This document summarizes M&A activities related to Ontario's FIT programs. It discusses how FIT 1 projects are approaching their notice to proceed milestones and may face liquidated damages for delays, representing risks for buyers. It outlines opportunities in FIT 2 for aggregating microFIT projects and financing community/Aboriginal projects. The document predicts intense competition for remaining FIT contracts and uncertainty from annual price reviews, creating political risks for long-term renewable projects.
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EUCI Presentation by Andrew Chant FIT 2.0 Program July 20 2012
1. EUCI FIT 2 PROGRAM
M & A Activities
How We Got There
(It seemed like a good idea at the time)
&
Where We Go From Here
(Look w hat you got us into Ollie!)
Toronto, Ontario
July 20, 2012
2. Basic Presentation Approach
• D efine M & A – For purposes of this
presentation, does not mean Mergers and
Acquisitions but financing and associated
activities
• In the context of the FIT 1 program means
financing of a FIT project to satisfy the
requirements of N TP
• Expanded under FIT 2 because of rule changes
and changing nature of Ontario pow er market
• Includes debt and equity and focuses on (i)
requirements for launch FIT 1 projects and (ii)
financing requirements under FIT 2 environment
3. Who Is ORTECH
• Head office in Mississauga w ith satellite offices in Windsor and
Sarnia
• Predecessor is Ontario Research Foundation
• Active in atmospheric sciences since mid 1970’s; privatized in 1999
• Staff of 40 professionals and technicians in tw o divisions ORTECH
Environmental & ORTECH Pow er
• Principals of ORTECH Pow er have backgrounds as renew able
energy developers w ith experience in small hydro and w ind –
developed, constructed & operated 3.3 MW small hydro project near
Englehart & developed Wolfe Island Ecocentre now ow ned and
operated by TransAlta
• Focused on consulting in 2005 after acquisition of development
business by Canadian Hydro D evelopers
4. Who Is ORTECH
• ORTECH Pow er has tw o classes of clients: (i) Private
developers w ho use ORTECH to provide technical and
financial analytical services and (ii) financial institutions and
infrastructure investors w ho have financial skills but need
technical advice
• One of few renew able energy consulting firms that take
technical information and apply it to financial models to
assess economic viability of renew able projects
• Have evaluated onshore and offshore w ind, hydro and solar
projects throughout N orth America and Europe
• Practical experience as developers and operators gives
sensitivity to unknow ns such as O & M Costs and component
life cycles; special skills at finding plugged numbers
5. Current Ontario Pow er
Market
• Period of falling industrial demand and increasing non -dispatchable
renew able supply
• Fixed price contracts for renew ables exceeds hourly spot market price
(HOEP) by large margin
• Rapidly increasing Global Adjustment (GA) is a sensitive political
issue threatening FIT Program
• GA is difference betw een fixed price FIT program pricing and HOEP;
for onshore w ind under FIT 1 current price in excess of $140 MWh;
HOEP averages $30-$40/MWh w hich means GA w ill increase by
$100/ MWh as FIT 1 projects reach COD
• Problem w ill intensify as more FIT 1 projects come on line
• Rising pow er prices w ill determine M & A activity for next few
years
6. Ontario Pow er Prices
$80.00
Ontario Market Prices 5000000
4500000
$70.00
HOEP
4000000
$60.00
3500000
Annual MWh Output
$50.00 GA
Price per MWh
3000000
$40.00 2500000
Op Reserve
2000000
$30.00
1500000
$20.00
on-peak
1000000
minus off-
$10.00 peak
500000
$- 0
7. FIT 1 M & A Activities
• Launch Period Projects approaching N PT
• Facing Liquidated D amages over failure
to meet Milestone COD
• Tw o principal reasons (i) over-optimistic
belief in ability to complete projects on
an accelerated basis and (ii) failure of
REA process to live up to streamlined
approval process – see demise of REA co-
ordinator from expediter to receptionist
8. FIT 1 M & A Activities
OPA Potential Responses
• Under FIT 1 rules failure to meet Milestone N TP D ate can
result in cancellation of contract
• Form of Waiver precludes Supplier claiming force majeure
for permitting reasons
• Unclear w hether elevation of REA to the Environmental
Tribunal qualifies as force majeure claim
• Given oversupply of renew able energy capacity, no
incentive for OPA to be lenient
• But cancellation of FIT contracts w ith D omestic Content
requirements w ill impact job creation targets under Green
Energy & Economy Act.
• Classic “rock and hard place” competing policies dilemma
9. FIT 1 M & A Activities
• One possibility is in Section 2.4 (f) is a
N TP D eferral N otice
• Second approach is horse trading w ith
respect to D omestic Content levels
• Conclusion: FIT Launch projects may
be high risk leading to contingent
payments and development fees offset
by liquidated damages.
• Buyer bew are.
10. FIT 2 M & A Activities
What’s N ew
• Backlog of microFIT Projects – OPA reports 49,000 microFIT
applications plus additional 12,000 in draft contract stage
• Priority Point system for FIT 2 Projects: Minimum 1 point
necessary to qualify for FIT Contract. Highest point level for
Community, Aboriginal and MUSH sector projects
• microFIT Projects present opportunity to broaden base of
support for FIT Program w ith minimal increase in Global
Adjustment
• Community, Aboriginal and MUSH sector projects also
increase FIT support, serve broader social objectives, but less
Global Adjustment neutral
11. FIT 2 M & A Activities
Opportunities & Fearless Forecasts
• 192 FIT 1 projects had reached COD
as of D ecember 31, 2011
• As of D ecember 31, 2011 the OPA had aw arded
1,968 FIT Contracts leaving 1,772 to reach N TP. Of
the 1,968, 1,792 or 91% w ere solar PV
• Given FIT 2 price reductions and falling module
prices these contracts are extremely valuable
• Watch for intense competition for these contracts as
they approach N TP and are required to submit
financial plans
12. FIT 2 M & A Activities
More Fearless Forecasts
• Emphasis on microFIT is an opportunity for
aggregators and mortgage lenders
• Aggregators w ill require debt funding; due
diligence activity for banks and other lenders to
assess economic and technical merits of microFIT
projects
• Community and Aboriginal projects w ill require
innovative financial structures to ensure maximum
adders
13. FIT 2 M & A Activities
Land Mines, Booby Traps & Roadside IED ’s
• Given oversupply and falling demand large scale
projects likely to be deferred – possibly until 2017
w hen SBG issue is expected to disappear
• Failure to meet Milestone COD cannot be redeemed
through repurchase of missed days
• For Priority Point projects, drop in Participation
Level = Event of D efault
• Annual Pricing Review adds further uncertainty
• Long-term project planning and development
expenditures threatened by inherent political risk
14. FIT 2 M & A Activities
Thank you for your attention
Copies of this presentation are available on the ORTECH w ebsite –
w w w .ortech.ca
Or email or telephone achant@ortech.ca
905-822-4120 ext. 463