Purchase price cap may be too tight

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The Quebec government has issued draft rules for two new requests for proposals (RFPs) for a total of 500 MW of smaller-scale, locally based wind power projects, but industry players are worried a proposed cap on the power purchase price could end up discouraging potential bidders. The RFPs, for 250 MW each, will be directed at Quebec municipalities and at First Nations groups. Both have been vocal in demanding more of the financial benefits of wind energy development in their jurisdictions.

The final version of both tenders will be released this fall and target projects up to 25 MW in size that will come on line between 2012 and 2014. Under the proposed rules, municipalities will have to provide at least 30% of project financing and take at least a 30% ownership stake in the wind farm. First Nations groups will have to pony up 30% of project costs and have a 50% ownership stake.

But government's proposals also set a cap of C$0.095/kWh on the price to be paid by Hydro-Quebec, equivalent to about a 10% premium on what the utility is paying for power from the 15 winning projects in its recently completed call for delivery of 2000 MW of large scale wind farms (Windpower Monthly, June 2008). That may not be enough, warn the Canadian Wind Energy Association (CanWEA). It has hired Hélimax, a wind industry consulting firm in Montreal, to do a financial analysis.

"Our fear is that at nine and half cents a kilowatt hour the rate of return may be low enough and the risk high enough that it makes it an unappealing investment. So we are trying to get our heads around that question and our comments to the government will reflect that analysis," says CanWEA's Sean Whittaker.

It is a particularly important question because of the proposed financial structure of qualifying projects, Whittaker says. A 25 MW project is a C$50-60 million investment, meaning municipalities and First Nations will have to come up with about C$18 million as their equity stake. "We know they will have to partner with the private sector. That is pretty clear. And we know the private sector can come up with that kind of financing. The 70% chunk I would be less worried about. The chunk I would be worried about is the 30%," he explains.

For a municipality to come up with C$18 million is tough, Whittaker continues. "It can be a risky venture. Municipalities are going to have to do a lot of thinking and a lot of careful analysis to make sure they can do that investment. They are pretty strained these days with respect to investments in infrastructure."

Like other Quebec wind power purchases, the two planned RFPs carry requirements for a good deal of the project spending to be done locally. At least 60% of the project cost must be spent in the province and 30% in the Gaspésie region.

Stakeholders had until the end of June to provide feedback on the rules before the terms of the call are finalised.

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