Since its inception, the McGuinty Government has been committed to the development of a green
Ontario. Key to this commitment has been a concerted effort to shift power generation to renewable
energy sources. To this end, the Province instituted the RESOP, a first for North America. Those
renewable energy developers that, alongside the Government, pioneered these initial efforts (the “First
Movers”) had to move their projects forward within the permitting process as it then was. After
confronting and overcoming a myriad of administrative and procedural delays, the First Movers have
finally been able to move their projects to very advanced stages of development. Unfortunately, due to
these delays, most of these projects are coming to maturity amidst an unforeseen economic crisis that is
seriously jeopardizing their economic viability and likelihood of proceeding.
I.
The Companies
Gengrowth was established to develop small scale low impact renewable energy projects in Ontario.
Prior to creating Gengrowth, the company’s team members led the development of over 1000 MW of
large scale wind energy projects for other companies across Canada.
Recognizing the benefits of distributed generation, Gengrowth focused its efforts to mirror the
development approach common in Germany, where small scale low impact projects are the standard.
Benefiting from its knowledge and experience, Gengrowth aimed to develop a large portfolio of small
scale projects located in the windiest parts of Ontario where transmission and/or distribution capacity
constraints did not exist. A portfolio approach was required because the stated price of the RESOP of
11 cents per kilowatt hour demanded economies of scale in order to produce successful projects.
Boralex is a major private electricity producer whose core business is the development and operation of
power stations that run on renewable energy (wind, run-of-river hydro, biomass, etc.). Out of 365 MW
of installed power capacity, 110MW are micro (≤10 MW) wind energy projects installed in relatively
small communities in France. Boralex began its wind development in France in 1999 by working on
small projects under a feed-in-tariff structure. Over the last ten years of development in this country,
Boralex has signed 11 power supply agreements with EDF (Électricité de France).
Over many years of wind power development and operations Boralex has developed excellent
relationships with turbine manufacturers. Boralex was integral in introducing turbine manufacturers to
the wind energy production market in France and recently Boralex was a key player in convincing
Enercon to participate in the 2000MW Hydro-Québec RFP.
II.
The Issue
Since the launch of the RESOP two years ago, market conditions for wind energy projects have changed
dramatically, including an increase in the cost of wind turbines and construction, the falling Canadian
dollar, and the global credit crisis; which has resulted in both increased interest rates on debt and
decreased loan to equity values.
In addition to the changing economics, the First Movers have had to deal with all of the administrative,
procedural and interest group delays; which the Government acknowledges as a detriment to progress - a
detriment that will be addressed on a going forward basis, by way of amendments to the process set out
in the proposed Green Energy Act. The result of these delays has not been limited to an increase in
project specific costs; it has also meant that these First Movers were not able to get their projects up and
running prior to the current economic crisis, and now must cope with the new economic reality. The
combination of these, and other factors, has jeopardized the economic viability of the best and most
mature RESOP projects.
A sample case:
Gengrowth was one of the first companies to adopt and develop wind projects under the RESOP, and its
projects have been an important contributor to the program’s success. Gengrowth obtained 9 of the first
11 wind RESOP contracts issued by the OPA and, with 90 MW under contract, is the second largest
developer of wind energy projects under the program to date. Gengrowth partnered with Boralex to
ensure these projects would have the best chance to reach commercial operations and become successful
operating energy assets.
The following outlines some characteristics of the Gengrowth/Boralex projects:
(a) are all located, on average, 10 km from the next and was not originally a large scale project
broken down into smaller ones;
(b) use the existing low voltage distribution system in the area and will not require any significant
upgrades or modifications in order to connect;
(c) hold first positions in the queue for access to the relevant distribution line;
(d) strong wind resource
(e) are located in an environmentally benign area;
(f) have no tangible or noteworthy concern for any First Nations group; and
(g) are not negatively impacting any other economically or socially important land use
consideration.
While the Ministry of Energy (MOE) and the OPA fully embraced the Gengrowth/Boralex projects, the
projects have encountered significant delays at the municipal level in the Municipality of Chatham-Kent
and the County of Essex (including its lower municipalities). Changing rules of engagement, lack of
preparation, and a general hesitation to “get-it-wrong” at the municipal level, combined with
filibustering by NIMBY groups, caused Gengrowth/Boralex a delay of over 12 months for its projects
located in the Municipality of Chatham-Kent and over 18 months for its projects located in the County
of Essex. Unfortunately, the process in the County of Essex remains unresolved.
Gengrowth/Boralex has had to bear a significant amount of the responsibility in working with these
government bodies to get them up to speed. As a result of these delays, Gengrowth/Boralex projects
have been pushed into totally unfavourable market conditions. Gengrowth/Boralex initially planned to
obtain municipal approvals for its projects during the summer of 2007. Due to the factors stated above,
Gengrowth/Boralex did not finalize the municipal process for its Chatham-Kent projects until October
2008 and the County of Essex approvals have been be pushed to 2009, and could be delayed as late as
2010. But for these delays, these projects would have received all municipal permits, purchased
equipment, secured financing and most would have reached commercial operations. These “force
majeure” events have had clear cost impacts that are out of Gengrowth/Boralex control.
The Gengrowth/Boralex projects have paved the way for the next generation of renewable energy
projects, and now are left to compete with the same. Given the very limited capital available due to the
current global financial crisis, it will be that much more difficult for the Gengrowth/Boralex projects to
obtain funding if they have to compete with other wind energy projects that benefit from better terms
and conditions than the Gengrowth/Boralex is in possession of. Further, this competitive environment
may become even more challenging as the Obama administration moves forward with its green agenda.
Even though the Gengrowth/Boralex projects possess numerous optimal characteristics, the combination
of the delays the company has faced, along with the current unforeseen market conditions outlined
below, the economic viability of its projects has become seriously jeopardized.
III.
Market Conditions
In order to have a better understanding regarding how the market conditions have affected the
Gengrowth/Boralex projects, a proven and well-tested economic model1 was run assessing the impact on
economic viability resulting from changes to the Canadian/Euro exchange rate and credit spreads.
These two variables were used because they are easily verifiable and have experienced significant
changes as a result of the recent economic downturn.
The following table outlines how these variables have changed from the date Gengrowth signed its
RESOP contracts to the date of the launch of the draft FIT Program rules.
Exchange rate – CAN/Euro
Credit/spread margin
RESOP Signature
02-21-2007
1.52
5.25%
FIT Launching
03-11-2009
1.64
8.5%
The following graph provides a visual illustration of how these two variables have changed during the
time period noted above.
1
The economic model has been used by Boralex for all of its wind energy projects and is known to be proven and
accurate.
The table and graph clearly demonstrate the following:
• the Canadian Dollar has lost 8% of its value to the Euro; and
• credit spreads/margins have dramatically increased due to the global credit crisis causing interest
rates on project debt to rise by over 3%.
The results of the economic model confirm that the changes in the exchange rate and credit spread noted
above are enough to justify an increase of the contractual price of $25.2/MWh.
While the economic model only assessed two variables that have recently experienced significant
changes, it is worthwhile noting that loan to equity values have also significantly changed for wind
energy projects as a result of the global credit crisis from a ratio of 75/25 at the time the RESOP was
launched to a ratio of between 60/40 to 50/50 in today’s debt marketplace. The magnitude of the shift in
loan to equity values has put substantial downward pressure on equity rates of return at a time when
return expectations for equity investors have increased alongside interest rates and the risk aversion of
all investors.
Furthermore, there are a number of others conditions that have dramatically affected wind projects over
the last year; which also have a significant impact on the economic viability of the Gengrowth/Boralex
RESOP projects.
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IV.
The Federal Government’s ecoENERGY incentive that, as of November 2006, was robust
enough to last until 2011, has seen much of its funds depleted sooner than expected. As of the
end of March 2009, a balance of only 547M$ is still available for future funding and NRCan is
forecasting that the incentive will run out by September 2009.
As stated in the last federal
budget, the ecoENERGY program has not been expanded, leaving projects that were at advanced
stages of development without a key source of funding to help ensure they proceeded to
commercial operations.
Wind turbines, which account for 65% to 70% of the total capital cost of a wind energy project,
have increased considerably due specifically to the exchange rate.
Due to increased wind development and increased pressure on service and maintenance
resources, annual operations and maintenance costs have risen significantly.
Current situation
While the FIT program will greatly encourage renewable energy development, the normal delays
associated with this new program and general development timelines will push the commissioning of
FIT projects to the end of 2012 at the earliest. The following table outlines the expected timeline for a
FIT project.
DIFFERENT STEPS TO REACH A READY TO BUILT PROJECT
Table1: Permits and development timeline
Timeline
Time
2009
Permits and tasks
(month)
Wind campain and land lease done
0
Final version FIT
3
Delay to proceed (60 days)
REA (Environmental permits and
municipal permits)*
Interconnection Permits (CIA, CCE,
CCRA, HONI Design, Connection
Agreement)
Q1
Q2
Q3
2010
Q4
Q1
Q2
Q3
2011
Q4
Q1
Q2
Q3
2012
Q4
Q1
Q2
Q3
Q4
2
6
12
Financing
4
Wind Turbine (Contract to turbine on
site)
18
Construction period
6
* Considering all field work is done and environmental study ready to be submitted
While FIT projects will have the incentive to proceed to commercial operations given the revised
electricity price, serious RESOP projects that cannot cope with the current economic situation might be
suspended indefinitely. In this case, a gap will be created between 2009 and 2012 in which it is likely
that no projects will be constructed or commissioned. This gap is unfavourable and contradictory to
Ontario’s desire to be a leader in renewable energy production. The need to move expeditiously to bring
equipment, technology,, know how and jobs to the Province cannot be underscored. The daily barrage
of negative news highlighting job losses in Ontario’s manufacturing sector calls for immediate progress
to be made to establish green jobs for the 21st Century economy. Further, as the new Obama
administration pushes forward with its Green Energy Agenda, without bold action to get renewable
energy projects to market now, the finite resources, equipment and financing currently available will be
re-directed and Ontario will lose its current leadership edge.
Gengrowth and Boralex strongly believe that a strong and stable renewable market can be created in
Ontario. However, with all of the changes to the Ontario Government’s policies regarding renewable
energy, Ontario still needs to work on presenting a stable marketplace in order to attract manufacturers
to come to the Province. By ensuring RESOP projects proceed to commercial operations will translate
into a significant injection of investment into the Province`s economy over the short term and will send
a clear message to manufacturers that irrespective of policy changes, Ontario clearly supports renewable
energy and its first movers.
V.
Proposed solutions
It is our understanding that the Green Energy Act will remove the potential for unreasonable delays to
negatively affect renewable energy projects on a going forward basis. We also understand that the Act
will address the economic realities that confront renewable energy projects, a reality that has been
exacerbated by the current economic conditions. While the Act will address the barriers that the First
Movers had to confront, thus ensuring a path to success for new projects on a going forward basis,
assistance is also required for good mature projects that have received most, if not all, of their permits
and are ready to begin construction in the near term. In light of the Government’s objectives to advance
the Province’s economy by taking a leading role in the global green economy and establishing Ontario
as the epicentre for green technology development, manufacturing and investment, it behooves the
Government to look at ways to assist the First Movers as their projects, although delayed, are the ones
that are closest to commercial operation.
Only ready-to-build projects can bring immediate results, such as hundreds of millions of dollars in local
investment, much needed jobs and a strong signal to OEMs to invest in Ontario, but, again, they need
government assistance in order to move forward in the current environment.
Gengrowth and Boralex strongly recommend that the OPA recognize ready-to-build RESOP
projects as Legacy Projects under the FIT Program rules.
In proposing a full solution, Gengrowth and Boralex recommend that certain conditions be required in
order for a project to be recognized as a Legacy Project. We understand that a limited number of
RESOP projects shall be qualified as Legacy Projects. The conditions should include:
- the possession of at least 1 year of wind data as of March 19, 2009;
- the possession of a Connection Cost Recovery Agreement as of March 19, 2009;
- the commitment to reach commercial operations by December 31, 2011; and
- all other commitments and requirements set out in the FIT program.
If a project meets these conditions, it should be defined as a Legacy Project and be eligible for the FIT
Program.
By supporting the ready-to-build RESOP projects, the OPA would satisfy many issues facing the First
Movers while still helping to achieve Ontario green policies:
- Create jobs in the most critical time while FIT projects are completing their development cycle;
- Recognize First Movers for the extensive work and risks they have undertaken in the early stages
of Ontario’s wind energy development;
- Provide a clear message to OEMs to help attract them to invest in Ontario; and
- Ensure the success of the FIT program by rapidly commissioning ready-to-build RESOP projects
and clearing the queue for the next generation of projects.
Finally, based on various discussions held with wind turbine manufacturers, we believe that our
proposed solution would send a positive message to the manufacturers that Ontario provides a
favourable market for them to operate in. Some of them are currently concerned with the Ontario’s
unstable situation with respect to the various procurement programs put in place over the years. Some
RESOP projects for which wind turbines supply have already been secured are in jeopardy if they
cannot benefit from the FIT program rules. This is obviously a concern for the manufacturers and the
possibility to qualify these projects as Legacy Projects would provide more certainty that their contracts
will be honoured by their counterparties and give them an incentive to focus their development in the
province.
Boralex/Gengrowth strongly believes a strong and stable renewable market can be created in Ontario.
But Ontario Government still needs to put efforts and commit to help stabilizing the market in order to
attract manufacturers in the province, creating what is much needed in these times, long-term job and
quality employment. The province engagement into green energy still needs a little push so success can
be achieved. We would be pleased to have the opportunity to further discuss the subject matter of this
submission with any of your representatives. Please do not hesitate to contact us if this is of interest to
you