Atlantic Canada Opportunities Agency
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Atlantic Energy Gateway - Financing of Renewable Electricity Projects in Atlantic Canada

Executive Summary

Introduction and Purpose

The Atlantic Canada Opportunities Agency (ACOA) is conducting the Atlantic Energy Gateway (AEG) study to facilitate the development of Atlantic Canada’s clean energy resources.  As part of this initiative, ACOA engaged Power Advisory LLC (Power Advisory) to analyze the challenges to the financing of renewable energy projects by independent power producers (IPPs) in each of the four Atlantic provinces.  This study evaluates the key factors that affect the availability and cost of capital for Atlantic Canadian renewable projects developed by IPPs.  The purpose of this study is to identify the necessary economic and market conditions and appropriate policies and government actions to support renewable project financings under reasonable terms and conditions so that the Atlantic Provinces can take full advantage of the opportunities offered by the region’s renewable and clean energy potential.

Main Findings

The main findings from this study are:

  • Renewable energy projects in Atlantic Canada have the same availability of finance and expertise on development of renewable electricity projects as the rest of Canada.
  • Access to finance for renewable projects developed by IPPs in Atlantic Canada depends on the economic and financial characteristics of the project, not on its location.
  • Smaller projects have difficulty attracting capital and will suffer from lower returns unless the Power Purchase Agreement (PPA) price offers a sufficiently high premium over the PPA price for larger “utility-scale” projects.
  • Large, experienced, well-supported renewable project developers can access financing for their projects in Atlantic Canada under essentially the same terms as they get in the rest of Canada.
  • The four Atlantic Provinces all have some sort of program or policy instrument in place for promoting the development of electricity generation from renewables. The systems of New Brunswick, Nova Scotia and PEI are reasonably well integrated, but coordination can still be improved between the provinces.

Evidence on Financing Renewable Energy Projects in Atlantic Canada

As part of this review, Power Advisory surveyed over 20 renewable project developers and financiers that are active in Atlantic Canada, researched the market, and conducted a literature review on the issues associated with financing of renewable energy projects in general and on such issues within Atlantic Canada. 

With respect to attrition rates, Power Advisory believes that Atlantic Canada hasn’t experienced higher project attrition rates than other parts of Canada.  Overall, the issues faced in raising financial capital are the same in Atlantic Canada as elsewhere. Both developers and financiers told us that location in Atlantic Canada does not create any disadvantage compared to the rest of Canada in terms of availability of finance or of expertise on development of renewable electricity projects. The major financial institutions, banks and insurance companies, consistently said that they are generally not interested in projects where the total financing is below $50 million (a wind project of about 30 to 35 MW).  Large, experienced, well-financed developers are able to access financing for their projects in Atlantic Canada under essentially the same terms as in the rest of Canada.

Several interviewees pointed out that the conditions for financing renewable projects are quite different for small projects than for large projects, especially if the developer is also small and relatively inexperienced, as they are more likely to be.  In general, smaller developers preferred a feed-in-tariff (FIT) process which would provide them with sufficient returns and with certainty of contract award, providing that they meet the FIT criteria.

Ultimately, the size of the market for renewable resources in Atlantic Canada significantly affects renewable energy development in the region. Since the overall Atlantic Canadian electricity market is small relative to other areas, the amount of renewable capacity that can be integrated and the amount of renewable energy needed to meet a requirement like a Renewable Portfolio Standard (RPS) is small. Therefore, the possible number of projects large enough to attract interest from these financial institutions is also small.  The survey respondents said that this limits the number of companies that can participate in the market. 

Review of Factors Affecting Cost of Capital and Key Risks that Affect Project Financing

To evaluate the challenges in the financing of renewable energy projects in Atlantic Canada, it is important to understand project risks that will be considered by lenders and investors and the risks that are borne by developers to get their projects to a point where they can be financed. 
Six fundamental project-related risks affect the capital costs for projects: 

  1. Technology risk: the degree to which the technology is immature;
  2. Operating risks: equipment performance related to the energy conversion efficiency;
  3. Market risks: the revenue uncertainty of the value of the project output;
  4. Resource availability risks: the underlying variability of the resource and the potential for measurement error when estimating the resource;
  5. Construction risks: borne by the project proponent; and
  6. Market access risks, including the potential for transmission constraints. 

Most of the capital providers with renewable project financing expertise are large institutions and need to pursue larger projects to provide a meaningful impact on financial results.  The due diligence and structuring costs for a typical renewable power project financing can easily reach $1 million to $2 million in total transaction costs, and a significant portion of the transaction costs is fixed regardless of the size of the project.

We carried out a number of case studies, including financing a large wind project and other programs and entities that have been established to help aboriginal and community groups in financing smaller renewable energy projects. 

Potential Policies and Actions

Power Advisory has also reviewed government policies that can be used to promote the development of electricity generation from smaller renewable projects and has assessed how they affect project finance for these smaller projects. Policies to promote development from renewables fall into one of three main categories:

  1. Revenue support, or policies that increase the project’s revenues or revenue certainty, or both (for example, feed in tariffs, and production subsidies [e.g., ecoEnergy Program]);
  2. Cost reduction, or policies that reduce the cost of the project through direct or indirect subsidies on either construction cost or finance cost;
  3. Market access, or policies that facilitate a renewable project’s access to the market either by improving physical facilities or by implementing policy favourable to renewables.

In terms of market access, the size of the renewable market in Atlantic Canada can present a significant barrier to the development of projects. The best remedy is to increase the market size, which in Atlantic Canada means stronger interconnections and co-operation. 

Policy Considerations

These policy considerations focus on financing small IPP projects because our survey and case studies show that larger renewable energy projects can get financing under the same conditions and attention from lenders as do similar projects elsewhere in Canada.

  1. Focused FIT programs: A FIT program focused on smaller projects offered by target groups can attract participation by them. A FIT program could also be designed with caps.
  2. Loan Guarantees: Loan guarantees can promote participation by targeted groups such as First Nations and community groups who may have difficulty in raising equity capital.
  3. Development cost funding: including resource assessment, EA costs, project engineering, and other costs incurred before the project receives a contract and can access project finance.
  4. Facilitate Co-operative Development: Co-operative developments, especially community-based co-operatives, can be effective; appropriate legislation would be required so that renewable energy co-operatives can be formed.
  5. Renewable Aggregator: A renewable aggregator could help mitigate barriers to trade for small developers by negotiating trades, and securing transmission for a number of smaller developers, thereby spreading the transaction costs over a larger volume of trade.
  6. System Integration: Electricity trade, including trade in renewables, can be increased by closer integration of the electricity systems of Atlantic Canada.
  7. Policy Harmonization: Harmonizing the terms and conditions of the RFP processes in the region would make it easier for bidders and could encourage more participation.
  8. Connection at Distribution Level: Connecting small renewable projects at the distribution level can avoid some of the issues with transmission congestion, at least initially, and increase the capacity of the system to integrate renewable projects.

View related Atlantic Energy Gateway studies

 

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