Budget expands incentive program -- Nearly C$1 billion more

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Wind energy fared well in what is being described as Canada's greenest federal budget ever, with the government committing nearly C$1 billion more over the next 15 years to its wind power production incentive (WPPI) program. The 2005 budget, passed by parliament in a March 9 vote, quadruples the WPPI target to 4000 MW of new installed capacity and extends the program deadline by three years to April 1, 2010. It will pay C$0.01/kWh for the first ten years of a project's life, at a cost of C$200 million over the next five years and C$920 million over the next 15 years. The money is in addition to the C$260 million the government originally committed to WPPI in its 2001 budget.

x"It is an incredibly significant step," says Robert Hornung, president of the Canadian Wind Energy Association (CanWEA). The new funding, he says, will stimulate C$6 billion in investment and should help convince the provinces, which control electric industry policy in Canada, to go ahead with their own plans to promote wind energy development.

xOverall, the budget sets aside C$3 billion in new spending over the next five years on the environment, the bulk of which will go towards meeting Canada's greenhouse gas emissions reduction target. It creates a Renewable Power Production Incentive, with a budget of C$97 million over the next five years and C$886 million over 15 years, to stimulate the installation of up to 1500 MW of technologies like small hydro, biomass and landfill gas.

xIt also establishes a C$1 billion Clean Fund that, among its functions, will buy project-based greenhouse gas offsets to help to stimulate a domestic market for emissions trading. How wind fits into that plan is not yet clear. The industry has already been locked in a debate with government over whether wind power projects receiving WPPI should be allowed to create emissions credits in an offsets trading system being developed for Canada's electricity sector. The government is concerned that wind projects would be "double dipping" into federal Kyoto initiatives.

x"We are going to have the same debate about the Clean Fund," says Hornung. "There the federal government will be arguing we've already paid you once, why would we pay you again? We've argued quite consistently that nobody, when they sign a WPPI agreement, is giving away the environmental attributes. We think wind developers need to be able to have those attributes and seek value for them, both in the short term, but more particularly in the long term when WPPI may either be reduced or no longer in place."

xThe budget also sets aside C$250 million for a Partnership Fund, which will be used to develop "big ticket" projects, along with the provinces, that can achieve large volume cuts in greenhouse gas emissions. One of the suggestions is for an east-west transmission grid, which would help move cleaner sources of energy, such as hydroelectricity, to regions relying on fossil fuel generation. It would also, its advocates argue, unlock now stranded wind resources on the prairies and along the Great Lakes. "I suspect within the Partnership Fund most of the benefits for wind, if there are some, will be indirect like that," says Hornung.

xxMixed bag

xOn the tax side, the budget is a bit of a mixed bag for the wind industry. The government plans to increase the capital cost allowance deduction rate for renewable energy equipment, including wind turbines, from 30% to 50%. The faster write off is important, says Hornung, but will only help the "small subset" of the industry that has the tax appetite to make use of it. "For those companies, it is a great thing," says Hornung.

xCanWEA had also been hoping for changes that would allow the government's Canadian Conservation and Renewable Expense (CRCE) program to work in tandem with WPPI. CRCE allows developers to deduct 100% of certain pre-construction expenses, including the installation of so-called test turbines that can account for as much as 20% of a project's capacity. Because they can also flow-through those deductions to investors, the program is becoming an increasingly significant tool for accessing financing in a project's early stages. But turbines built with CRCE are not eligible for WPPI payments, and the budget makes it clear that separation will continue.

xCanWEA has long argued that developers who need CRCE to access capital should not be forced to take lower returns by giving up production payments. Hornung says the industry will now have to look at ways to change CRCE to make it more effective. "The fact that you have to build in two phases increases the cost of projects," he says. The time limitation means one part has to be built in the winter, which increases the cost.

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