With an abundant offshore resource and a highly competitive feed-in tariff, Ontario's offshore wind industry finally looks set to blow away its global counterparts. The remaining hurdle - early stage finance - is still a problem...But Trillium Power may have it all worked out.

By Karl Harder

Compared to their European counterparts, Ontario's offshore wind developers have been slow to get out of the starting blocks - admittedly through no fault of their own.

Despite wind energy having been researched and tested on the Great Lakes since the mid 1990s, the first applications for offshore wind only began to be accepted and processed in early 2008.

Among the early movers was Ontario-based wind developer, Trillium Power,  whose research and testing of offshore wind turbines in the 1990s predated any formal application process for developing the area.

However, it was not until the new millennium that planning applications were finally accepted. But even then, controversy stalked early attempts at offshore wind in the Great Lakes.

Complaints from local communities on the Ontario shoreline of Lake Erie about the impact on the landscape of a near-shore wind projects stymied developers’ efforts.

To the detriment of wind energy developers, Ontario’s National Resource Ministry placed a moratorium on the development of offshore wind on the Ontario side of the Great Lakes.

Many years later, in January 2008, the ban was lifted. Since then, roughly 20 applications have been submitted for the development offshore wind farms, across a total of 4200 hectares.

From laggard to leader?

The introduction of the Green Energy and Green Economy Act in 2009, designed to stimulate renewable energy development and drive energy efficiency, was welcomed with relief by the renewable energy sector.

As John Kourtoff CEO of Trillium Power enthuses: “There is no question that [the Green Energy and Green Economy Act] provides the present-day best practice for stimulating the growth of renewable energy and that it should be emulated by all jurisdictions on a global basis.”

Former Ontario Energy Minister George Smitherman recently estimated that the legislation would be the catalyst for over C$4 billion of investment.

The centrepiece of the legislation is a feed-in tariff, which is guaranteed for a 20 year time period. Rates set under Ontario's feed in tariff program, formally launched on October 1, 2009, establish an offshore wind generation price of C$0.19kW/h to be paid to approved suppliers.

But Kourtoff also highlights the importance of the legislation efforts to streamline the application process.

“I know of no location in the world where there is a 6-month service guarantee for regulatory and permitting approvals, other than in Ontario. This is a major bonus for developers and helps de-risk projects,” says Kourtoff.

Trillium Power is first in line for Ontario offshore wind development. The company will be the first developer to test the streamlined environmental and permit application process.

The developer currently awaits a decision on their first wind farm, the 710MW Trillium Power Wind 1, in Q4 2010 or Q1 2011.

In the pipeline are a further three offshore farms: Trillium Power Wind 2 (740MW), the Great Lakes Array (1,600 MW), and the Superior Array (650 MW).

Trillium Power is currently in the process of raising up to CAD$25 million of additional development equity finance for Trillium Power Wind 1 and expects to initiate negotiations for up to CAD$400 million of construction equity financing in Q3/Q4 2010.

According to Kourtoff, the financing prospects look very positive. “When the feed-in tariff combines with average wind speeds of over 9m/s and power density level greater than 900 w/m2 project finance should not be a problem,” he says.

The finance solution

For Ontario’s offshore wind developers, the project finance environment remains untested. Ontario’s offshore wind farms have yet to be constructed, and finance for these projects has yet to be raised. But the industry appears to be comparatively well positioned.

“With a generous feed in tariff, developers looking to raise project finance for offshore sites should be in one the strongest positions globally,” says William Young, manager and lead analyst, New Energy Finance.

Tania Maciver, an analyst from Haywood Securities adds: “Relative to many other offshore sites, the conditions on The Great Lakes are benign. The water is fresh and the average wave height is relatively small.  This should all go to help de risk the projects in the minds of the banks. ”

But Kourtoff cautions that Ontario’s capital markets for early stage finance have not evolved sufficiently to reflect the tremendous policy changes ratified by the Ontario government.

“There is still a lack of development-stage capital about for renewable energy projects post credit crunch,” he adds.

Kourtoff suggests an integrated solution that could be an elegant win-win fix for this problem  - which could generate profits for the Ontario government.

Specifically, he suggests that as part of a three-step process the Ontario government establish tax-advantaged Renewable Energy Development Corporations (REDCs), emulating a similar tax-advantaged structure used by Ontario in the 1980s to encourage the growth of small business.

The use of a tax-advantaged REDC structure would grant the Ontario Government an option to take out the debt of the renewable energy project once it achieves commercial operation status.

The Ontario Government could raise the debt ‘take out’ funds as green bonds sold to Ontario citizens, or on the international debt markets, for which the Ontario Government would charge an interest spread above its green bond borrowing cost to the REDC.

Given that Ontario Government borrowing costs are significantly lower than the borrowing costs of renewable energy developers, the debt cost - even with the added spread ‘green premium’ - would still be a considerable saving for the REDC compared to what it would be charged in the debt markets.

With debt servicing presenting a significant cost, any reductions in this area could reduce pressures for future feed-in tariff rate increases.

Ultimately this assists the economics of all renewable energy developments, in particular, capital-intensive developments such as offshore wind.

The interest ‘green premium’ would be designed to not only cover the costs to the treasury of any tax benefits provided by way of REDC’s, but also leave a net gain for the treasury, which could be used to seed new renewable energy projects. 

It appears that Ontario is well positioned to take advantage of the incredible wind resource at their disposal. As such, 2010 holds much promise as projects move toward the construction phase and the new legislation is given its first real test drive. 

Quick Facts:

Ontario's Green Energy Act aims to deliver:

   * 6000 MW of conservation by 2015 with an additional 2.5% annual (compounding)    reduction in energy resource needs from conservation from 2015 onwards.

   * 10,000 MW of new installed renewable energy by 2015, over and above 2003 levels.

   * 25,000 MW of new installed new renewable energy by 2025, over and above 2003 levels.

   * 1,500 MW of new installed clean distributed energy by 2015, and 3,000 MW by 2025, as of the introduction of this Act.

   * Achievement of the approximately 30% reduction in natural gas consumption that has been identified as economic by 2017 in studies for the gas utilities.

This will be delivered by incentives structure and subsides for energy efficiency products and services, and also a package for renewable energy generation which provides a technology specific feed in tariff as well as a streamlined application process.

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Rikki Stancich: rstancich@gmail.com