Wind Energy Update
Ontario’s burgeoning wind energy market could face a slowdown as investor concerns grow over the future of the province’s flagship feed-in tariff (FiT) programme.
Initial enthusiasm among ratepayers for the scheme is flagging in the wake of perceived links between the FiT and increased energy prices.
The FiT passed into law in May 2009 as part of the Green Energy Act, which aims to promote the development of wind and solar generation in the province. The Act comes as part of Ontario’s commitment to phase out coal-based power generation by 2014.
Ratepayer concerns feed into existing skepticism among some civil society groups about the potential environmental impacts of wind farms.
Feed-in phase out?
With provincial elections slated for 6 October next year, the opposition Progressive Conservative Party [www.ontariopc.com] is threatening to substantially revise and possibly even scrap the FiT should it win.
“It is clear than wind has become a political issue in Ontario” admits Robert Hornung, president of the Canadian Wind Energy Association (CanWEA).
Were the FiT to disappear, Hornung concedes that the “minimum” result would be a “significant slowdown” in wind energy development in the province.
“There is absolutely no doubt that if the FiT were to disappear, Ontario’s ability to complete would be significantly weaken relative to other jurisdictions”, he adds.
Despite inevitable investor jitters, industry representatives remain quick to quell undue speculation about future wind energy policy in the province. Scrapping the FiT, they argue, remains very much a worst-case scenario.
Even if it the subsidy scheme were to be revoked, the legal implications of rescinding the over 1500MW in existing FiT contracts would be highly problematic.
Nor would it be the death-knell for the industry. Ontario’s existing 1,298MW of installed wind capacity (up from 15MW in 2003) all came into place prior to the FiT’s introduction.
That said, as both parties prepare their campaign manifestos, the wind industry is lobbying hard to stave off any major modifications to the FiT.
“Most developers are beginning to communicate with Conservatives to show the economic potential of continuing with this programme”, says Graham Findlay, general manager at renewable project consultants 3G Energy [http://www.3g-energy.com].
A recent report by the Ontario government sets a target of between 7,000MW and 8,000MW for installed wind capacity by 2018. Every 100MW of new capacity will generate Ca$ 2.75 billion in private sector investment and 1,000 new jobs, according to predictions by industry body CanWEA.
Investors are also hoping that the commencement of construction activity for FiT-contracted projects will make a major policy reversal difficult for the new provincial government.
“2011 is set to be an amazing year . . . There’s going to be a lot of building over the summer and it’ll be tough for the Conservatives to say that that’s a bad thing”, Findlay states.
Others are less optimistic. Those FiT projects contracted prior to October 6 next year are considered “relatively safe”, maintains Deborah Doncaster, executive director of the Ontario-based Community Power Fund [www.cpfund.ca].
“Anyone applying for a FiT project after October 6, however, is waiting to see what will happen”, she adds.
Even if the ruling Liberal Party contradicts current polling trends and wins an unprecedented third term, the FiT is unlikely to survive at least some modifications.
One major issue is price. The FiT is currently set at a price of 13.5 ¢/kWh for onshore wind and 19.0 ¢/kWh for off-shore, immaterial of production capacity.
Most industry commentators consider the price to be “realistic”, according to Jon Worren, co-founder of renewable energy specialist ClearSky Advisors [www.clearskyadvisors.com].
Developers rebut claims that the FiT was set too high, pointing out that the average price for wind contracts prior to the Green Energy Act amounted to 12.5 ¢/kWh.
In real terms, the existing price now looks slightly more attractive from a developer perspective due to the recent rise of the Canadian dollar against the US dollar.
However, economics are unlikely to take precedence as the price comes under review early next year. Ratepayer suspicion over the FiT’s role in higher energy bills will make a downward revision of the subsidy a “political necessity”, Worren predicts.
Another major element of Ontario’s wind development programme set to come under the microscope is its domestic content requirement.
Under the provisions of the Green Energy Act, 25% of equipment for FiT contracted wind projects must be procured from manufacturers based within the Ontario jurisdiction.
For developers, the requirement represents a major stumbling block. To date, Ontario has attracted only two firm commitments from wind manufacturers to set up in the province.
One is Korean manufacturer CS Wind, which has pledged to set up a wind turbine tower plant. The other is German engineering giant Siemens, which is planning a blade plant in the province.
Both commitments derive from partnerships with Samsung’s power generation business in Canada, Samsung C&T. Under a negotiated deal with the Ontario government, the South Korean company will invest around C$7 billion to build 2,500MW of new generation capacity. At least, 400MW of this will be wind-based.
“In general, there’s an inertia on the wind manufacturing side that isn’t there with solar,” concedes 3G Energy’s Findlay, referring to the flood of solar panel manufacturers attracted by incentives under the Green Energy Act.
Part of the delay in wind manufacturers setting up in Ontario owes to the longer lead times required for plant installation and the relative complexity of the wind power supply chain compared to solar.
Uncertainty as to whether the domestic content requirements will permit Ontario-based manufacturers to export outside the province give further cause for hesitancy, Findlay maintains.
From a regulatory perspective, the ruling Liberal party has enormous political capital tied up in attracting manufacturers to the province. That makes any immediate modification to the domestic content rules unlikely.
“It’ll be hard for them to climb down from this position until after October 6 next year”, says Worren of ClearSky Advisors.
“After that I think they will have a mandate to fine tune the programme if they so desire”, he adds.
Recent events could see their hand forced, however. The Japanese government has brought a complaint to the World Trade Organisation on the grounds that the local content provision constitutes illegal trade protection.
The WTO case adds to the political risk associated with Ontario’s wind market, CanWEA’s Hornung concedes.
“The fact that this challenge exists does introduce uncertainty and in a relative sense weaken Ontario’s competitiveness”, he states.
Negotiations between the Canadian and Japanese governments have so far failed to reach a resolution, although some type of settlement is expected in the near future.
“I think the Ontario government will be able to make certain concessions to make Japan happy”, Worren says.
Should such concessions include the diminution or withdrawal of the local procurement obligation, developers would not complain.
As Findlay points out: “Industry would feel much better because they could mobilise hard-to-acquire goods from other provinces and jurisdictions into Ontario.”
At present, the domestic content requirement is set to increase to 50% on 1 January 2012. Further investments by wind manufacturers into Ontario may follow. Should current levels of manufacturing capacity not increase, it is difficult to see how the increased target will be met.
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