Developers and investors alike are looking to understand where the next opportunities will be for renewable energy projects in Canada and how the next stage of Ontario’s market will evolve. The outlook for financing is another key area of interest with many projects entering the execution phase in 2013. The following thought-leadership piece tackles these critical questions with insight from Craig Walter, Partner and Georges Arbache, Vice President with KPMG’s Power & Utilities team based in Toronto.

According to KPMG, Canada will continue to be a growing market for renewable energy in 2013 with new opportunities opening up for wind, solar, hydro and bioenergy projects across the country, specifically driven by M&A trades but also in continued support for new Greenfield developments. While the emphasis has been on the Ontario market for the last few years, it is expected that investors and developers will shift focus to new evolving opportunities in Quebec and British Columbia in 2013. Both provinces are expected to issue Request for Proposals (RFPs) this year. Timings remain unclear however with British Columbia gearing up for a May election and Quebec’s recently elected minority government is still pondering the timing and size of the next RFP.

The Ontario market, which boasts the largest feed-in tariff program in North America, is switching gears: projects are now well into their later stage development processes and stepping into construction. Given the timing of project awards and their respective committed commissioning dates, there will be a significant volume of projects being financed and built this year. While the future for large-scale projects remains uncertain, ratepayer concerns and falling energy demand are top of mind with energy policymakers and may dampen the need to move forward with new procurement in the short to medium-term.

Lower energy demand is a short-term issue, however, points Georges Arbache, Vice President with Canada-based KPMG‘s Global Power & Utilities team. “Varying degrees of cost pressures, mostly driven by concerned ratepayers, are focusing attention on shorter-term issues, including surplus baseload generation (SBG).  We may very well be underestimating the future need for energy generation in Ontario and across other Provinces“, he observes. “Looking at capacity and load growth curves, stakeholders need to ensure that planning for long-term needs trumps short-term grassroots and politically-driven concerns”.

Managing Political Stakeholders

Renewable energy procurement will remain politically sensitive for reasons well known to all: rate pressures, NIMBYism, specific agendas from varying lobby groups amongst others. Developers need to be able to adapt and learn to maintain contact with key stakeholders across multiple jurisdictions, always keeping up with provincial energy agencies and their respective political leaders. “Maintaining a neutral and fact-based approach is key,” notes Arbache, who advises renewable energy developers, investors and suppliers across Canada. “The minute you are seen as pushing a single agenda while neglecting the practical realities of your “ask”, you risk losing all credibility”.

The renewable energy industry is still fairly nascent in its maturation in Canada with proponents varying from large-integrated players to more “Mom & Pop” developers. This broad diversity of developers makes it difficult to build cohesive messaging about the benefits of renewables and coordinate the necessary PR campaigns around election cycles. Still, better messaging is needed to build traction with provincial politicians and policymakers. “It is important to convey a united front that allows you to demonstrate the benefits of a particular fuel source without attacking alternatives, or making them look less valuable to the system as a whole,” says Arbache. “Governments around the world are continuing to manage fuel supply mix and diversify portfolio risks away from relying too heavily on too few technologies; renewables is one of the tools available to help achieve this.”

Hand-in-hand with political messaging is the need for developers to have local industry and community connections to ensure they understand the dynamics of the market and the communities they want to operate in. “You have to stay close to your stakeholders and the people at the grassroots level who are involved in promoting or inhibiting renewables, get their perspective on what is driving behavior in a particular community or region,” adds Arbache.

More Bond Deals Ahead

The coming year will also see new developments in debt and equity financing for Canadian projects with new lenders entering the market. “Frankly, developers are getting more creative in terms of where they are finding their financing,” observes Craig Walter, a Partner with KPMG LLP. Historically Canadian projects have been funded by European banks but the last two years has seen a shift toward lifecos and Asian banks. “There has been a real sea change in terms of the lenders who understand the nature of investing in renewable energy projects,” adds Walter, who also advises investors, developers and suppliers across the renewables sector.

Renewables are starting to get more attention from domestic banks in Canada and the bond market is proving to be a new source of debt lending. In September, RBC Capital Markets closed a $171.8 million bond financing for NextEra Energy Resources’ 40 MW St. Clair solar farms in Ontario. This was the first bond deal for the Canadian PV market and the first solar project to attain a BBB- rating from DBRS. This type of financing provides better pricing but the process can take more time because bond investors tend to write smaller cheques than traditional debt lenders. Still, these types of deals will become more popular in the near future. “We are already aware of a couple of projects that are looking at financing through rated-bond solutions,” observes Arbache.

Developing Truly Bankable Assets Is Key

Both Arbache and Walter advise developers to manage their development process carefully and procure bankable technologies and equipment instead of lower-cost alternatives which can make their portfolio more difficult – or impossible – to finance. Long term investors shy away from any technology risk and prefer equipment and suppliers with strong track records. “We have seen developers make some mistakes in confusing cost and value of the equipment they procure, not really understanding that a lower equipment cost may not necessarily mean greater value,” Arbache adds.

On the whole, finding equity will not be an issue for most well developed Canadian projects in 2013/2014 as there remains plenty of investors looking for places to put their capital to work. “Good projects will always get built but marginal projects will really struggle if they don’t have a good team and strong reputation in place,” concludes Walter.

Editor`s Note: This thought leadership piece provides insights from Craig Walter, Partner and Georges Arbache, Vice President with KPMG’s Power & Utilities team based in Toronto. It offers perspectives on new renewable energy project opportunities across Canada, the outlook for financings and the next stage for Ontario’s renewables market. 

Georges Arbache will be speaking at this year's Ontario Feed-In Tariff Forum, April 2-4, 2013, Metro Toronto Convention Center.

Full details at www.ofit2013.com

Lead image: Canada flag via Shutterstock