How Much, How Fast

Governments have gotten the ball rolling on climate change plans. How quickly those plans unfold — and what level of financial support they entail — remains to be seen

INVESTORS SEE LOTS OF POTENTIAL for innovation and a myriad of business opportunities in Canada’s clean-tech and renewable energy space — not surprising given the momentous policy initiatives coming from the provinces, such as Ontario’s Climate Change Action Plan and Alberta’s Climate Leadership Plan. At the same time, there’s a wait-and-see nervousness. How exactly these plans and policies will unfold is unclear. And, if there’s anything that makes investors nervous, it’s uncertainty.

To date, Ontario has been the poster child of renewables in Canada, with its aggressive pace of procurement. But Sarah Powell, an environmental lawyer in Toronto, says her clients, primarily utility scale developers in the wind and solar sectors, are looking westward, shifting much of their interest to Alberta. There’s also interest in Saskatchewan, where the current climate strategy aims to double renewables by 2030. Over the next decade, this means a major expansion of wind, solar and hydro power in the province.

The market in Ontario, says Powell, a partner at Davies Ward Phillips & Vineberg LLP, is both mature and saturated. In contrast, we’re seeing “a transformational moment” in Alberta and Saskatchewan, says Powell, as they move away from their traditional reliance on coal-fired generation, which has always been their primary electricity source. “Clearly the clock is ticking,” says Powell. The question is, how quickly will these provinces move away from coal-fired generation, and how much renewable energy investment is going to be needed to fill the gap over the next five to 10 years?

At present, the Alberta government is reviewing recommendations from the Alberta Electric System Operator on how to proceed in implementing its renewables program. For Powell, the key question is whether the province will actively support investment in the current market. “Right now there’s one of the lowest power pool prices we’ve seen. What will the government do to encourage extensive capital investment in renewable projects?”

Unlike Ontario, Alberta has not relied on government contracts for electricity infrastructure, but on the market for investment in generation, points out George Vegh, head of McCarthy Tétrault LLP’s Toronto energy regulation practice. As Alberta moves off coal, says Vegh, when you require investment in new renewable facilities, “most jurisdictions in North America and in Europe have found you need additional payments, some sort of support in addition to what’s in the market.

“The Alberta government, while it’s been very clear that it wants this new investment and it wants renewable power, needs to be equally clear and realistic about how it’s going to pay for new facilities.”

IS GAS THE NEW COAL?

Ontario’s new cap and trade regime — which is due to come into effect in 2017 — has generated a new catch phrase in the energy industry: gas is the new coal.

“Shutting coal plants down and contracting for 10,000 MW of renewable energy projects in Ontario has seemed like a pretty aggressive greenhouse gas policy,” says Jacob Sadikman, a Toronto-based partner at Osler, Hoskin & Harcourt LLP whose practice focuses on the energy sector. “Now, layering in this cap and trade legislation, frankly, from the perspective of the energy sector, are these legislative decisions making gas the new coal?”

As Alberta ponders its next steps, are there lessons to be learned from Ontario’s experiences? Quite possibly, says Vegh. “What’s the future for natural gas in Ontario?” he asks. “There already seems to be some regret on how much gas [production facilities] Ontario built to replace coal. Some of the indications from the province’s Ministry of Environment and Climate Change is they’d like to move away from natural gas for the production of electricity. So you have this brand-new set of facilities, and the government seems to want them not to produce very much anymore.”

He says the big question for potential investors concerned about the long-term investment climate for natural gas generation is whether, given the capital investment that’s required, governments see gas generation as transitional? “If you’re a potential investor in a natural gas facility, you have to ask yourself, ‘Is the government’s commitment to this sustainable?’ or are they going to come back in five years and say, ‘Now we don’t want the gas facilities to run anymore?’”

BOX IN POLITICAL RISK

If history is an indication, it’s not just Canadian investors who are apprehensive. It’s early days for the new programs in Ontario, Alberta and Saskatchewan, but it’s a critical time in making the international renewable investor community comfortable, says Powell. How do you provide assurance there’s no political risk associated with a future change in government?

She remembers fielding calls from investors from all over the world when it wasn’t clear whether the Liberals in Ontario were going to get re-elected after the McGuinty government. Top of mind for these investors, she says, was political risk to their projects. “Our advice,” says Powell, “was that these power purchase agreements are binding commercial agreements. It is highly unlikely that a change in government would in any way retroactively impact these agreements.”

Going forward, she says, “what will be key for Alberta and Saskatchewan is to ensure they box the political risk so that any investor, whether sitting in Spain, New York, Ontario or Alberta, understands a future change in government is not going to negatively impact their renewable project.”

According to Chris Christopher, an energy lawyer with Torys LLP in Calgary, there’s a lot of buzz about renewables both within Alberta and from outside investors. The electricity market is pretty much tapped out in Ontario, he says, leading a lot of investors who haven’t considered Alberta before to give the province a serious look. “Many of the renewable energy investors showing interest in the province are developers of renewable projects on a world scale.”

The Alberta government has set lofty renewable energy goals, with an overall target of 30 per cent of Alberta’s generation capacity by 2030, says Christopher. “To achieve this target, we must recognize that we are competing on a global basis for investment dollars. We should approach renewables in Alberta like most jurisdictions do and say, ‘It’s a worldwide competitive game and we need to be in that mix,’ so our approach has to be predictable and favorable and on a very even basis.”

NEW IDEAS WELCOME

In Ontario, meanwhile, now is the time for innovators in the renewable and clean-tech sectors to come forward with their ideas, says Ian Mondrow, the partner who leads Gowling WLG (Canada) LLP’s energy regulation and policy practice in Toronto.

“Clean-tech and renewables are driven off this philosophy of environmental responsibility, and now it’s come to a head because climate-change regulation has finally caught up with political and social movements and preferences,” he says.

“Ontario’s climate-change legislation hardwires in an obligation on the government to recycle revenues from its cap and trade program into investments in clean-tech and renewables. The government is legislatively obligated to explain where the money is spent, in a transparent and public fashion.”

He says that, while there is uncertainty as to how much revenue there will be, this legislative obligation should give investors some assurance that there will actually be money available for these business opportunities, irrespective of any electoral changes in government that might be in the future.

TECHNOLOGY PLAY

Most of the renewable energy deployment we’ve seen in Canada to date has not been particularly high-tech in terms of the technology being deployed, says Sadikman. Layer this fact onto the pending twilight for large utility scale renewable energy projects — particularly in Ontario — and the focus appears to be shifting towards the integration of new initiatives into the electricity consumers’ experience.

Sadikman feels that, for forward-thinking investors, the real opportunities for renewable energy in Ontario — past the next couple of years, anyway — is going to be about deploying those technologies at the point of the electricity consumer, either behind their meter or integrated at the place it’s being used.

“It’s about innovation. For example, one of the next technological frontiers is really integrating renewable energy technologies with energy storage to solve the historical challenge with renewable energy, which is its intermittency.”