Incentive program still needing more muscle -- Canadian policy taking shape

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For Canada's wind energy developers, 2002 was a year when the policy pieces needed to drive the industry forward began falling into place. The federal government launched its five year wind power production incentive program (WPPI) and ended the year by voting to ratify the Kyoto accord on climate change. At the provincial level, governments across the country began to look at ways to increase the amount of clean energy flowing onto their power grids.

But despite the progress, 2002 was also a year that showed just how much work there is left to do. "It is beginning to gel, but it is not quite there," says Glen Estill, president of the Canadian Wind Energy Association (CanWEA). "The good thing is that when it does gel, the industry could move forward very quickly."

The numbers illustrate Estill's point. Last year, Canada's wind industry added just over 31 MW of new capacity, less than half the total for the previous year. But at the same time, developers have registered letters of interest under the WPPI program for 80 projects with a combined capacity of nearly 3300 MW. About 1200 MW of the registered projects have an expected commissioning date in 2003, but Estill does not expect them all to go ahead this year. "A lot of the expressions of interest are just that," he says. "They will not translate into the installation of turbines until the economic environment is proper, and that's a function, largely, of government policy."

The five-year, C$260 million federal WPPI program is the foundation of that policy. CanWEA predicts that 58 MW will be installed under the program during its first year, which ends March 31. While the total is not surprising, given the time lag for projects to get designed, approved and actually built, "I would say industry people are perhaps a little disappointed that things haven't proceeded a little better," says Estill.

The wind industry has been hit by a series of market fundamentals outside its control, including a drop in power prices triggered by the downturn in the US electricity sector, currency exchange differentials that have driven up the cost of turbines shipped from Europe, and big hikes in insurance rates. But part of the problem is with the WPPI itself. While the program's five-year window gives Canadian wind producers the kind of policy stability their US peers are still fighting for, WPPI does not have the financial muscle needed to drive investment.

fine print failings

The production incentive, which averages C$0.01/kWh, covers only one quarter to one half of the cost premium for wind power in Canada, so complementary provincial and territorial programs are vital, says Estill. The trouble is the incentive is also limited to 1000 MW of new capacity, with a cap of 300 MW for any single province. "So, for example, in a province like Ontario, where 300 MW is not a whole lot of generating capacity, it is hard to keep the government focused on coming up with wind-friendly policy when they think that they're going to have to carry the full load if their program is successful and they put in a couple of thousand MW of wind."

The solution, says CanWEA, is a significant expansion of WPPI. The association is lobbying Ottawa to double the incentive payment to C$0.02/kWh, increase the budget to support the development of 4000 MW and remove all funding limits. The expanded program would cost an average of C$146 million a year more over the next 15 years, says CanWEA, but it will also help Canada take an 8.2 megaton bite out of its Kyoto emissions reduction commitment, which equals about 15% of the government's industrial sector target of 55 megatonnes.

Estill believes Canada's ratification of Kyoto will be an important driver for the wind industry and for government clean energy policies. After being battered by critics about the cost of meeting the target, he says the federal government is open to the industry's argument that it offers a "significant Kyoto dividend" in the form of jobs and rural economic development. Indeed, when CanWEA presented its WPPI proposal in Ottawa, it was well received by ministers, including finance minister John Manley.

Despite the challenges, wind is making inroads in the provinces as well. Hydro-Quebec will soon issue the first request for proposals in its plan to buy 1000 MW of wind over ten years, while Ontario has said it will implement a renewables portfolio standard that is among the most aggressive in North America. British Columbia wants electricity distributors to voluntarily buy at least half of all new power from clean sources over the next decade, and New Brunswick has promised a renewables mandate as part of its new competitive electricity market this year. In Alberta, work has started on the 75 MW McBride Lake project that, on its own, will set a national record for new installed capacity in a single year. Three Canadianised 750 kW turbines from French Jeumont are also going up in Quebec as the Parc Eolien du Renard on the Gaspe Peninsula.

The list of developers applying for WPPI also reveals an encouraging trend, says Estill. "One of the things the program has revealed is that there are a lot of people, a lot of companies, a lot of sizeable players who want to participate in the industry." Oil and gas heavyweights like Shell Canada and Suncor Energy, industrial giants like Atlantic Canada's J.D. Irving Limited and major power producers like Ontario's Brascan Corporation and Alberta's TransAlta Corporation are getting involved. And unlike the US, where the production tax credit has limited the field to large, tax-paying equity players, Canada has its share of smaller developers.

"We don't know for sure how that will evolve," says Estill, but points out that a broad based industry could help attract manufacturing to Canada as the market grows. "If you were a manufacturer, would you rather have 50 potential customers or two?"

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