WindEnergyUpdate speaks to Lewis Reford, CEO of wind energy project developer, Schneider Power,  about leveraging its latest merger deal to gain access to the US market; Ontario's wind energy investment climate; and the extent to which Ontario's feed-in tariff will bolster wind project development.

By Rikki Stancich in Paris

Last week, Ontario-based Schneider Power inked a deal with California-based Quantum Fuel Systems Technology Worldwide. The deal is one of many that have been announced since Ontario’s introduction of an attractive feed-in tariff in mid-2009 - that developers say will provide renewable energy with a much needed boost.  Other recent notable Ontario wind transactions include TransAlta’s purchase of Canadian Hydro Developers and International Power plc’s acquisition of AIM PowerGen.

Schneider Power  went public and was listed on the Toronto Venture exchange (TSXV: SNE) in the summer of 2008. However, the down-draft that occurred late-2008, which left investors acutely risk-averse to small cap ventures, sent its share price plummeting from Canadian 50 cents to around 10 cents per share.

Although this week’s CAD$0.30/share transaction price may not fully restore Schneider’s share price to its IPO level, it represents a significant premium to recent trading levels in addition to allowing Schneider shareholders the ability to roll their investment into much more liquid alternative energy play.

WindEnergyUpdate talks to Schneider Power’s CEO, Lewis Reford, about the strategic benefits of the recent merger, the benefits of upwardly revised PPA rates and how Ontario developers view the new FiT.  

WindEnergyUpdate: What advantage does the deal confer on Schneider Power, with regards to providing or attracting project financing?

Lewis Reford: We began talking in mid-2009. The Quantum team had been seeking a management team to develop wind and solar projects that could be bolted on to Quantum’s existing alternative energy platform.

We found Quantum’s approach appealing because they have managed to attract good management teams, keep them intact and then grow synergies between the business units. For example, solar panels developed by its German subsidiary, Advanced and Automotive Solar Systems (Asola) are being used on its Fisker Hybrid automobiles.

Instead of looking at a deal that would simply provide us much-needed capital, we looked at how we could really work together. Also following the down draft of 2008, when investors became much more risk averse to small cap venture opportunities, we needed a way to gain scale in order to recapture investor attention.

The deal offers three key advantages. The first is that it offers our shareholders a much higher degree of liquidity. Quantum’s share trading volume on Nasdaq is many orders of magnitude greater than what Schneider Power was trading on a daily basis.

Secondly, it provides us greater access to growth equity, enabling us to tap into a broader base of investors on both sides of the border in both Canada and the US, stretching beyond our small niche of Canadian micro-cap investors.  We can now tap into Quantum’s North America-wide relationships that focus more on mid-cap renewable energy opportunities.

Thirdly, the Quantum partnership will enable us to execute on our US development plans. We have always targeted the US for future wind and solar projects, but without a footprint and partners, it’s a tough market to break into. So this deal makes the US market more manageable.

WindEnergyUpdate: What other resources does the deal open up to Schneider?

Lewis Reford: There is big potential for cross-pollination with Quantum’s growing solar module business. They will be building a module factory in the US next year and Schneider will be a natural in-house customer.

With regard to wind, our development team is currently focused on areas that are most attractive for project development – which currently happens to be in our Ontario back yard.

We have at least six Ontario wind and solar projects that will move forward between 2010-2012, so our development plate is pretty full.

That said feeding a pipeline with projects is a lengthy forward-looking process. In the future, given our relationship with Quantum, many of our early-stage projects will likely be US-based, adding to those in Canada and the Caribbean where we have focused thus far. We’ll mainly be looking at developing projects in the Western US – the Pacific and Rocky Mountain states where good wind regimes provide tremendous opportunities for developers.

WindEnergyUpdate: Are you considering any offshore wind projects?

Lewis Reford: Combined, Schneider and Quantum have a market cap of around $200mn and offshore wind really is a big players game.  We’ll be following developments in the Great Lakes but its unlikely that we’ll be a first mover.

WindEnergyUpdate: Schneider recently secured higher PPA rates for three of its
Ontario wind projects. How significant were these upwardly revised rates and is this likely to set a benchmark for rates paid to other wind power projects?

Lewis Reford: Ontario’s previous Standard Offer Program didn’t bear all the hallmarks of the European feed-in tariffs and consequently the PPAs were set too low. In the new FIT program, the power price was shifted upward from 11cents to 12.1 cents/kWh for projects built next year, going up to 13.5cents/kWh for projects built in 2012 and beyond.

At these price points for a 20-year contract, the return for wind projects should work out nicely if you have access to transmission. But since you have to connect yourself, a project that is located too far from transmission or without timely connection, it will kill the economics of the project. So we have focused on areas in Ontario that are well positioned with regards to transmission, that are cost-effective to connect.

In Ontario the transmission and generation is provincially-owned. HydroOne, the provincial transmission utility, was mandated under Ontario’s Green Energy Act to increase capital expenditure to improve and increase connection to renewable energy facilities.

Effectively they will be de-bottlenecking the transmission network – and there is talk of installing a number of new main lines that will run the length of the province.

WindEnergyUpdate: Quantum will provide a CAD$1mn loan to Schneider for PPA applications under the FIT program. How many applications could this cover? Which of Schneider Power's Canadian projects under development is most likely to secure the next PPA?

Lewis Reford: Ontario’s new feed-in tariff system was designed in part to prevent small entrepreneurs without funding from squatting on applications with no real means of developing a project. An application deposit system requires you to have money up front, to show you’re serious.

For wind energy, the initial deposit you pay is CAD$10,000/MW and for solar you pay CAD$20,000/MW.  The fee is held in escrow by the Ontario Power Authority, up to the point where they decide whether or not to award you the contract. If you don’t get awarded the contract, you get your money back.

So with our CAD$1mn loan, we could submit ten 10MW wind project applications, or five 10 MW solar projects. We are going for a combination of wind and solar, perhaps five or six applications.  And we are hopeful that all of our applications will secure a PPA.

WindEnergyUpdate: To what extent has Ontario's feed-in tariff given a boost to wind energy project development in Canada?

Lewis Reford: Although it is early days yet, I think it is going to be a very successful programme. Offering power at CAD 13.5 cents/kWh compared to the wholesale price of 6 cents/kWh will eventually translates into a higher cost of power for the end user – it’s a subsidy that rate-payers will bear although only on the margin.

But it’s a tremendous way of kickstarting renewable energy development, because the FIT programme  leaves it up to the private sector to arrange the financing and make each project justify itself. It’s an excellent hybrid programme that allows the entrepreneurial sector to develop faster than the big utilities might otherwise.

The PPAs offer a 20-year contract with an implied government counterparty risk and there is no way of breaking that contract, so it provides much-needed certainty where project financing is concerned.

The FIT program is likely to be reviewed over the years by subsequent governments, but one hopes that its merits, in terms of green job creation – the turbine components manufacturing supply chain that will follow  - will justify the means. It will be judged on that aspect – on the basis of the renewable energy jobs that will be created in Ontario.

Given Schneider’s new larger North American focus, we are hopeful that other states and provinces will follow Ontario’s lead by implementing feed-in tariffs as a way of promoting the uptake of renewable energy.  That would be very positive.