Wind Energy in Canada: Realizing the Opportunity - Clean Energy ...

Wind Energy in Canada: Realizing the Opportunity Issue: 2 July 2013 kpmg.ca

02

A new chapter of wind development in Canada

Contents Québec – a potential long term market for wind

22

Appendix

© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

15

Clean Energy Report | 1

KPMG is committed to providing timely commentary and insights to help our clients and inform the sector in securing opportunities and addressing challenges. We have launched a series of quarterly publications on key issues affecting the power and utilities sector in Canada. Last quarter (Issue 1) we provided an update on project finance market trends and commented on the prospects of new power generation developments in British Columbia and the rest of Canada. This quarter (Issue 2) we have focused on wind financing activities given significant activity in the sector in the last 18 months. We provide a timely and relevant update on the status and considerable evolution in financing options to address some of the challenges that the sector faces in securing cost effective solutions. We also focus on the next wave of wind opportunities in the province of Québec.


2 | Clean Energy Report

A

new chapter of wind development in Canada

Summary findings • Rates: Project finance rates for Canadian wind energy assets are still attractive despite the recent increase in benchmark rates. However, uncertainty around the US Federal Reserve’s quantitative easing program may prompt further increases in rates. Developers requiring long-term debt financing should act now to secure capital at attractive rates. • Financing capacity: Financing capacity for Canadian wind energy projects will be seriously stretched in the next 18 months. On average, some 1,000 MW of wind capacity has been brought online in Canada per year since 2009. However, in the next two years this figure could almost double as a series of projects contracted during the past five years seek financing to commence construction. This circumstance is expected to increase competition for financing that will reward the best positioned projects and motivate new and innovative solutions to financing for the success of many projects. • Public bonds as a new option: Public bonds offer another financing route for Canadian wind energy projects. Brookfield Renewable Energy Partners successfully secured

C$450 million through a rated bond issuance priced at 5.13% for its 166 MW Comber wind farm in February 2013. Public bonds enable developers to secure long-dated debt at competitive pricing compared to other sources of capital, however the public bond markets are more suited to those typically raising over $150 million. • M&A activity: M&A activity in Canada’s wind energy sector will continue to be strong in the next 18 months. This will be driven by: strategics seeking accretive acquisitions, financial investors acquiring operational assets in the search for yield; oil and gas companies acquiring assets to offset carbon emissions; and large utilities divesting project portfolios. • New opportunities: Alberta, British Columbia and Québec are markets to watch in terms of wind investment opportunities in the medium to long term. Wind procurement in Ontario is expected to slow significantly during the next three years due to grid capacity constraints and uncertainty around the transition to a new competitive wind procurement process.



Project debt finance conditions are improving but market is still capacity constrained, creating a competition for best projects

Country

Average long-term interest rate in 1Q13 (10-year government bonds)

Average long-term interest rate in 2Q13 (10-year government bonds)

Canada

1.92%

1.97%

France

2.16%

1.96%

All-in rates remain attractive despite recent volatility

Germany

1.53%

1.42%

Italy

4.45%

4.20%

Project debt financing conditions for Canadian wind energy assets have improved since the global economic recession of 2008-2010 both in terms of lender interest and rates, however recent volatility in the market continues to present challenges.

Japan

0.71%

0.75%

UK

2.03%

1.94%

USA

1.93%

2.00%

Medium-sized well-structured projects continue to be able to secure long-term debt at favourable rates from a diverse group of financiers comprising North American banks, Canadian LifeCos and Japanese banks. Wind energy projects underpinned by long-term power purchase agreements with provincial utilities or agencies continue to attract attention from both domestic and international investors that view Canada as a safe investment jurisdiction.

Source: OECD

Spreads have also decreased. “Credit spreads have decreased by around 50 basis points since the financial crisis of 2009 and early 2010,” explained Jean-François Thibodeau, Vice-President and Chief Financial Officer at Boralex. “For 15-20 year money we are now seeing spreads in the 250-300 bps range. The benchmark rate has also come down to very low levels, meaning that we are at all-in rates of around 5%, which is very attractive.”

That said, recently volatility in the debt markets has edged the benchmark rate higher in the last two months. Ten-year Canadian Government bonds are now yielding 2.47%, a significant increase on yields of 1.80% only two months ago. Developers can still secure debt project finance at attractive historical rates, but this may not last forever. Uncertainty on the future of the US Federal Reserve’s quantitative easing program reinforces the need for developers requiring long debt financing to get to the front of the line to secure pricing that is still at historical lows.

Rate (%)

Canadian Government bond yields 2.7 2.6 2.5 2.4 2.3 2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9

09 July 2013 09 January 2013 09 July 2012

2-yr

3-yr

5-yr

7-yr

Source: Bank of Canada © 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

10-yr


Canadian Government bond yields 3.0 2.5

Rate (%)

2.0 10yr

1.5

7yr

1.0

5yr

0.5

3 01

Ju

20 ay

n2

13

3 01 M

r2

13 20 ar

Ap

3 01 M

Fe

n2

b2

01

3

2 Ja

2

01 c2

01

De

v2

01

2 No

t2

01

2 Oc

p2

01

2

Se

g2 Au

Ju

l2

01

2

0.0

Source: Bank of Canada

Capacity remains limited for large projects With the exit of most major European banks active in long-term lending, developers have had to tap other funding sources, including LifeCos, Japanese banks and the limited number of active German banks. Alternative shorter term structures are another option but with obvious refinancing risks. While there are multiple sources of long-term debt that matches the terms of PPAs, only a few can write cheques in excess of $75 million. Therefore a large club of lenders is needed to secure debt for larger projects. “Some of the larger projects have had difficulties in getting financed, especially the ones that require $500 million or more,” commented Hugo Bouchard, Chief Investment Officer & General Manager of Eolectric. “This is primarily due to many European banks pulling out of the market for long-term debt. The most active banks in Canadian wind are now Japanese and German banks.

The LifeCos also finance several wind projects every year. The institutional players will go up to the end of your PPA, which means they will finance up to 20 years in Québec. The banks will not usually lend beyond 18 years.”

Mini-perm structures with LifeCo takeout are suboptimal While Canadian and other foreign banks are still actively financing wind energy projects at attractive rates, they are generally not prepared to lend at long tenures? Developers are often left with little choice but to refinance their assets a few years into operation. This is particularly the case for large projects. Mini-perm structures with refinancing exposure also pose significant risks to equity investors. “Equity rates of returns have been substantially compressed in recent years to upper single digits on a levered basis”, explains Georges Arbache, Vice-President with KPMG’s Global Infrastructure team in Toronto. “While still attractive in a very low interest rate


environment, the impact of upward rate movements dramatically impacts project returns if a refinancing event needs to take place in the short to medium term. Some believe that a way to mitigate this risk and to tap into additional lending capacity is to enter into a hybrid structure of LifeCo and mini-perm with a domestic bank. While this may make sense financially, practically these are more difficult to structure due to inter-creditor issues, mismatches in tenures and uncertainty of long term project economics.” Others agree and according to Bill Sutherland, Senior Managing Director – Project Finance, at Manulife Financial Corporation, “Canadian banks have an interest but really only for mini-perm structures. They are marketing the mini-perm solution with a capital markets take out with LifeCos such as ourselves once the project is operational. We have little interest in these structures as the terms and conditions tend to be much looser than we would structure ourselves.”


Project bonds can be used to meet growing demand for financing Why are new structures needed? Financing capacity for Canadian wind energy projects will be seriously stretched in the next 18 months. On average, some 1,000 MW of wind capacity has been brought online in Canada per year since 2009. However, in the next two years this figure could almost double as a series of projects contracted during the past five years seek financing to commence construction. Annual and cumulative installed wind capacity in Canada Annual capacity

Cumulative capacity

7000 6000

Capacity (MW)

5000 4000 3000 2000 1000 0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: CanWEA © 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

2011

2012

2013


Based on the number of awarded projects, Québec alone is expected to install approximately 700 MW of wind capacity per year between now and the end of 2015. Even more has been contracted in Ontario – 3.1 GW of wind capacity has been contracted in the current FiT program, of which only 280 MW has been built as last reported by the OPA. New financing structures will almost certainly be necessary in order to ensure this volume of capacity is financed. “A lot of contracts have been issued in places like Ontario, BC and Québec in the past five years which are now starting construction or will start construction later this year,” explained David Timm, Vice President, Strategic Affairs at GDF Suez North America. “When this bulge of projects goes to market for financing at the back end of 2013 and early 2014 there will have to be new financing structures. This will test the Canadian financing market. Everyone has their investment limits. Creativity will be important.”

Bonds are gaining traction Encouragingly, new structures are emerging. In February 2013 Brookfield Renewable Energy Partners broke new ground when it secured C$450 million financing for its 166 MW Comber wind farm located in Essex County, Ontario. The financing was secured via a broadly marketed, rated bond issue. This was the first time this structure had been used to finance a Canadian wind farm. The project was operational at the time of the financing. The senior bonds, rated BBB by DBRS, bear an all-in interest rate of 5.13% and fully amortize over a 17.7 year period. More than 25 investors subscribed to the oversubscribed offering, many of which were institutional investors that had never previously invested in the sector. Project bonds are relatively new structures when it comes to renewable energy. A table of notable renewable energy bond financings in 2012 and early 2013 are shown in the table below:

“The Canadian bond market has been active of late,” explained Jamie Storrow, Managing Director of Northleaf Capital Partners. “The industry is maturing, so we have more data and case studies to take to mainstream bond investors. So, while the bank market is shrinking, the private and public bond markets are growing.” “This new form of financing certainly demonstrates that there is increasing investor comfort with the asset class, but with some caveats,” says Georges Arbache, KPMG. “While terms can be attractive as compared to alternative sources of long-term debt, the actual capital raising process and the requirements imposed on the equity sponsors may not be desirable for smaller cap less established developers and owners/operators.”

Recently Completed Public Bond Offerings Sponsor

Funds raised

Rating

Interest rate

Tenure

Date

166 MW Comber wind farm (ON, Canada) Operational

Brookfield Renewable Energy Partners

C$450 million ($438.6 million)

BBB

5.13%

18 years

Feb-13

550 MW Topaz solar PV farm (CA, USA) Under construction

MidAmerican Energy Holding Co

$850 million

BBB-

5.75%

27 years

Feb-12

550 MW Topaz solar PV farm (CA, USA) Under construction

MidAmerican Energy Holding Co

$250 million

BBB

4.88%

26 years

Apr-13

NextEra Energy Inc

C$171.8 million ($175 million)

BBB

4.80%

19 years

Sep-12

Acciona SA

$299 million

BBB-

7.25%

19.5 years

Aug-12

Soitec Solar GmbH

ZAR1,000 million ($111 million)

Baa2.za (equivalent to BBB)

11.00%

16 years

Apr-13

Project

40 MW Sombra and Moore solar PV projects – St. Clair Holding – (ON, Canada) Operational 204 MW Oaxaca II & IV wind farms (Oaxaca, Mexico) Operational 44 MW Touwsrivier solar CPV project (South Africa) Pre-construction Source: Clean Energy pipeline



Canadian Life Insurance Companies

Canadian Public Bond

US Life Insurance Companies

Foreign Banks

US Banks

Canadian Banks

Debt Sizing

$25M –$300M

$150M–$250M

$100M+

$50M+

$50M+

$25M+

Term

19.5 Years

19.5 Years

20 Years

15 Years+

5–7 Years

5–7 Years

10 Year GOC 2.04% 30 Year GOC 2.62%

10 Year Swap Curve 2.29% 20 Year Swap Curve 2.96% 30 Year Swap Curve 3.21%

6 Month LIBOR

5 Year BA 1.44% 7 Year BA 1.76%

Interpolated GOC 2.10%

Interpolated GOC 2.10%

Interpolated US Treasury 2.20%

Interpolated US Treasury 2.20%

LIBOR Floor 0.41%

1.44% – 1.76%

275–350 bps

250–325 bps

350–400 bps

275–350 bps

275–350 bps

275–300 bps

Base Rate

Credit Spread

10 Year US Treasury 2.14% 20 Year US Treasury 2.73% 30 Year US Treasury 3.31%

Source: KPMG *Rates quoted as of June 2013

Why bonds? Bonds are attractive as they can unlock deeper pools of capital. As shown in the table above, project bonds are also advantageous as they typically allow the sponsor to borrow at a lower cost than from conventional debt sources of similar tenure.

Bonds can also be used for greenfield projects Given the credit rating of turbine suppliers and the relative ease of constructing wind projects there is no reason why project bonds can’t also be used to finance the construction of wind farms. “Public bond structures could certainly be used to finance pre-construction stage projects,” confirmed Bruce Ells, Senior Vice President, Project Finance, DBRS. “Compared to other power asset classes, wind construction risk is low to moderate. Some 60-70% of the total

construction cost relates to the delivery of modular turbines. The top four turbine suppliers are all investment grade themselves, so there is a certain amount of confidence in the delivery of the turbines. More complex greenfield power projects, such as hydro, have certainly utilized project bonds, so the structure should be feasible to fund construction of wind farms.”

construction but rather only at take-out, meaning two financings are required. Negative carry costs may impact overall attractiveness to the solution. “A public bond solution requires the borrower to draw on the entire amount upon achieving closing, rather than adhering to a draw down schedule that matches construction costs” explains Georges Arbache, KPMG.

However greenfield projects may have to borrow at higher rates. “We penalize a project or increase the debt service coverage ratio for a given rating if it has not been operating for a year or is a greenfield project,” added Ells. “This is because we don’t really know what the wind resource will be. We add 5 bps of debt service coverage for this. In effect we increase the threshold that for instance determines a triple B from a triple B low rating.”

Demand for bond structures may be limited

Finally, we have yet to see a bond deal with investors willing to step in to fund


It is still unknown whether there will be sufficient liquidity for these types of structures. As Bill Sutherland, Manulife Financial explains, many of the Canadian LifeCos, who would be natural investors in these types of deals, usually prefer to arrange their own deals rather than purchasing project bonds. “Recent bank-led transactions include the Spy Hill CCGT and Comber Wind re-financings,” he said. “I think we


will see more of these structures but liquidity may be limited. We have a strong preference for arranging our own transactions which allows us to structure to meet the needs of LifeCo lenders.” It may also prove difficult for smaller developers to utilize this structure. “When you do a public deal the size of the sponsor comes into play,” explained Jean-François Thibodeau, Vice-President and Chief Financial Officer at Boralex. “There are not that many sponsors in Canada that are large enough to go to the public markets and do a large deal like Brookfield or Nextera. Even for project bonds, the strength of the sponsor impacts the rating. People look at who is behind the project because they will want to know that they can be repaid if something goes wrong.” For smaller developers to utilize this structure, they will certainly have to structure projects in a way that transfers risks from bondholders to project counterparties. “If an equity sponsor has no track record, we would have to think about how this is managed in the transaction,” explained Bruce Ells, Managing Director at DBRS. “The best way to do this would be to have a very experienced operator in the project company. The risk can be transferred away from the project company and bond holders in the construction phase by entering into fixed-price contracts with suppliers and contractors and by partnering with an experienced operator during the operations phase. In both

phases the equity sponsor’s apparent weakness is not a factor due to the way the project is structured.”

M&A activity will continue to be strong Every wind energy executive interviewed in this report expects there to be a flurry of M&A activity during the next 18 months. The projected increase in new projects coming online in the next 18 months should ensure there are plenty of targets for these investors. As mentioned earlier, compression in expected equity rates of return has been fairly substantial in the last few years driven by increased competition from investors needing to deploy raised capital into assets, increasing scarcity of good strong projects and no clear line of sight on additional large scale procurements. This demand is impacting valuations. “In recent times, prices have risen,” stated Jamie Storrow, Managing Director of Northleaf Capital Partners. “With more equity participants in the market in a low interest rate environment, investors are being driven to seek out assets with yield. In addition, certain investors have started looking at mature infrastructure as a fixed income substitute. We are seeing private and public Canadian entities pursue these types of investments and there are certainly more now than there used to be. We are also seeing international investors, particularly from Asia, looking to invest in Canada.”


Financial investors are certainly not the only acquirers in this market. Oil and gas companies have been relatively active acquirers of Canadian wind capacity in recent years to offset carbon emissions. For example, Canadian oil and gas major Enbridge has committed to generate a kilowatt of renewable energy for every kilowatt of conventional energy its operations consume. It has acquired numerous wind energy assets to honour this pledge. M&A activity may also be catalyzed by large European utilities divesting stakes in their Canadian wind generation portfolios. Utilities announced the sale of 32 renewable energy asset portfolios valued at US$12.25 billion globally in 2012, a significant increase on the US$5.4 billion worth of asset sales announced in 2011. Canadian wind assets have featured heavily in this disposal process. In December 2012, France-based energy company GDF Suez announced it had agreed to sell a 60% stake in its 680 MW Canadian renewable energy portfolio, valued at more than C$2 billion (US$2.03 billion), to Japanese conglomerate Mitsui & Co and Canada-based asset management firm Fiera Axium Infrastructure. The portfolio included 363 MW of operational wind capacity, 297 MW at the construction stage and 50 MW at the development stage.


Recent M&A Activity Target 363 MW portfolio of operational wind assets in Ontario, New Brunswick and Prince Edward Island; 297 MW portfolio of construction-stage wind assets in Ontario and British Columbia; 50 MW development stage wind farm in British Columbia; 20 MW portfolio of construction-stage solar PV assets in Ontario.

Province

Stake (%)

Deal value ($ million)

Date Announced

Acquirer(s)

Seller(s)

17/12/2012

Mitsui & Co. Ltd./ Fiera Axium Infrastructure Ltd.

GDF Suez SA

Invenergy LLC

Ontario, New Brunswick, Prince Edward Island and British Columbia

60

1,500 MW portfolio of operational wind farms in North America, including two in Canada. One of the acquired Canadian assets is the Le Plateau wind farm (138.6 MW)

Québec

Undisclosed (minority stake)

500

08/01/2013

Caisse de dépôt et placement du Québec

150 MW Massif-du-Sud wind farm

Québec

50

345

20/12/2012

Enbridge Inc.

EDF EN Canada Inc.

Tumbler Ridge and Meikle wind farms (164 MW)

British Columbia

100

28

30/04/2013

Pattern Energy Group LP

Finavera Wind Energy Inc.

1,000 MW portfolio of four development-stage wind assets in Banks Island, Porcher Island and McCauley Island

British Columbia

100

Undisclosed

18/05/2012

Alterra Power Corp.

Undisclosed

Alberta

100

Undisclosed

08/04/2013

Enbridge Inc./ EDF Canada Inc.

Greengate Power Corp.

British Columbia

49

Undisclosed

12/12/2012

Fiera Axium Infrastructure Inc.

GE Energy Financial Services

Québec

100

Undisclosed

27/03/2012

Boralex Inc.

Venterre NRG Inc.

300 MW Blackspring Ridge wind farm 144 MW Dokie wind farm (Phase 1) 50 MW Témiscouata Regional County Municipality (RCM) wind farm

1200

Source: Clean Energy pipeline

As David Timm, Vice President, Strategic Affairs of GDF Suez North America explains, utilities may target more Canadian wind divestments given current valuations. “Our divestment was driven by the desire of our parent company to optimize assets and monetize the value in the portfolio,” he said. “There has been a trend in the last five years

of large non-Canadian utilities coming into Canada. The likes of GDF, EDF and Nextera have all come here. Some utilities are now seeking to divest and monetize some of the value that has been created here.” “The Canadian market is very attractive as there are many projects that are just


coming online or are very early in their long-term PPAs. So from a liquidity perspective Canadian portfolios are quite attractive in terms of valuation, especially when compared with other markets such as the US where you don’t have the same relative volume of projects with long-term secure off-take agreements.”


Alberta: the next major wind market in Canada? With 1,117 MW of installed capacity, Alberta is Canada’s third largest wind energy market. However unlike Québec and Ontario, growth has been relatively subdued in recent years. Only 530 MW of wind capacity was brought online between 2010 and 2012, less than the 694 MW installed in Québec or the 875 MW installed in Ontario. To date installation has been slow due to the rapid decline in natural gas prices since 2008. After hitting a peak of US$12.69/mmBtu in June 2008, natural gas prices have fallen to an average of US$2.75/mmBtu in 2012. Low natural gas prices directly impact the development of wind energy projects in Alberta as the Province has a deregulated energy market, meaning that generation assets compete directly with each other in an open market.

However some wind energy projects are securing finance and entering into commercial operations. In December 2012 Capital Power brought online its 150 MW Halkirk wind farm, which is Alberta’s largest project to date. Another recent notable development was EDF EN Canada and Enbridge’s acquisition of the 300 MW Blackspring Ridge wind farm in April 2013. The project will be Alberta’s largest when it comes online in the summer of 2014. Importantly, both developers agreed to sell the Renewable Energy Certificates (RECs) the projects will generate to Californian utility Pacific Gas and Electric under a 20-year purchase agreement. As Cory Basil, Vice President, Development at EDF EN Canada explains, this extra revenue stream is essential in rendering Alberta wind projects financeable. “We recently acquired wind development assets and are currently constructing 300 MW. The project had secured a buyer for the renewable

energy certificates (RECs) in California which helped ensure the project was viable. It is challenging to finance wind farms in Alberta without having a source of revenue in addition to the Alberta power pool. But even with an additional source of revenue such as the sale of RECs, it can be very difficult to secure long term financing due to the risk of fluctuation in the market price.” Despite the current difficulty in financing wind energy projects in Alberta there is potential over the long term due to the province’s vast power requirements. The Alberta Electric System Operator estimates that peak demand will grow to 17,281 MW by 2032. In 2012 peak demand was only 10,841 MW. The increase is due to increasing power requirements from the Province’s rapidly growing oil sands industry as well as population growth. The projected evolution of Alberta’s power demand and current power supply base is shown next.

Annual and cumulative installed wind capacity in Alberta Annual capacity

Cumulative capacity

1200

Capacity (MW)

1000 800 600 400 200 0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: CanWEA


2010

2011

2012


In addition, existing generation capacity is forecast to decrease as a series of coal and gas power plants are retired. Alberta’s draft Federal Reduction of Carbon Dioxide Emissions from Coal-Fired Generation of Electricity Regulations require coal generation be retired before or once it reaches 45 years of operations or at the end of its Power Purchase Arrangement (PPA). According to the Alberta Electric System Operator, this will result in 1,796 MW of coal generation being brought offline by 2022 and a further 2,700 MW retired between 2023 and 2032. These projects are listed to the right. At the moment it is likely that natural gas-fired plants will plug any emerging power gap. However, any upturn in gas prices could result in a wind renaissance in Alberta. “The number one market in the long term will be Alberta,” predicted Hugo Bouchard, Chief Investment Officer & General Manager of Eolectric. “It is and

will remain cyclical due to the electricity pool price, which is so closely tied to natural gas prices. At this moment the price is low as the price of natural gas is low. When the price of natural gas goes up the average pool price will also go up and plans to build new gas-fired facilities will slow down.” Wind’s low carbon credentials may also give it an advantage. Increasingly there is a commitment by oil and gas companies to matching MW of nonemitting resources to offset their emission footprint. “In Alberta there is also an environmental spin to this issue,” continued Bouchard. “There is already an incentive to reduce emissions. Companies that don’t reach a certain target of emissions have to pay a certain amount. The Premier has set a bold target and hinted at an increased price per tonne of carbon. Wind projects could increase their income from these measures.”

Assumed coal generation retirements Power plant Sundance 1,2,3,4

144

Battle River 3,4

308

Total Power plant

807

Battle River 5

389

Sheerness 1,2

780

Keephills 1,2

780

Total Source: AESO

18,000 16,000 Existing other generation Existing effective wind generation Existing effective hydro generation

10,000

Existing gas generation

8,000

Existing coal generation

6,000

Load outlook (winter peak)

4,000!

0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

2,000

Source: AESO


1,796 Retired capacity 2022-2032 (MW)

Sundance 5,6

20,000

12,000

1,344

HR Milner

Expected Alberta generation capacity requirements

14,000

Retired capacity by 2022 (MW)

2,756


Ontario: new wind procurement uncertain Ontario is Canada’s largest wind energy market by installed capacity. As of May 2013 it had 2,043 MW of installed wind capacity, 327 MW more than second place Québec. As part of its Green Energy Act, Ontario is seeking to install 10.7 GW of non-hydro renewable energy capacity by the end of 2015, a large portion in the form of onshore wind.

Under the current FiT program 3.1 GW of wind capacity has been contracted, of which only 280 MW has been built. The Ontario Independent Electricity System Operator expects an additional 3,300 MW of renewable energy capacity to be brought online by November 2014, including 1,100 MW of wind power in the summer of 2014 alone. Much of this capacity still needs to be financed, so significant investment in wind energy projects is expected in Ontario in the next 18 months.

Despite the recent momentum, the growth potential beyond 2014 is unclear. A limiting factor is any new renewables capacity would likely require significant new investment in the grid, which has little available capacity in most areas. The Ontario government has also recently stated that it will halt its feed-in tariff for projects over 500 KW and replace it with a competitive procurement process. Details of the

Annual and cumulative installed wind capacity in Ontario Annual capacity

Cumulative capacity

2500

Capacity (MW)

2000

1500

1000

500

0 2006

2007

2008

2009

2010

Source: CanWEA


2011

2012


scope, timing and requirements for this process have not yet been outlined. There will undoubtedly be some uncertainty on future opportunities as investors await clarity on details of the procurement system. There is also uncertainty around the implication of the recent the World Trade Organization’s ruling that Ontario’s local content requirements contravene global trade agreements. Ontario Energy Minister Bob Chiarelli has since stated that it intends to comply with the ruling and that revised legislation will be implemented early next year. The pending implementation of new rules will likely further reduce future potential along other initiatives taken by the Ontario government to reduce the pace of wind energy installation. In early 2012, the province unveiled its new renewable energy feed-in tariff rates for new projects. The wind tariff was cut from C$0.135 per KWh to C$0.115 per KWh.

“I think Ontario is close to having as much renewables as it needs,” confirmed Bill Sutherland, Manulife Financial Corporation. “When everything is built out that is contracted we will probably have way more than we need. We have surplus capacity in Ontario and I certainly see new procurement trailing off.” As David Timm, Vice President, at GDF Suez North America warns, there is even uncertainty that the Ontario government will contract sufficient capacity for its initial 10.7 GW target to be met. “There is a long-term plan for 10,700 MW of non-hydro renewables capacity in Ontario by 2015,” he said. “Depending on what happens, 800-1,000 MW still needs to be contracted. But that goal is less certain right now.”



British Columbia: Uncertain potential

Annual and cumulative installed wind capacity in British Columbia

There continues to be potential for wind energy in British Columbia assuming electricity demand materializes from planned LNG developments.

“In British Columbia there is a potentially significant load growth due to a chain of LNG facilities that are being planned,” confirmed Cory Basil, at EDF EN Canada. “But potential is the key word, as these are long-term development projects and many are still in the early stage of the planning process. But aside from the LNG facilities there is significant load growth in the north of the province in sectors such as mining. There is certainly potential for new wind procurement.” If these projects proceed, wind and hydro are realistically the only renewable technologies that can be deployed given British Columbia’s renewable energy resources. The province has not

Annual capacity

Cumulative capacity

400 350 Capacity (MW)

The BC Government is actively considering its current electricity generation targets, including maintaining a 93% clean energy target for its portfolio and its commitment to cut greenhouse gas emissions by 33% from 2007 levels by 2020 and 80% by 2050 in establishing policies associated with LNG development. Depending on the outcome, there may be new opportunities for new renewables including wind development. And while many proponents are exploring powering options associated with their investment decisions in LNG projects, including a primary default to a world standard of non-electric power or primarily non-electric power, the outcome may be some renewable power development commitments to secure consent and balance impacts.

450

300 250 200 150 100 50 0

2009

2010

2011

2012

Source: CanWEA

stated which technology it will favour, but it is likely that wind will feature strongly as it can be built out much more quickly than hydro. Beyond the medium-term and long-term potential, short-term wind energy investment opportunities exist in British Columbia. The province launched renewable energy procurement rounds in 2006 and 2008. Many wind projects contracted throughout this process will seek financing in the next 18 months.



Q

uébec – a potential long term market for wind

Summary findings • Current financing requirements: Some 1,600 MW wind energy capacity procured in previous RFPs will be installed in the next two and a half years in Québec. Some projects have not yet achieved financial close. • Future commitments: The recent announcement of a 800 MW RFP demonstrates a commitment to wind beyond 2015. This is intended to preserve Québec’s wind manufacturing base through to 2016 although the opportunity for IPPs is unclear. The proposed RFP is consistent with a long term commitment to wind in Québec. Around 400 MW/ year procurement is acknowledged to be needed to maintain the Province’s wind manufacturing industrial base and its associated jobs.

Entering a busy period of construction and financing Québec is Canada’s second largest wind energy market after Ontario. In 2003, the government set a target of 4,000 MW installed capacity by 2015. To achieve this objective the government awarded contracts for approximately 3,300 MW of wind energy capacity across three wind energy procurement rounds in 2003, 2005 and 2009. A small proportion of these projects (approximately 200 MW) have since been terminated, meaning that just over 3,100 MW is likely to be online by the end of 2015. However, only 1,505 MW was installed as of May 20131. This leaves in the region of 1,600 MW to be installed during the next two and a half years, a large proportion of which still needs to be financed.

1 This figure only includes operational wind projects that were contracted through the Province’s RFP process. A further 211 MW of wind capacity is operating, although these projects were not contracted through the RFP process.



The projects contracted in previous wind energy procurement programs are outlined in the table below:

RFP 1 (2003) Capacity (MW)

Status

Commencement date/Expected commencement date

St-Ulric St-Léandre wind farm (phase 1)

127.5

Operational

Nov-09

Gros-Morne wind farm (phase 2)

111.0

Operational

Nov-12

Baie-des-Sables wind farm

109.5

Operational

Nov-06

Carleton wind farm

109.5

Operational

Nov-08

L’Anse-à-Valleau wind farm

100.5

Operational

Nov-07

Mont-Saint-Louis wind farm

100.5

Operational

Sep-11

Gros-Morne wind farm (phase 1)

Project

100.5

Operational

Nov-11

Montagne-Sèche wind farm

58.5

Operational

Nov-11

St-Ulric St-Léandre wind farm (phase 2)

22.5

Planned

Undisclosed

Status



RFP 2 (2005)

Project

Capacity (MW)

Rivière-du-Moulin wind farm

350.0

Construction

Dec-15

Des Moulins wind farm

156.0

Construction

Dec-13

Massif-du Sud wind farm

150.0

Operational

Jan-13

Lac Alfred (phase 1) wind farm

150.0

Operational

Jan-13

Lac Alfred (phase 2) wind farm

150.0

Construction

Dec-13

Seigneurie de Beaupré wind farm (phase 3)

140.6

Construction

Dec-13

Le Plateau wind farm

138.6

Operational

Mar-12


131.2

Construction

Dec-13

Vents du Kempt wind farm

101.5

Construction

Dec-14

Montérégie wind farm

101.2

Operational

Dec-12

De l’Érable wind farm

100.0

Construction

Dec-13

80.0

Operational

Oct-12

Clermont wind farm

74.0

Planned

Dec-15


69.0

Planned

Dec-14

New Richmond wind farm

67.8

Operational

Mar-13

Témiscouata II wind farm

50.6

Planned

Dec-15

St-Robert-Bellarmin wind farm

Source: Clean Energy pipeline © 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


RFP 3 (2009) Capacity (MW)

Project


Status

La Côte-de-Beaupré wind farm

25.0

Planned

Dec-15

Viger-Denonville wind farm

24.6

Construction

Dec-13

La Mitis wind farm

24.6

Planned

Dec-14

Le Granit wind farm

24.6

Planned

Dec-14

Pierre-De Saurel wind farm

24.6

Planned

Dec-15

St-Philémon wind farm

24.0

Planned

Dec-14

Frampton wind farm

24.0

Planned

Dec-15

St-Cyprien wind farm

24.0

Planned

Dec-15

Val-Éo wind farm

24.0

Planned

Dec-15

St-Damase wind farm

23.5

Planned

Dec-14

Témiscouata wind farm

23.5

Planned

Dec-14

Le Plateau-2 wind farm

23.0

Planned

Dec-13


Annual installation is gathering pace. Four projects totalling 431 MW were brought online in 2012, representing a 66% increase by capacity on the three projects totalling 260 MW brought online in 2011. As of May 2013, three projects totalling 368 MW have already been installed. Assuming projects proceed on schedule, a total of 1,093 MW could be brought online in 2013. Annual and cumulative installed wind capacity in Québec Annual capacity

Cumulative capacity

4000 3500

Capacity (MW)

3000 2500 2000 1500 1000 500 0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: CanWEA


2013e

2014e

2015e


“The greatest opportunity for financing and commissioning between now and 2015 will be in Ontario and Québec due to the number of projects in the pipeline,” explained Cory Basil, Vice President, Development at EDF EN Canada. “We have recently commissioned just under 400 MW of wind in Québec and have about 600 MW to be brought online in the next two to three years alone.”

New wind procurement a sign of good intentions On May 10, 2013, the Government of Québec announced long anticipated plans to procure an additional 800 MW of wind energy. The details of the procurement program, including timeframes, are yet to be clarified but the move is welcome news for the industry since it represents a commitment to wind power post-2015. Procurement will be divided into three blocks: • 450 MW will be awarded through a RFP process to local communities and cooperatives in partnership with private developers. Within this, 300 MW will be awarded specifically to projects in the Gaspésie-Îles-de-la Madeleine and Lower St. Lawrence regions; • 200 MW will be allocated to HydroQuébec Production, a division of Hydro-Québec; and • 150 MW will be allocated to the three Mi’gmaq First Nations of Québec, who have established a partnership with Canadian IPP Innergex.

The new procurement is encouraging and was widely expected. The new program is crucial in meeting the province’s 4,000 MW capacity targets. Attrition in previous RFP rounds means this target may not be reached until after 2015. The expected procurement round is a positive development for Québec’s wind energy supply chain, although the opportunity for private developers is uncertain. “The new RFP does present opportunities but it has its limits,” explained Jean-François Thibodeau, Vice-President and Chief Financial Officer at Boralex. “It is not a fully open RFP. Out of the 800 MW, 150 MW has been given to First Nations projects in collaboration with Innergex. 200 MW has been given to Hydro Québec, so 350 MW is already not available to us. Then 300 MW will be driven by local municipalities in Gaspésie. We don’t know the details yet of how this segment will be allocated and whether it will be a real open RFP. That only leaves 150 MW that we can definitely bid on. But there may be around 3,000 MW bid for this 150 MW of capacity.” Some however, argue that the new RFP is not structured in a way that encourages cost efficiencies. “The long term development of the industry requires that production costs fall over time,” explained Renault Lortie, partner at KPMG. “The best way to assure costs and consumer prices go down is to have the most competitive bidding process in an open RFP.”


Wind has a healthy long-term future Nearly every wind energy executive interviewed for this report believes there is significant long-term growth potential for wind energy in Québec even after its 4,000 MW capacity target is achieved. The following factors will underpin future wind energy procurement: • Maintaining the local wind industry: Preservation of Québec’s wind equipment manufacturing industry and associated jobs is by far the strongest driver to promote wind energy. According to the Government of Québec, more than 150 companies located in Québec currently manufacture equipment for or provide services to the province’s wind industry. The industry employs more than 2,000 individuals directly and many more indirectly. Job creation was at the heart of Québec’s wind energy strategy when it was established in 2003. Recent RFPs require that at least 30% of turbine costs and 60% of total project costs be related to expenses specifically in the Gaspésie and Matane regions of Québec. The government hoped that Québec’s supply chain would also develop export markets. However local content requirements in Ontario and the dominance of large domestic turbine manufacturers in the US has resulted in limited success. As a result, Québec’s wind manufacturing and servicing industry depends almost entirely on local demand and new wind procurement programs.


“From the government’s perspective, wind is an economic development program,” confirmed Hugo Bouchard, Chief Investment Officer & General Manager at Eolectric. “Whether 800 MW will be enough to maintain all of the wind manufacturing jobs in Québec will depend on the timing. Post-2015, 400-500 MW of turbines will have to be deployed per year for the industry to maintain itself and expand its industrial base.” “During her announcement of RFP IV in May 2013, Québec Premier Ms. Marois stated that the government had a long-term vision,” explained Helmut Herold, Managing Director, REpower Systems. “We understood that the government intends to further develop the wind industry in Québec and that there will be more RFPs to come, hence enabling the industry to, at the least, maintain jobs created in the province. In 2024, new turbines will be needed for repowering.

As a well-established Québec manufacturer, REpower welcomes this long-term vision as it enables us to make further investments in a stable business environment. At the same time, it allows REpower to maintain the jobs existing in its supply chain and its direct workforce.”

its capacity during the winter peak. Most of the residential heating is electrical, which gives wind an interesting value. You get significantly higher production from wind farms during the winter months so it is a perfect match. Wind can therefore act as an alternative to natural gas standby facilities.”

• Supplementing natural gas during the winter: Québec electricity consumption in the winter is very high, since the majority of the province’s inhabitants use electric-fired heaters. The level of peak demand is rising. In January 2013 freezing temperatures caused electricity consumption to hit a record high of 38,910 MW, 3% above the previous record set in January 2011.

• Complementing hydro: Québec has a large base of approximately 40,000 MW of installed hydro capacity (including the 5.4 GW Churchill Falls generating station situated in Newfoundland and Labrador), accounting for 91% of total electricity production. Much of this is sourced from dammed hydro projects, production from which can be easily altered. With this flexibility, the problems of wind intermittency are removed, since any dips in generation can be easily compensated with increased hydro output.

“Wind energy is perfect for Québec as we have a winter energy peak,” explained Hugo Bouchard, Chief Investment Officer & General Manager of Eolectric. “Québec uses almost all of



Québec’s energy surplus conundrum Québec has registered an energy surplus for many years and does not currently require new power capacity. Hydro Québec projects the province will generate a surplus of 25 GWh between 2012 and 2020. Other studies indicate the surplus will last until 2027. Some critics of the province’s wind energy strategy argue that running a surplus pushes up energy bills as it forces Hydro Québec to purchase electricity it does not need. The utility estimates the surplus will add approximately $1.5 billion

to electricity bills in the next seven years, although some critics have estimated this figure is much higher. Indeed the Québec Association of Industrial Electricity Consumers estimates that the recently announced 800 MW wind energy procurement will increase electricity bills by 1% if Hydro-Québec distribution buys the power. However, projections are that the scale of the surplus should decrease in the next seven years. Hydro Québec estimates the surplus will hit a peak of 5.6 GWh in 2015 before falling to 2.2 GWh in 2018 and 0.1 GWh in 2020. The surplus totalled 4.4 GWh in 2012.

“Hydro Québec’s most recent numbers predict an annual average surplus of 1.2%, which is not that much,” explained Jean-Frédérick Legendre, Regional Director – Québec, CanWEA. “One major new industrial consumer could change things. The economy still hasn’t recovered from the crisis and an upturn in activity could raise demand. We shouldn’t stop developing wind because we currently have a surplus.”

Projected electricity demand and supply in Québec (GWh) 210 200 190 Non-heritage electricity supply Heritage electricity supply base

180

Projected electricity demand 170 160 150

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: Hydro Québec

Looking beyond wind Aside from wind there may be smaller opportunities for other renewable power technologies. As Martin Imbleau, Vice President, Operations and Major Projects at Gaz Métro explained, there may be significant long-term potential for biomethane. “Biomethane, which is locally produced natural gas, has a lot of potential in Québec,” he said. “By 2017

all municipalities in Québec won’t be allowed to bury domestic waste. So they will have to put in a recycling program. The best way to deal with that waste is to put it into a digester to generate energy. There is a $700 million subsidy available to Québec municipalities to develop these types of projects. I think it is realistic that 2% of natural gas consumption could be displaced by biomethane by 2017.”


In contrast, there is less potential for new hydro development. “The opportunity for new hydro development in Québec is relatively small as the low-hanging fruit has already been taken,” continued Imbleau. “Most of the best rivers have already been developed on.” In addition, Hydro-Québec recently cancelled smaller run-of-river projects.




Appendix

Notable renewable energy project debt finance deals in Canada since 2012 Project

Location

Owners

Debt providers

Portfolio of wind and solar farms (680 MW)

Ontario & British Columbia

GDF SUEZ, Mitsui & Co. Ltd, Fiera Axium Infrastructure Inc.

Japan Bank of International Cooperation, Bank of Tokyo- Mitsubishi UFJ, Mizuho Corporate Bank, Sumitomo Mitsui Banking Corporation & The Manufacturers Life Insurance Company

South Kent wind farm (270MW)

Ontario

Samsung Renewable Energy and Pattern Energy joint venture

Mizuho Corporate Bank Ltd., Bank of Tokyo-Mitsubishi UFJ and Union Bank, BayernLB, BMO, CIBC, Credit Agricole, Keybank, Manulife, Natixis, NordLB, RBC, RBS, Siemens, Societe Generale

Comber wind farm (166MW)

Ontario

Brookfield Renewable Energy Parnterns LP

Scotia Capital Inc. acted as sole lead and bookrunner

Chatham & Alma onshore wind farms (200.6 MW)

Ontario

Kruger Energy

Not disclosed

l’Érable onshore wind farm (100 MW)

Québec

Enerfin Energy Company of Canada

National Bank Financial, Sun Life Financial, The Manufacturers Life Insurance Company, The GreatWest Life Assurance Company and Industrielle Alliance, Assurance et services financiers

Phase 1 of 130 MW ground-mount solar PV program (60 MW)

Ontario

Northland Power

Union Bank Canada Branch, Mizuho Corporate Bank and CIT Financial

Kwoiek Creek run-of-river hydro (49.9 MW)

British Columbia

Innergex Renewable Energy/Kanaka Bar Indian Band

The Manufacturers Life Insurance Company, The Canada Life Assurance Company, The Great-West Life Assurance Company

Kokish River run-of-river hydro (45 MW)

British Columbia

Brookfield Renewable Energy Partners/ Namgis First Nation

Scotia Capital acted as sole private placement agent

St. Clair solar PV project (40 MW)

Ontario

NextEra Energy Resources

RBC Capital Markets acted as sole bookrunner




Global project finance by region: 1Q09 to 2Q13 Rest of the World Asia

4-Quarter moving average

50 40 30 20

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

0

2Q09

10 1Q09

Deal value (US$ billion)

60

North America Europe


Financing volume

Financing date

Financing type

Tenure (years)

Rate (%)

C$1.1 billion

Dec-12

Construction & term loan

Not disclosed

Not disclosed

C$700 million

Mar-13

Construction & term loan

Not disclosed

Not disclosed

C$450 million

Feb-13

Refinancing – rated bond offering

17.7

5.1%

C$377 million

Sep-12

Refinancing

Not disclosed

Not disclosed

C$250 million

May-12

Senior secured construction and term loan facility

Not disclosed

Not disclosed

C$227 million

Jul-12

Construction credit facility & term loan

18 (term loan)

Not disclosed

C$186.5 million

Jul-12

Construction and term loan

39

5.1%

C$175 million

Nov-12

Private placement bond financing

41

4.5%

C$171.8 million

Sep-12

Recapitalization – rated bond placement

19

4.8%

(Continued)



(Continued) Notable renewable energy project debt finance deals in Canada since 2012 Project

Location

Owners

Debt providers

Portfolio of solar PV projects (49 MW)

Ontario

Canadian Solar

Deutsche Bank

Portfolio of solar PV projects

Ontario

Canadian Solar

Bank of China

Portfolio of run-of-river hydro power facilities

Ontario

Capstone Infrastructure

TD Securities acted as sole private placement arranger

Des Moulins wind farm (135.7 MW)

Québec

Invenergy Wind

Sovereign Bank NA, Rabobank Nederland and Union Bank acted as joint lead arrangers and joint bookrunners. Sunlife Assurance Company of Canada also participated as a fixed rate note purchaser


Europe project finance breakdown by sector (3Q12-2Q13)

6%

2% 5% 2%

Wind Solar Biomass 58%

27%

Recycling & Waste Geothermal Other


North Amercia project finance breakdown by sector (3Q12-2Q13) Wind

2% 3% % 3% 2 3%

Solar Water & Waste Water Treatment 54%

33%

Biomass Hydro Geothermal Other




Financing volume

Financing date

Financing type

Tenure (years)

Rate (%)

C$139 million

Dec-12

Construction loan

Not disclosed

Not disclosed

C$120 million

May-12

Construction loan

Not disclosed

Not disclosed

C$100 million

Jun-12

Recapitalization – private bond placement

28 (Senior secures bonds), 29 Subordinated bonds)

4.6% (Senior secures bonds), 7% (Subordinated bonds)

Not disclosed

Dec-12

Construction, bridge & term loan

Not disclosed

Not disclosed

China project finance breakdown by sector (3Q12-2Q13) 2% 3% 3% 8%

Wind 52%

32% 74%

Solar Biomass Energy Storage Green Transportation Other



About the Research This report provides insight into financing, investment and development trends in Canada’s clean energy sector. The report was written in collaboration with Clean Energy Pipeline, a specialist provider of research, data and news on the clean energy sector. Transaction data and statistics included in this report have been extracted directly from Clean Energy Pipeline’s databases. Clean Energy Pipeline is a division of VB/Research. Both articles in this report include comments from interviews conducted with the following individuals: Jean-François Thibodeau, CFO, Boralex Inc Jean-Frédérick Legendre, Regional Director – Québec, CanWEA Bruce Ells, Senior Vice President, Project Finance, DBRS Ltd Cory Basil, Vice President, Development, EDF EN Canada Inc Hugo Bouchard, Chief Investment Officer & General Manager, Eolectric Inc Martin Imbleau, Vice President, Operations and Major Projects, Gaz Métro Inc David Timm, Vice President, Strategic Affairs, GDF Suez Energy North America Inc Bill Sutherland, Senior Managing Director – Project Finance, at Manulife Financial Corporation Jamie Storrow, Managing Director, Northleaf Capital Partners Helmut Herold, Managing Director, REpower Systems Inc

Contact us Mary Hemmingsen Partner Advisory Services National Sector Leader, Power and Utilities T: +1 416 777 8896 E: [email protected]

Nathalie Labelle Québec Energy Leader Partner, Audit T: +1 514 840 2143 E: [email protected]

Craig Walter GTA Energy Leader Partner Infrastructure Advisory and Transaction Services T: +1 416 777 8342 E: [email protected]

Renault-François Lortie Partner Advisory Services – Management Consulting T: +1 514 985 1273 E: [email protected]

Georges Arbache Vice President Infrastructure Advisory Development, M&A and Strategy T: +1 416 777 8170 E: [email protected] kpmg.com/ca/powerutilities The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2349 The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.