Investing in wind power

With the rising cost of commodities that fuel electricity generation (such as natural gas) and growing pressure on the world's nations to reduce greenhouse gas emissions, it's no surprise that governments are focusing on renewable sources of energy. That's particularly true in the case of wind power, which is rapidly becoming the world's fastest-growing source of electricity.

In Canada, the wind power opportunity is particularly pronounced. As of July 2005, Canada's installed wind energy capacity was 570 megawatts (MW). But industry sources suggest that Canada has a total wind energy capacity of 50,000 MW. In the future, the country could use wind energy to provide a significant amount of the country's electricity needs.

For developers, investors, construction companies, engineering firms and financiers, these forecasts underscore a burgeoning opportunity. Yet, before entering the wind power marketplace, there are certain considerations to keep in mind.

Different approaches to harnessing wind power
The structure of the electricity market and support for renewable energy projects are strongly dependent on provincial policies. At this point, Quebec, Ontario and Alberta are the wind policy leaders. Yet, even among these provinces, there are significant differences in approach.

• Although Quebec relies heavily on hydroelectric power, the province is also a strong proponent of wind power. To date, Quebec has 212 MW of installed wind capacity, with plans to expand to 2,044 MW by 2010. Its purchasing approach is to award fixed-price Power Purchase Agreements (PPAs) to successful bidders, who use their PPAs to secure project financing.
• Ontario relies heavily on nuclear power today, but is also actively exploring other energy alternatives. The province's primary aim is to increase capacity, potentially up to 2,600 MW by 2010. In fact, Ontario has committed to purchasing a certain percentage of its electricity from renewable sources. Like Quebec, Ontario purchases its wind power through fixed-price PPAs. However, merchant-power opportunities do exist and are increasingly being explored.
• Alberta has taken a different approach to the purchase of wind power. The province, which currently relies on coal and natural gas, has adopted a merchant-power market to acquire alternative sources of electricity. This means developers must first build a wind farm, then offer their capacity to the province — without advance assurances that the energy will be purchased. The market dictates pricing, which rises and falls with consumer demand. That said, Alberta has taken concrete measures to improve its transmission grid to accept additional capacity from wind power, which currently stands at 275 MW.
• Other provinces, where wind power production is nascent, may also offer development opportunities, particularly for early entrants.

Considerations for wind power developers and investors
Given current market realities, both developers and investors must take certain issues into account:

• Capital structure. The capital structure chosen for a wind development project will vary depending on the project sponsor. For instance, speculative developers may be more inclined to rely on highly leveraged structures that consist of 70 percent (or more) debt. Corporate developers may prefer hybrid structures that use a more traditional debt-to-equity mix, although the ability to achieve a healthy internal rate of return while maintaining a low PPA bid price diminishes as the amount of equity increases. Finally, income funds are likely more inclined to use structured finance during the construction phase. Post construction, the capital structure of the project is adjusted to be consistent with the income fund, thereby maintaining the fund yield.
• Balancing risks with rewards. For developers and investors in Quebec and Ontario, the primary industry risks include pricing risks (getting locked into a PPA that may not deliver an adequate internal rate of return), contract risks (failing to be awarded a PPA), and development and operational risks — which tend to be slim for successful bidders. In Alberta, however, the merchant-power market delivers no pricing assurances. The result? Investment risk in Alberta is higher, but returns may ultimately be higher as well.

Making informed decisions
Whether you are a new entrant to the wind power industry, or an established player, it remains critical to keep up-to-date with industry trends and emerging market opportunities. By working with Utilities specialists who possess industry experience, you may be better placed to develop a compelling business case, arrange requisite financing, or validate your approach in this growing market.