Alternative Energy: Chasing The Wind

How to create renewable energy out of thin air.

John Douglas unrolls a large topographical map on the dining room table of his spacious and bright west-end Toronto home. Produced on a 42-inch blotter printer upstairs in his home office, the map shows details of Quebec's massive James Bay hydroelectric dams along the La Grande river system. The river is of little consequence to Douglas, though. He's interested in the rocky, wind-swept terrain that surrounds it–and the electrical transmission lines strung south.

Douglas's company, Ventus Energy Inc., is small–just six employees operating from separate locations via a remote shared server–but it has big dreams. It took Douglas a year of frequent visits to the Cree community of Chisasibi on the banks of La Grande to earn the trust of the region's chief, Abraham Rupert, but Ventus has optioned the right to pursue development of wind farms on more than 12 million acres of Cree Nation land–the largest land position of any such company in Canada. “It could end up being the largest wind farm in the world,” he says.

Douglas is no crunchy-granola Green. His brown hair is neatly trimmed–a solid gust of wind wouldn't even mess it up–and he wears slacks and golf shirts. An S-Type Jaguar is parked outside his home, which is not powered by solar. But while Douglas is hardly a poster boy for environmental causes, he does know a business opportunity when he sees one–and believes he has the Bay Street connections to finance it.

When Douglas left his job as the director of corporate finance at Sprott Securities, in 2001, to start his own firm, Douglas Capital Inc., two early financing deals were for wind projects. The more he and his partners looked at the emerging prospects for wind power in Canada, the more they liked them. “There's a lot of money available,” says Douglas. “A year ago, traditional project finance people would have said, 'No bloody way would I look at that project.' But now, all of a sudden with rising energy prices, people are starting to call you back.” By December 2003, Ventus Energy was incorporated, and it now has 25 projects in the works. Financing-wise, it has raised $12 million for feasibility assessments, with another $400 million ready to fund the construction of wind plants in Ontario, should the government approve them.

Only 10 years ago, a business generating wind power was as tenable as holding wind in your hand. Wind was, quite rightly, not taken seriously by electrical utilities, in part because the technology did not produce reliable power. But the biggest knock against wind power was cold, hard, economic facts: it cost upward of 30¢ per kilowatt hour.

Now, that's changing. A combination of technological innovations, such as more efficient towers, has driven the price of wind power down to between 6¢ and 10¢ per kWh. Meanwhile, government incentives, a growing scarcity of economical hydroelectric sites and, most important, the rising price of natural gas, has suddenly made wind power a competitive alternative. It has its limitations–storage issues, mainly–and no one argues that wind power can replace every nuclear, coal or natural gas plant in Canada. But across the country, wind has been identified by provincial governments and power utilities as an essential part of the generating mix.

With its abundant resources of hydroelectricity, oil, gas and coal, Canada is a laggard when it comes to wind. As of August, 590 MW of installed wind power capacity dots the country, generating just 0.2% of its electricity. That's hardly a breath compared to Denmark, which gets between 16% and 20% of its power annually from wind, and Germany, which generates 6% of its energy from wind. Even the U.S., often derided as failing to support alternative energies, had more than 6,740 MW at the end of January. By comparison, the Canadian Wind Energy Association (CanWEA) says that about 300 MW of installed capacity will be constructed in 2005; a total of 1,975 MW are currently approved. CanWEA estimates Canada is on track to have 7,000 MW of wind power installed by 2012, representing some 3% of total electricity use. Globally, it's not much, but it translates to a tenfold increase in the size of the domestic industry in the next seven years.

The reasons for the sudden gust of interest are varied–but very little of it has to do with Canada's Kyoto targets. (The federal government still hasn't allocated emission limits among specific industries, and no formal system for trading credits yet exists, so no one knows what the rules of the game will be.) Instead, much of the demand is coming from provincial governments: Quebec and Ontario, for instance, are two hotbeds of activity, thanks to aggressive request-for-proposal (RFP) targets (see graphic, page 39). In Quebec, the government wants to provide economic development to outlying regions like the Gaspé peninsula. Ontario, on the other hand, faces a shortage of power at the same time as the government wants to shut down coal-fired plants to improve air quality. Alberta currently has the country's largest installed capacity with 275.5 MW. But the growth of wind power in Alberta isn't due to government policy. Instead, wind power generation is simply competitive to the rising price of natural gas–utilities like the idea of signing 20-year contracts at fixed prices. Also, wind is free. It won't run out. And the costs of harnessing it are almost all up front.

Much of the risk, though, is on the shoulders of developers and their financial backers. People like John Douglas are willing to take those risks, and he's hardly a maverick. Douglas's Ventus Energy is backed by Canadian, Dutch and U.S. institutional investors, and former Ontario premier David Peterson sits on his board. An industry that used to be the domain of lone, idealistic dreamers is now attracting big energy players: TransCanada Corp., TransAlta, Nexen, Brascan, Enbridge and Suncor Energy all have significant stakes in some of the largest wind farms in development in Canada. Income funds, like Quebec's Northland Power and Creststreet in Toronto, are also in the game, attracted by the promise of steady, long-term returns.

So where would a prospective wind entrepreneur start? Financial success and return on investment is determined over a wind plant's 20-year life cycle. The decisions made in the earliest stages of planning can have crucial effects on a project's ultimate profitability. It's not quite so simple as erecting some 80-metre-tall turbines on a windy hill.

In most cases, it is small development companies that do the prospecting. Wind atlases recently published by federal and provincial agencies provide starting points. Good signs are locations where wind rushes across a lake or plain and then encounters a rise in the terrain, causing the breeze to speed up. Canada has lots of windy locations. The trick is to get to them–tall wind turbines aren't easy to transport–and get the power from them. Without proximity to existing transmission facilities, the costs of connecting a wind farm to the grid can skyrocket. This is why Douglas is so optimistic about the Chisasibi region in Northern Quebec: Hydro-Quebec has 15,000 MW of transmission facilities already drawing out of seven hydro dams. (In fact, a 2004 report by Montreal wind energy consultancy Hélimax Energy Inc. suggests Quebec is ripe for wind power: it estimated the province has 100,000 MW of economically viable wind power sites within 25 kilometres of existing transmission lines.) The region also has the added benefit of being remote, which reduces the risk that many developers face: that their projects will get bogged down dealing with local community groups that oppose wind farms for noise, perceived threats to bird populations, or for sullying pristine vistas.

To determine just how much power a potential wind plant could produce, the wind has to be measured, often by a technical consulting firm like Hélimax, and usually over at least 12 months. It's a critical step that forms the basis for a series of assumptions. In theory, wind power production is the cube of wind speed (in other words, a 10% increase in wind speed produces 30% more electricity, although in practice it's closer to 20%), so a small change in the assessment of wind potential can make a big difference in a developer's expectations for power output. But it's not a perfect process. Mississauga, Ont.-based consultancy Ortech estimates a wind resource assessment can be considered accurate only to within ± 23%–a margin of error that a developer has to factor in.

Hélimax produces a probability curve of how much power a site might generate, but the clients pick the number they want, says president Richard Legault. “Sometimes to win an RFP they may be more aggressive,” he says. “It's a business decision at that point.” But the devil is in the details. Eager to meet an RFP deadline, a developer might do too little monitoring and overestimate the resource.

Measuring the windiness of a site is one part of the equation. A lot also depends on the turbines themselves, which are usually 1.5 MW and 3 MW units, and account for some 70% to 80% of a wind energy project's total cost. Selecting the right turbines for the wind regime and designing their placement is critical. More turbines are not always better: position them too close, and they can distort the wind, reducing the downwind units' effectiveness. Site planning also affects operating costs. GE Energy's wind turbine divisions use 227 parameters to predict what loads the units will likely experience. This determines how long GE guarantees service.

Simon Olivier, the manager of GE's wind business in Canada, says developers now work closely with turbine manufacturers, as they need to have a good handle on the future availability and pricing of turbines. Demand is up in the United States, where the federal government recently renewed its renewable energy production tax credit, and scores of projects that depend on the credit for viability were back in the mix. Also, fluctuating commodity prices for steel and the petroleum-based resins used to make the blades have increased turbine prices.

At this point, much of the industry still relies on government incentives. The federal Wind Power Production Incentive of 1¢ per kWh for up to 4,000 MW of new wind power development makes a big difference for a 8¢ per kWh plant, which is the average price for the Ontario projects recently approved. Provincial governments are creating demand for wind production by setting targets for renewable energy, and are willing to pay a few cents more per kWh than they would for a new coal plant; plus, 20-year fixed price contracts can be attractive to some utilities.

Some industry players doubt the prospects for financing and building wind power plants without a PPA from a credit-worthy utility. But that's just what Douglas and Ventus Energy are trying to do–build a wind plant that, in addition to competing in the RFP market, sells into the export electricity market. In June, Creststreet Capital Corp. completed a $40-million IPO for its Creststreet Kettles Hill Windpower fund. This fund will develop a wind farm in Alberta to sell both power and emission credits.

Brascan Power Wind's chief operating officer, Richard Legault (no relation to the president of Hélimax) doesn't think the conditions are right–not yet. In the U.S., with its 1.9¢US tax credit and higher electricity prices, it might work. “It is feasible on a long-term basis in the U.S. to sell into the wholesale market,” says Legault. “But in Canada, I don't think you have the prices to justify that.” Without government incentives, he says, wind power is not yet a profitable business. The only reason wind farms are considered a competitive alternative to natural gas plants is the soaring price of natural gas. “If you have a view that gas prices are going to stay this high,” he says, “then wind is a competitive technology.” Considering the state of global energy supplies, it is increasingly hard not to come to that conclusion.