Contracts, Construction and CommissioningsWind Matters / 2008

Finance and Investment WorkshopToronto, Ontario – February 28, 2008

Uwe Roeper - ORTECH

Contracts, Construction and Commissionings

• Wind sector success story• State of the market• Challenges

Wind Sector Success Story

• Sources:– CanWEA website– AWEA website– U.S. DOE

Wind Installed – 1,856 MW (Jan/08)

Source: http://www.canwea.ca/Map_of_Installations.cfm

Wind = 1% of Elec. Marketbut 1/3 of new supply built

Canada Power Consumption (TWh/yr)

5

577

Wind Other

Wind penetration elsewhere

Wind Picking Up

• 1,770 MW installed at end 2007• 2,600 MW contracted for 2008-2012• 3,000 MW in RFP / PPA tender stage

» Source, CanWEA

More in the Wind

• Provincial policy goals:– ON 4,600 MW by 2020– QC 4,000 MW by 2016– AB 1,200+ MW– MB 1,000 MW by 2016– NB 400 MW by 2010– BC 325 MW by 2010– SK 300 MW by 2012– NS 300 MW by 2013– PEI 75 MW by 2013– NFL 51 MW by 2008

» Source: CanWEA

Wind Installed Capacity in Canada

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Year

MW

137

Adapted from: www.canwea.ca and www.emerging-energy.com

198 236 322 444 684 1,4601,770

Estimated Wind Installed Capacity

Current Wind Installed Capacity

12,475

10,945

9,3707,870

6,6205,220

3,570

14,000

Investment in Wind

• $3 billion invested in wind in Canada• $1 billion/yr. in new wind farms• $70 million/yr. operations• Wind is quickly becoming an

important industry for investment, manufacturing, construction and service sector.

New Manufacturing Investment News

• Siemens - new blade plant in Iowa• Suzlon - new nose cone plant in Minnesota• Vestas – new blade plant in Colorado• Acciona - new production plant in Iowa• Moventas – doubles gear production• REpower - new turbine plant• GE - doubling annual production

Source: http://www.reliableplant.com/article

Wind Sector Success Story

• Huge growth• Still in infancy• Lots of opportunity ahead ($30 billion

to be invested by 2020)

State of the Market

• Key market drivers:– Green policy– Feasibility– Power sector deregulation

Excellent Green Policy Support

• Accelerated tax depreciation• $10/MW Federal production incentive• Provincial PPA purchases• Going forward, strong green policy

support is likely to continue (global trend)

Feasibility

• Wind became popular because technology made it almost competitive with traditional sources and it is green.

• Combination of cost competitiveness, scaleability, and green aspects put wind ahead of other green power sources.

Power Sector Deregulation

• Global move to deregulate power sector has increased opportunity for the private sector & wind.

Challenges

• Grid infrastructure is lacking• Power markets are complex• Green power premium hard to value• Energy output is variable• Capital costs are rising• Plant performance not perfect• Operating costs uncertain.

Challenges - Grid

• Canada’s transmission infrastructure is old and not built for distributed generation like wind.

• Deregulation has raised questions about who is responsible for investment in new transmission lines (could become a private sector opportunity).

• Best and cheapest wind resource is often further away and requires transmission line services.

• Canada’s grid systems run north-south, not east-west, making national strategy difficult.

• Jurisdiction for the grid rest with Provinces, resulting in a variety of different approaches.

Power Trade (GWh), 2005

Source: National Energy Board, Canada

CANADIAN MARKET REGIONS(trading platforms)

http://www.pnrec.org/2001papers/Newcomb.pdf

Challenges – Power Markets

• 10 Provinces = 10 markets (complex)• Various states of deregulation• Various market structures (most are

PPA based because nothing else is in place to attract investors)

AC4, 75

QC, 175

ON, 156

MB, 28

SK, 19

AB, 61

BC, 62 North, 1

Can. Power Markets (TWh)

Deregulation Status Varies

• Alberta – Wholesale and retail open access - Functional separation

• British Columbia – Wholesale open access - Functional separation

• Manitoba – Wholesale open access - Functional separation

• New Brunswick – Wholesale open access – Functional separation

• Newfoundland – Energy policies under review

• Nova Scotia – Wholesale open access in planning - Functional separation

• Ontario – Wholesale and limited retail open access – Functional separation

• Prince Edward Island – Distribution network only

• Québec – Wholesale open access - Functional separation - Wholesale competition for domestic

• Saskatchewan – Wholesale open access - Functional separation

Export (Example)

REC, 35

US$/MWh, 55

PTC, 0 Tax, 5

Merchant (Example)

$/MWh, 60

Subsidy, 10

Tax, 5

REC, 10

Wind Power Market Types

PPA Market (Example)

$/MWh, 80

Subsidy, 10Tax, 5

Challenges – Green Power Premium

• Canada carbon market and REC market is in its infancy

• No agreement among provinces• “green premium” is buried in PPA

price, ecoEnergy subsidy, tax breaks and REC (where available)

Figure 3 1990 to 2000 Domestic Energy Consumption, Net Energy Export and Emission Trends (source gov’t of Canada)

GHG & Energy in Canada of increasing political concern but no solution

Figure 4 Electricity Generation and Greenhouse Gas Emissions by Province, 2000 (source gov’t Canada)

Provinces differ in industry and policy

Green premium cont’d

• No national plan on the table, long way from consensus, provinces have too much at stake …………

• Premium price PPAs, subsidies and tax breaks are and will likely be the economic policy work around for some time to come.

Challenges – Variable Output

• Wind energy output varies daily, seasonally and from year-to-year. This causes issues for grid system operators who must be reliability focused.

• Initial reluctance by grid operators has been replaced by pro-active cooperation, but significant underlying technical issues still exist.

• Provinces with water power resources can deal with this more easily than others.

• Affects value of wind power.• Variability in output is the Achilles Heel of wind and is the

underlying technical reason for limited reliance on wind (20% of energy supply maximum?).

Challenges – Rising Capital Cost

• High costs increase risk to future growth in wind– Tight turbine supply– Raw materials prices rising– Booming labour market– Financing costs

• Supply needs to catch up to demand

Wind Install Cost

0

500

1,000

1,500

2,000

2,500

3,000

2004 2005 2006 2007 2008

Year

$ / k

W ($

CD

N)

Source: SEDAR

Historical & Projected Wind Energy Costs

0

5

10

15

20

25

30

1980 1985 1990 1995 2000 2005 2010

Year

cent

s U

S/kW

h

Not attainable

Adapted from: CanWEA 2004

Price Reduction Due to

Technology Innovation

Challenges – Plant Performance

• Economic inputs: capital cost, cost of capital, revenue assumption, operating cost assumption.

• Sensitivity: Capital cost and cost of capital are known at project finance stage, but even small changes in revenue or operating cost are significant.

• Canada’s track record in wind is mixed –performing close to but not at target.

Op. Performance Examples

Source: BMO Capital Markets, "Wind Storm", 2007

-5.1%34.0%28.9%Simple Avg.

-10.3%41.4%31.1%Mont Miller

-2.3%37.6%35.3%Pubnico Point

-8.5%39.3%30.8%Mount Copper

-8.7%25.9%17.2%Taylor

-3.8%30.7%26.9%Sinnott

-0.7%30.7%30.0%Cowley Ridge N

-1.1%32.3%31.2%Cowley Ridge

DifferenceExpectedActualWind Farm

Capacity Factor

Operating Performance

Challenges – Operating Costs

• Estimating operating costs over 20 years is challenging because wind equipment has not been around for long enough. Failure statistics and operating experience is limited.

• Cost estimates for the mechanical operation of wind farms range from $10,000 to $90,000 per WTG per year.

Cost of Warranty, Service Maintenance Contracts

• Examples of recent price quotes (note variability).

• Large WTGs typically have slightly higher $/WTG-yr but not the main factor.

$/WTG - O&M + Warranty (Yr. 3-5)

$20

$40

$60

$80

1 2 3 4 5 6 7 8 9

Thou

sand

s

Selected Price Quotations by OEMs

Illustration of Variable Annual Repair Costs

• While unscheduled minor maintenance is expected to remain fairly constant, major repair will occur in intervals and increase in cost with age – but scope of repair is difficult to estimate.

Annual Repair & Maintenance Expenditure (illustration)

$0

$10

$20

$30

$40

$50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Thou

sand

s

Operating Year

$/W

TG-y

r

Conclusion

• Wind industry is booming.• Growth is expected to accelerate and

fundamentals are sound.• A long laundry list of growing pains and

challenges exists that the industry needs to work on to ensure success.

• Understanding the risks and opportunities is key to successful investing in wind.