Pioneering spot market trade across borders -- Canadian wind power and green energy credits gain traction in New England power pool

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West Cape Wind Energy Inc has become the first Canadian independent producer to export wind power across the international border into the US, says CEO John Douglas. He describes the exports as a "significant milestone" that could represent a new way of doing wind business in Canada, with the potential to release project developers from their dependency on utility requests for proposals and utility power purchase agreements.

Power from the 19.8 MW first phase of the West Cape project on Prince Edward Island (PEI) is being wheeled through PEI and New Brunswick and sold into the New England Power Pool (NEPOOL) at prevailing spot market prices. The arrangement is through a marketing agreement with Halifax-based Emera Energy, the trading arm of Emera Inc. Emera, with C$4 billion in assets, owns Canadian utility company Nova Scotia Power and Bangor Hydro-Electric Company in Maine. The associated renewable energy credits (RECs) are being marketed directly by West Cape to NEPOOL customers.

"It's worked out really well. We're making money and selling power into the US. I mean, who would have thought?" says Douglas, who is also CEO of Toronto-based Ventus Energy, the controlling shareholder in West Cape. The project was completed in May.

Most wind power in Canada is being developed through government or utility sponsored requests for proposals offering long term purchase agreements. But Ventus, says Douglas, saw a so-called "merchant" facility, selling power into the spot market instead of under a bi-lateral contract, as a way to tap into the revenue opportunities provided by REC trading, particularly in the US Northeast where renewable energy mandates have kept prices consistently high.

"The green attributes are selling for almost as much as the energy, so we thought it was an attractive model to consider from a financial perspective," he says. "Here in Canada you are handing them all over to whatever utility you have a contract with and we thought there was a future value to it -- and in hindsight that view is starting to firm up. We think we are in a position to capitalise on it."

Structural change

Douglas believes there is a "structural change" happening in the industry as environmental issues like climate change gain prominence. "More analysts are attributing value to green attributes," he says. Although fossil fuel participants in NEPOOL face penalties of about $55/MWh if they do not meet their renewable targets, they are not alone as REC buyers. "There are hedge funds buying RECs for future trading, there are voluntary utilities," he says. "My wife attributes it to the fact that everybody got the Al Gore movie for Christmas, but I think it has gone way beyond that."

In West Cape's project prospectus, the company predicts that through a combination of contracted and open market sales it can realise average REC prices ranging from $16.03/MWh this year to $35.11/MWh in 2009. On the energy side, the company expects spot prices in NEPOOL, where gas-fired generation sets the price most of the time, to average $0.065/kWh over the next ten years. "It is a gas weighted market," Douglas says. "People have different views about what gas is going to do, but we just think it is going to go up for the next 20 years."

Not easy

While the project is now generating power and revenue, Douglas admits it was not easy getting to this point. "What I think we underestimated was just how challenging it is to finance a merchant plant. You typically can only get 50% debt instead of 70-75% debt and so there is a lot more equity to raise."

Ventus elected to build the C$62 million first phase, which consists of 11 Vestas 1.8 MW turbines, under the federal government's Canadian Renewable and Conservation Expense (CRCE) program. CRCE provides special tax treatment to projects, including the ability to raise capital, by selling flow-through shares to investors.

The company launched a public offering of units in its Ventus Energy West Cape Windpower LP in December hoping to raise C$25-55 million. But at that time the income trust market, a key liquidity option for these kinds of limited partnerships, had "fallen into the ditch" with the Canadian government's announcement that it planned to start taxing trusts and limited partnerships like corporations (Windpower Monthly, January 2007). That, combined with problems another wind LP was having with project permitting, made investors wary. Still, says Douglas, Ventus did raise C$25 million and made up the balance of the equity side with "our own money."

The company is currently negotiating financing for the project's 79.2 MW, C$167 million second phase, which will consist of 44 Vestas 1.8 MW turbines. "There is a Canadian pension plan that has come forward and said it is interested in financing phase two as a merchant project," says Douglas. "But it doesn't mean we'll always be merchant. Other people have offered us contracted deals and we're considering them. So it may not be merchant forever. If someone bid us a good price that would allow us to put more debt on the project, we would seriously consider it."

The company plans to begin construction of the second phase this summer and fall so the foundations will be ready when the turbines are delivered in May. Ventus does have one contract for the West Cape project, a 20-year deal with Summerside Electric, a PEI utility, for 9 MW of its output.

Merchant round two

Douglas says Ventus hopes to apply the export model again, but in a brand new venture. The company has partnered with the Cree Nation of Chisasibi to develop wind energy on James Bay in northern Quebec, a region Douglas says has a development potential of as much as 2000 MW. The partners plan to submit a bid to Hydro-Quebec's current call for 2000 MW of wind power, but it is also looking at other options. "We've filed a National Energy Board application to export power out of Quebec," he says.

Meanwhile, Ventus was expecting to complete commissioning of its 9 MW Norway Wind Park, located on the northwest tip of PEI, last month. Electricity generated by the project, made up of three Vestas 3 MW turbines, is being sold under a 20 year contract to the government-owned PEI Energy Corporation at the province's standard offer contract price, C$0.0775/kWh.

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