With recent global and financial turmoil, we have all seen
investors race to own investment with solid yield such as utilities.
As a result most of those securities are seen as fully valued or,
in some cases, overvalued. Fortunately, in Canada with our
generally favourable regulatory environment, and abundant
natural resources, developing new renewable energy utility
projects is not so farfetched. As an advisor to both established
and emerging wind power developers, one of the most common
questions we get from exempt market dealers (EMDs) is: “What
can I do to help my wind power developer client in today’s
My answer is these seven key elements to improving a wind
power project’s investment potential:
1. Wind – Although, it may seem obvious at first glance, in some
case, not enough time is spent on evaluating the wind resource
quality and characteristics of a potential wind project site.
For example, two very similar wind resource profiles, when
combined with the various factors of a wind power project
could easily result in a significantly different economic viability
2. Land – As the wave of resistance to wind projects mount (the
old ‘NIMBY’ problem), it is critical to ensure the proper land
agreements are in place before advancing too far along in
the due diligence process of a potential wind power project.
3. Transmission – This is becoming more of a challenge in certain
jurisdictions as we reach grid capacity and in numerous cases has
resulted in significant wind power project delays or cessations.
For example, in the Ontario governments recently released
FIT 2.0 revisions, we see that a lack of transmission capacity
availability for a proposed project site translates to ineligibility
for a contract award, and means no project. Across North
America, we expect to see transmission availability and quality to
become an increasingly challenging area, at least until significant
transmission upgrade and expansion projects are implemented.
4. Environmental approvals & permits – In addition to traditional
environmental impact studies and numerous bat and bird
impact studies, some sites may require unique environmental
assessments, approvals and permitting. These could
significantly lengthen the time anticipated in project plans and
forecasts and delays could negatively impact the project.
5. Buyer – In today’s environment, I believe investor risk appetite
for non-contracted (aka merchant or market) wind power
projects is very limited. Power Purchase Agreements (PPA’s) in
Canada are generally seen as more robust than those awarded
by utilities in the U.S. largely due to the tax equity and other
incentive programs available (at least for a short while) in those
jurisdictions. PPAs are complex and critical contracts and
key provisions such as economic curtailment require detailed
evaluation, modeling and stress testing, as these could cause
significant loss of revenue. It is important to understand
and evaluate minimum production guarantees,availability
requirements, out-clauses, and multiple product bundling
provisions, among others.
6. Management – a reputable team with a proven track record
in bringing successful wind power projects to market is one of
the most desirable traits many investors look for in a project.
We are seeing this become an increasingly higher threshold
for wind power developers to overcome before establishing
7. Financing – Finding the right debt and equity financing partners
has become the single-most important factor in the success
of a wind power project in Canada. Although financing largely
depends on the quality of all the project elements, we are
increasingly seeing innovative project and financial structures
as the critical catalyst to making wind power projects succeed
in today’s economic environment. A variety of structures
including waterfall and preferred equity are becoming more
and more common in recent wind power project deals.
Of the seven elements, the initial three, namely wind, land
and transmission, have become implicit, table stakes if you will,
in order for any wind power project to advance to the next stage.
Ultimately, the most effective way for an EMD to help a
wind power developer client is to leverage their specific industry
expertise to first evaluate and model the various complexities
of financing these wind power projects, and second, to develop
customized strategies to mitigate the risks of these projects and
optimize the returns for investors.
With some wind power project returns in excess of 15%,
backed by stable, long-term 20-year PPAs, no wonder many are
taking a closer look at wind power opportunities.
For more information contact:
By Philip Bassil, MBA, Managing Director, Renewable Energy Strategic and Financial Advisory, BSM Global Partners Inc.