Canada: green gold

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The energy sector is constantly changing, and change is certainly the defining feature of the global energy production picture in 2017. In the Middle East a prolonged period of low oil prices has affected government spending, with a move towards diversification and reduced reliance on oil prompting investment in sectors such as real estate and tourism.

Meanwhile, methods of energy production are undergoing vast changes too, with a widespread move towards cleaner alternatives. One country that has led the way in this regard is Canada, which ranks sixth in the world for investment in new domestic energy generation.

The Lawyer spoke to Canadian lawyers to get their thoughts on the renewables market.

Q: Canada ranked sixth in the world for investment in domestic energy-generation projects last year. Why is that, and how is it reflected in your areas of expertise?

Bryson Stokes, Ontario partner, Blakes: The approach to renewable energy in Canada varies greatly from province to province. As a result, investment opportunities are probably best Screen Shot 2017-02-03 at 15.11.22described by looking at activity at a provincial level.

Ontario’s Green Energy Act of 2009 has been a big driver of renewable energy growth. Through phasing out coal and providing a number of procurement opportunities for renewable energy developers, including feed-in tariffs (FITs), its goal was not only to put greener energy into the supply mix but also attract new manufacturing jobs. It achieved the former, though not necessarily the latter.

There has also been increased investment in nuclear in Ontario recently as we are coming to the end of the life cycle of our nuclear fleet. Major refurbishments are underway.

Hill
Hill

Krista Hill and Adam Banack, partners, Torys: Canada’s successful development of renewables projects is anchored in our country’s reliance on hydroelectricity, developed over the last century. In 2013 Canada ranked second in the production of hydroelectricity, behind only China. Hydro represents 63 per cent of our net electricity generation. Historically, other than hydro, Canada’s energy mix has comprised of conventional fossil fuel resources such as oil, coal and natural gas, and nuclear power.

Change in Ontario began in 2003 when a Liberal government came to power in the province. The party committed itself to phasing out coal-powered generation; issued the first two rounds of government-sponsored renewable energy contracts; enacted its green energy act in 2009; and released its ambitious Long-Term Energy Plan in 2010, focused on the development of a culture of conservation and the creation of 50,000 ‘green-collar’ jobs in the province. The centrepiece of the 2010 plan was an FIT programme, pursuant to which the government of Ontario committed to contracting for the production of 10,700MW of renewable energy.

“Key to attracting foreign and domestic investment has been the feed-in tariff programme” Krista Hill

One of the key drivers of Canada’s success in attracting foreign and domestic investment has been the FIT programme. This ambitious initiative offered sufficient per-kW pricing to draw developers into the market, and contained a requirement that between 25 per cent to 60 per cent of the equipment and labour for construction of the projects had to reside or be created in Ontario as a way of fostering the development of a globally recognised renewable energy industry.

After the last round of utility-scale FIT contracts were issued the government of Ontario started a competitive procurement programme that resulted in the issuance of 16 power purchase agreements representing an additional 455MW, now under development. The second round of this procurement, targeted at issuing contracts for another 600MW of renewable energy, was cancelled and there has been no indication that new contracts will be issued in the near future.

Peter Keohane, Calgary partner, Blakes: Ontario and Quebec started to develop procurement initiatives to increase their renewable energy mix years ago. Ontario’s base load generation was historically from coal, hydro and nuclear, and Quebec from hydro. British Columbia is primarily hydroelectric when it comes to baseload. Alberta relies largely on coal and natural gas (which is lower in emissions, but not emissions-free) and co-generation – for example, using steam from natural gas generation for enhanced oil recovery from the oil sands.

“Natural gas-fuelled co-generation could provide the electricity and steam required for oil sands production” Peter Keohane

Western Canada has seen a prolific period of expansion of its industrial economy, particularly in Alberta. This has led to investment in energy generation infrastructure and development. However, you can’t separate industrial development and energy generation from social consciousness. This has led to investment in replacing or refurbishing the energy infrastructure to accommodate low-emission or emissions-free energy supply.

Sébastien Vilder, Montréal partner, Blakes: In Quebec there has been a strong focus on wind energy since 2007. The province has achieved an installed capacity of over 3,200MW of wind energy to its electricity supply. Quebec’s 2030 Energy Policy seeks to increase overall renewable energy output by 25 per cent.

Wherever you are in Canada energy infrastructure requires expertise across a number of areas including regulatory, environmental, real estate, project finance, First Nations, M&A and general commercial.

Keohane: Blakes has all those skill-sets in a tier 1 practice across the country – in all the major markets from Calgary to Montreal to Toronto to Vancouver.

Stokes
Stokes

Stokes: We have a national partnership with a co-ordinated multi-disciplinary power practice, and have leading power practices in Calgary, Montreal, Toronto, and Vancouver. The structure of our partnership and our focus on a national power practice facilitates a seamless approach to client service.

Q: How has renewable energy changed the legal market over the years? Do you see it increasing in prominence?

Hill and Banack: We expect the trend of foreign and domestic investment in the renewables sector to continue. While Ontario’s FIT programme has played a significant role in the boom in recent years there is still plenty of available capacity across the country that can be fulfilled by projects sited in favourable locations near population centres. This is complemented by decreases in the cost of renewable generation equipment and an experienced labour force able to execute on such initiatives.

With regard to Canada’s renewable energy industry more widely, drivers such as ambitious goals to reduce carbon emissions that have been set by many provinces can be achieved in part by the development of new renewables projects. The ‘cap and trade’ programme in Ontario may make renewable energy projects cost-effective (without offering above-market fixed price contracts) as compared to traditional fossil fuel by the early 2020s, while electrification projects for transit and home, industrial and commercial heating will increase the demand for affordable clean energy projects.

Keohane: There is the potential for big investment in renewables in Alberta. Alberta is starting a mandated procurement programme this year to shift away from coal. The aim is that 30 per cent of the province’s power, or 5,000MW, will come from renewable sources by 2030. Part of this is due to the social consciousness that comes with building pipelines. The Alberta oil sands are one of the largest oil reserves in the world, and oil is mostly an export market. To export not only to the US but also to Europe, Asia and other markets requires pipelines to be built.

The government in Alberta supports the idea that, to get these pipelines approved, the markets will have to see that production of this oil is done in a socially conscious way. A key component of this is that the electricity involved in oil production increasingly comes from renewable, or lower emission, sources. Lower emissions sources, with a focus on efficiency, could, however, also include natural gas-fuelled co-generation providing both the electricity and the steam required for oil sands production.

“The wild card is that climate change policies  may be introduced” Bryson Stokes

Stokes: Ontario invested early, and significantly, in renewables. The Independent Electricity System Operator issued a 20-year planning outlook in the fall of 2016 which suggests there is sufficient supply to meet forecast demand over that period. The wild card here is that various climate change policies may be introduced to take advantage of the fact that Ontario’s electricity supply mix is largely emissions-free. To the extent those policies promote significant electrification in the province, demand could exceed supply as early as 2025. Electrification initiatives could include incentives to move people towards using electricity instead of natural gas or oil for home heating (something that is already starting to be promoted) and a significant increase in the electrification of vehicles, which presents a whole different set of challenges.

Q: What are the opportunities for Canadian firms this financial year?

Stokes: Ontario has historically built its own renewable energy assets. In the fall it was announced there would be a clean energy transfer of two terawatt (TW) hours (roughly the amount that could power a city of more than 200,000 people) of electricity from Quebec annually from 2017 to 2023. It is possible that the next investment in Ontario could be to improve transmission to allow more importation of clean energy from other jurisdictions.

There’s also still a significant amount of M&A activity in the secondary market, together with financing/refinancing work for completed projects and projects under development.

Keohane: Yes, and there’s a similar situation relating to a hydroelectric dam in British Columbia, the Site C Dam, and the potential for clean energy transfers to Alberta. It’s not perceived to be an economic solution for Alberta right now, but possibly for the future.

Vilder: The appetite of the provincial government in Quebec to launch new opportunities for wind farms is not clear at present. Quebec already has a solid infrastructure of wind farms and hydroelectric dams, and, according to Quebec’s 2030 policy, bioenergy production will increase by 50 per cent by 2030. We can also expect an active secondary market for investments relating to renewables projects in operation.

Keohane: That will be true throughout the more mature, developed renewable energy provinces in Canada. Investment will come from secondary markets, financings and refinancings.

Alberta is different – and with the province’s recent commitment to moving from coal to renewable sources, there’s a lot of interest in the procurement process.

“We expect a strong secondary market to develop, involving  the sale of operating renewables projects” Adam Banack

Banack
Banack

Hill and Banack: We see significant prospects for investment in the Canadian renewable energy sector in 2017 and beyond, including opportunities for law firms to participate in the development, construction, financing, operating, buying and selling of these projects. There are a number of major hydroelectric projects underway in Canada including the Site C Dam in British Columbia, scheduled to commence in 2018 and take around five years to construct, at a cost in excess of C$9bn (£5.5bn).

As noted in Ontario’s Long-Term Energy Plan, some C$15bn has been invested since 2003 to enhance the province’s ageing transmission system. Of particular note are three projects that have been given priority status by the government of Ontario to reinforce the transmission Screen Shot 2017-02-03 at 15.13.43backbone, connect remote communities and, ultimately, support the connection of generation projects in the north of Ontario and the electricity needs of future natural resource extraction projects. The projects are: the Northwest Bulk Transmission Line; the East-West Tie Line to reinforce the network (400km with a load up to 650MW); and a line to connect remote First Nation communities to the grid (in excess of 1,300km of transmission line and 900km of distribution line). These projects are in varying stages of preliminary development, with construction commencing between 2017 and 2019. There is significant legal work still to be done on all three, including in environmental consultation, regulatory approval, and construction and financing.

To date, there are no offshore wind projects operating in Canada but many have been proposed off the Atlantic and Pacific coasts. Unlike other renewable energy projects, the authorisation for the development of offshore areas is a federal government responsibility. To date, there has not been a regulatory framework in place to administer such projects but the expectation is that the framework will be similar to the one for offshore oil and gas operations. Once in place we expect there will be significant energy regulatory, environmental and development work. The global offshore wind market is expected to expand to from the current installed capacity of 12,000MW to 40,000MW by 2020 and 122,000MW by 2030. It might indeed be another major area of growth for renewable energy in Canada over the next decade.

Not surprisingly, the extensive growth in renewable energy in Canada over the past 15 years has created significant opportunities for law firms working in the sector. By way of example, Torys formed its Infrastructure and Energy practice in the early 2000s and now has more than 50 lawyers practising in this space in the Calgary, New York and Toronto offices.

As the renewables industry has expanded, so have law firms. We provide advice in respect of the whole life cycle of a renewable energy project from land acquisition to decommissioning. We expect our lawyers will be busy in 2017 and thereafter working on such projects.

In particular, as many projects are now in operation we expect a strong secondary market to develop involving the sale of operating projects. And as more complicated projects are pursued we may see more sponsorship in one form or another from Canada’s Infrastructure Bank.

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