inclined towards owning wind farms. "There may be a greater economic incentive to wait for the RFP promised to them where they will have equity control," he told delegates.
Hydro-Quebec's Gilles Côté, however, warned that if municipalities make that decision without a firm grasp of what is involved, it could have potentially negative implications for the broader industry over the longer term. "Some see direct participation of the community in the ownership of wind farms as a means to reach their goals. But I think the risks involved are grossly underestimated and the results of that kind of undertaking, if it is not cared for appropriately, may have an impact on the industry as a whole."
Local content cons
The Quebec government has tried to ensure the economic benefits of wind development stay in the province by setting strict local content requirements for projects in both the current 2000 MW RFP, which asks for projects be delivered between 2009 and 2013, and an earlier purchase of 990 MW. A CanWEA study released at the conference found over the next nine years, C$7.5 billion will be invested in Quebec wind, with the majority of the investment dollars remaining in the province. More than 43,000 person-years of employment will be created during the construction phase, along with 1500 permanent jobs during the operational phase.
For Imbeau, the figures show that "the government's approach to economic development by way of the wind energy sector will have accomplished a great deal." But for turbine manufacturers the benefits of investing locally may not always be as clear, Joshua Magee of Emerging Energy Research told delegates. "The level you set your local content requirements at most definitely will influence the interest of turbine vendors in moving into that market. However, given that first postulate, the second is very, very important. If you are going to set local content requirements at a certain level, you must guarantee that the underlying market fundamentals for long term sustained growth are there, otherwise you are going to get into trouble."
China and Spain, for example, both have local content requirements ranging up to 70%. But both countries also provide large markets and the opportunity to export production elsewhere. "Compared to these examples, Quebec is not the most obvious market for export potential. It provides several key transport logistical issues and that translates quite directly into cost, "he said. And by the time projects from the second RFP are complete, the province will be approaching a capacity penetration of 10%, which may limit the future market for wind. "It is not necessarily a ceiling, but we are starting to get into significant megawatts of wind," Magee said. "The question is, if export becomes less of a viable optional, what is the guaranteed offtake for this manufacturing capacity that has been built up over the last few years? It is a question that I think lingers and it is going to have an effect, most definitely, on what happens to the fledgling wind energy industry that Hydro-Quebec has worked very hard to create."
Montreal-based AAER Systems, which holds the North American licence for German-developed Fuhrländer-Pfleiderer technology, announced at the conference it would move ahead with the necessary manufacturing facilities if it wins 600 MW of orders in the RFP. But other turbine makers are playing their cards close to their vests. GE Energy, which already has a manufacturing presence in the Gaspé after winning all of the orders in Quebec's first RFP, is still finalising its position, the company's Robert Gleitz said. "It is obviously not an easy RFP. Its difficult points are local content, but also the fact that it is spread out over a lot of years. Who knows what is going to happen after the first years? Who knows where commodity prices are going to go?"
Still optimistic
Despite the many issues confronting the industry, the consensus among conference participants was that the future is bright for the Canadian wind market. In fact, Hornung told delegates, current provincial targets should be viewed as minimum levels of development. "Much more is possible, and actually many jurisdictions are looking at higher penetration levels and assessing what the implications are," he said.
In Ontario, for example, a new GE Energy study presented at the conference found wind power penetrations of up to 5000 MW would have minimal impacts on the operation of the province's power system (page 43). CanWEA teamed with the OPA and IESO to commission the work and the IESO has now established a stakeholder group to look at wind power integration issues and solutions. It is in that type of collaboration that Hornung sees the potential for progress.
"I am optimistic because I know that going forward it is not just the wind energy industry that is going to be addressing these challenges," he said. "As the industry has grown we have gained a lot of allies. We are working collaboratively with system operators, we are working with utilities, we are working with governments, and together we are making progress. I have every confidence we are going to succeed."
