Strong provincial policy prospects spark hope -- Uncertainty clouds bright skies

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Canada's wind energy industry had one of its best ever years in 2008 and although 2009 could actually end up being even better, the double whammy of an economic recession and uncertainty surrounding the rapidly depleting federal wind production incentive means growth is likely to be slower than expected. Even so, there are still well over 1000 MW of new wind farms scheduled to come online this year, at least on paper.

Last year, independent power producers added 523.45 MW of wind plant in Canada, about 2% of the new wind capacity installed across the globe in 2008. Although the addition was less than an expected minimum of 700 MW, it was just enough to land Canada among the top ten countries for capacity increases. Canada ended the year with 2369 MW of wind power, placing it 11th in the world for total installed capacity.

"I think it was a good year. We had the second largest amount of installed capacity put in place in one year that we've ever had," says Robert Hornung, president of the Canadian Wind Energy Association (CanWEA). Only 2006 was better, with 775 MW installed.

Leading the way last year was Ontario, which added 291 MW to bring its tally to 782 MW. The province is set to keep its place as Canada's most active provincial market through 2009. It has nearly 400 MW more under construction and started the year by announcing power purchase agreements for six new wind farms, with a combined capacity of 492.1 MW. Last year also marked the installation of the first six wind projects built under the province's program of "standard offer" power purchase prices, which is designed to encourage connection of smaller wind projects to local networks.

Ontario explosion

But it is what is happening on the policy side that has the potential to see Ontario jump ahead. In the fall, Ontario energy minister George Smitherman called a halt to a regulatory review of the province's long term integrated power system plan by asking the Ontario Power Authority, the government agency responsible for electric system planning and procurement, to look at ways to bring more renewable energy online more quickly. Last month, Premier Dalton McGuinty offered the first hint of what is to come, telling a gathering in Toronto that his government will introduce legislation in the coming session designed to "unleash an explosion of new green energy" and create more than 50,000 jobs over the next three years.

Project developer Renewable Energy Systems Canada, one of the winners in Ontario's most recent round of wind power purchases, sees the province as one of Canada's key growth markets. "Quebec is going to go quiet for a few years," says the company's Peter Clibbon, reasoning that it will take some time for Canada's leading wind province to work through the projects selected from responses to its requests for proposals (RFPs). "Ontario, I think, is going to leap ahead in bounds and potentially have some of the most progressive legislation in Canada with the Green Energy Act, if what they say is true," he adds.

Quebec is planning to issue new RFPs this year for 500 MW of small-scale projects developed by municipalities and First Nations, although industry analysis shows the C$0.095/kWh cap on the price to be paid will deliver what CanWEA's Sean Whittaker calls an "unreasonably low" internal rate of return of around 4% that is unlikely to drive much investment. Prince Edward Island also plans to set in motion its 500 MW plan after delaying issuing an RFP in November because of the financial crisis fallout. British Columbia will award contracts this spring in its call for clean power, but has already served notice that declining demand in the face of the economic recession could cause it to buy less than it originally set out to.

The current financial environment is bound to have an impact, believes Hornung. Trouble accessing financing has already forced EarthFirst Canada, in the process of building a 144 MW project in British Columbia, to the brink of collapse. Early in February it said that if a sale of its assets could not be arranged by the end of that month, it would not have sufficient funds to continue to operate.

"We have seen in Canada, fortunately very limited so far, a few examples of wind developers who have come forward and said if we are in this situation we can't proceed," says Hornung. "That is part of the reason that, as we look ahead to 2009, our expectations are lower than they would have been a year ago. There is no doubt that for some projects the credit crisis will lead to delays, at a minimum."

Ben Isaacson, an alternative and renewable energy analyst with Scotia Capital, agrees. He says that while he remains bullish on the sector over the long term, there is "little doubt that poor credit and equity markets will continue to harm the growth prospects of many independent power producers over the short to mid-term."

Canadian alternative energy stocks decreased an average of about 70% in 2008, says Isaacson, dragged down by declines in global energy markets and a combination of higher debt financing costs and lower credit availability. The low share prices, he says, will likely cause companies to delay project-related equity offerings until stocks begin to recover, which could lead to wind project delays where contract terms allow it.

The situation, he says, has also left some companies whose stocks are trading at steep discounts to the value of their operating assets ripe for takeovers that would essentially allow buyers to acquire their development pipelines for free.

On the debt side, Isaacson says the implications of a frozen credit market for companies that typically target a capital structure of 80% debt and 20% equity are severe. "We believe that materially higher costs of borrowing, coupled with a limited availability of credit, will cause many attractive renewable power projects to be shelved or cancelled entirely." At the same time, though, Isaacson believes debt financing is still available to quality projects developed by companies with deep pockets or a proven track record.

Incentive shortfall

The waters have also been muddied by the Canadian government's decision not to provide new money to its ecoEnergy for Renewable Power (ERP) Program, which provides a C$0.01/kWh incentive for the first ten years of a project's life. The current funding could be fully allocated as early as spring, but certainly before the end of the year. Although the industry could get another shot at lobbying for an ERP expansion in 2009 if the Conservative government, which holds a minority of seats in parliament, is defeated and voters go to the polls yet again, the situation will make potential investors skittish.

"This does add uncertainty and what business always needs -- and particularly more so now than ever in our lifetimes -- is certainty," says John Keating, CEO of Calgary-based Canadian Hydro Developers.

The lack of a federal incentive could prompt provincial governments to rethink their renewable energy purchase plans, he says. And in Canadian Hydro's home province of Alberta, the only power market in Canada where new wind is not brought online through formal RFP processes, ERP is the only way to account for the environmental value of zero emissions technologies like wind.

"We'll have to see whether the forward price, without any significant carbon trading value, can make the economics work. The bottom line is until carbon is dealt with properly in the competitive marketplace, I think ecoEnergy should continue," he says.

Obama delay factor

Another policy issue Hornung expects to confront the industry in 2009 is in the area of greenhouse gas emissions reduction. The federal government has been working on a plan that includes emissions-intensity targets and an offset trading scheme that would provide another revenue stream for wind power projects. But with US president Barack Obama determined to finally map out a climate change response for his country, Canada could once again be thrown into limbo.

"I think there is a tremendous amount of uncertainty that has been reintroduced to the greenhouse gas discussion. The Conservative government has made it clear with the election of the Obama administration that it wants to pursue a North American approach to climate. It is also clear the Obama administration is keen to pursue a different kind of approach than the Conservatives have been doing to this point -- and any sort of North American negotiated approach is not something that will happen quickly," says Hornung.

"There's a real possibility the long-term result may be more powerful and beneficial as a result of cooperation between the two countries, but unfortunately I think there is a reasonably high probability it will lead to a delay in actually getting a carbon price signal in place in Canada."

Milestones in 2008

On the project development front, a key milestone in 2008 was the completion of the first utility-scale wind farms in both New Brunswick and Newfoundland & Labrador, leaving British Columbia as the only Canadian province without an operating wind farm. Nova Scotia Power announced contracts for seven wind projects totalling 244 MW, while New Brunswick Power signed deals for three projects with a combined capacity of 213 MW. Manitoba finalised a deal for a 300 MW project that will be the largest in the country.

Quebec, Canada's largest province in area, laid the foundation for the continued growth of its wind energy sector with the awarding of contracts for 2004.5 MW of new turbines to be supplied by Germany's Enercon and Repower Systems, both of which will set up factories in the province to make and assemble components. Prince Edward Island, the smallest province in Canada, announced its own C$1 billion strategy to install 500 MW of wind by 2013 and build a new transmission cable to carry it to markets on Canada's mainland and south into the US Northeast. For a province with an average load of 160 MW it is a very ambitious goal and "a clear example of the kind of big thinking we would like to see," says Hornung.

The big winner among wind turbine suppliers last year was GE Energy, which supplied technology to two projects representing 46% of Canada's 2008 capacity additions. Vestas machines were used in eight projects with a 35% market share. Siemens saw its technology used for the first time in Canada, in one project representing 19% of the total installed.

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