Canada: Focus on Climate Change - March 22, 2006

Last Updated: April 11 2006

Article by Bernard Roth, Tom Pepevnak , Karim Mahmud, Miles Pittman, Joseph Palin, Kevin Scott, Philip Barton, Rich Miller, John Hurley, Claude Imbeau, Charles Spector, Sebastien Vilder, Helen Newland, Ralph Cuervo-Lorens and Ron Stuber

This issue of Focus on Climate Change reviews the record growth in the Canadian wind energy industry and the government incentives and policies which are encouraging such growth.

Background:

There is currently a development boom in the Canadian wind energy industry fuelled by support from several provincial governments and from Ottawa. The national wind energy industry has expanded from just over 300 megawatts ("MW") of installed capacity in 2003 to 683 MW at the end of 2005; making Canada the 14th largest producer of wind energy in the world. The average annual growth rate between 2000 and 2005 has been 38% and 2005 witnessed a spectacular growth rate of 54% with the addition of 239 MW of new capacity representing about $400 million of capital investment. Furthermore, the Canadian Wind Energy Association ("CanWEA") expects this rapid growth to continue as 2006 is projected to again increase installed capacity in excess of 50%. In addition to projects by companies focused exclusively on wind energy, conventional energy companies are now diversifying their asset portfolios to include renewable energy sources such as wind power.

Provincial Initiatives

Significant provincial developments since 2005 include the following:

  • February 15, 2005: SaskPower called for expressions of interest for environmentally low-impact generation projects to provide 32 MW of private generation.

  • February 25, 2005: Hydro-Québec Distribution announced that 20 year power purchase agreements representing 990 MW have been signed with Cartier Wind Energy Inc. (739.5 MW)1 and Northland Power (250.5 MW) for the purchase of wind-generated electricity.

  • June 29, 2005: NB Power invited expressions of interest for the purchase of up to 440 MW of wind energy by 2016. The deadline for submissions was December 16, 2005 and they are currently under review.

  • October 31, 2005: Hydro-Québec Distribution released a call for tenders for the purchase of 2,000 MW of wind power with a deadline for bid submissions by April 17, 2007 - the successful projects could represent between $3 and $4 billion in capital investment.

  • November 21, 2005: The Ontario government and the Ontario Power Authority announced plans to procure 955 MW of new wind energy capacity from eight projects from the following developers: EPCOR, Enbridge, Suncor2, Canadian Hydro Developers, Brascan Power Wind and Kruger Port Alma Ltd.

  • November 21, 2005: The Manitoba government and Manitoba Hydro released an invitation for expressions of interest for up to 1,000 MW of wind power projects. The deadline for submissions was January 20, 2006 - it is estimated that these projects could ultimately result in $2 billion in capital investment, $1 billion in operating expenditures and $7 billion in energy sales.

Footnotes

  1. The shares of Cartier Wind Energy Inc. are held as follows: 50% by TransCanada Corporation; 30% by Innergex II Inc.; and 20% by RES Canada.
  2. In a joint venture with EHN Windpower Canada Inc.

Wind Power Production Incentive ("WPPI"):

In addition to the provincial wind procurements described above, the WPPI program of the Federal Government has also helped to fuel the current wind boom in Canada. WPPI was first introduced in May 2002 with funding of $260 million to encourage 1,000 MW of wind development by providing an incentive of $0.01 per kWh of net wind energy generated during the wind project's first 10 operational years. The 2005 Federal Budget (the "Budget 2005") added $920 million over 15 years to the WPPI program to increase the development target to 4,000 MW. As of this month, twenty projects totaling 839 MW are either under construction or have been commissioned with funding from WPPI.

There are five key requirements for eligibility under WPPI:

  1. The wind farm must be commissioned between April 1, 2002 and April 1, 2010.
  2. The wind farm must have and maintain an independently metered interconnection with the electric grid.
  3. The wind farm must have a minimum nameplate capacity of 500 kilowatts ("kW").
  4. The wind farm must be composed of new components, including turbines, towers, generators and blades.
  5. The electricity generated from a test wind turbine installed under the Canadian Renewable and Conservation Expense provision of the Income Tax Act (Canada) (discussed below) will not be eligible for WPPI.

It is important to note that Budget 2005 also allocated $97 million over five years and $886 million over fifteen years to the Renewable Power Production Incentive to encourage the development of other forms of renewable energy, such as small hydro, biomass and landfill gas. The details of this program are currently under development.

Canadian Renewable and Conservation Expense ("CRCE"):

The Income Tax Act (Canada) (the "ITA") provides important tax advantages to companies which incur certain exploration and development expenses in wind energy projects. Other forms of renewable energy may also qualify for these tax benefits.

CRCEs are expenses associated with a project whose assets are expected to be primarily included in capital cost allowance Class 43.1 of Schedule II to the Regulations under the ITA (discussed below).

Eligible CRCE expenses relevant to wind development projects include: (i) the costs of feasibility studies (including wind resource, interconnection and environmental), (ii) the costs related to engineering and design, (iii) the costs related to site approvals and regulatory approvals, (iv) the costs of preparation and negotiation of power purchase agreements, and (v) certain site preparation costs such as the construction of a temporary access road and the clearing of land. CRCE also includes the cost acquiring and installing "test wind turbines" (discussed below). Expenses that do not qualify as CRCE are such things as (i) the costs for the acquisition of land or for the right to use land, (ii) the expenses related to administration or management, (iii) insurance premiums, and (iv) financing and interest charges.

CRCEs are included in calculating a taxpayer's Canadian Exploration Expense ("CEE"). CEE is 100% deductible on a discretionary basis and can be carried forward indefinitely for use in future years. CEE may also be renounced under a flow-through share ("FTS") agreement.

Often, a wind developer will not have sufficient revenue to gain any immediate tax benefit from such expenses. The ITA permits these developers to issue FTSs to investors and the investors are entitled to claim the deductions that would otherwise be available to such corporations.

It is important to note that with respect to the costs associated with the actual turbines, only the cost of acquiring and installing "test wind turbines" qualify as CRCE. The key criteria for test wind turbines are as follows:

  • Must have a minimum spacing of 1500 meters.
  • If the total capacity of the project is greater than 6 MW, the capacity of the test wind turbines cannot exceed 20% whereas if the total capacity is less than 6 MW, the capacity of the test wind turbines cannot exceed 33%.
  • The test period must be a minimum of 120 days before any "in-fill turbines" can be installed (the in-fill turbines are the remaining turbines for the project to reach its planned capacity).
  • The project does not share with any other project a point of interconnection to a transmission or distribution system.
  • The primary purpose of installing the test wind turbines is to test the level of electrical energy which can be produced.
  • As noted above, the wind energy generated by test wind turbines (i.e. during CRCE) is not eligible under the WPPI program for the $0.01 per kWh incentive despite recent lobbying by CanWEA.

    Class 43.1 Accelerated Depreciation

    Class 43.1 allows taxpayers to recover capital cost at an accelerated rate of 30% for certain equipment that conserve energy, including wind energy systems. Proposed Class 43.2 will increase the capital cost allowance ("CCA") rate from 30% to 50%. To be eligible for the 50% CCA rate, an asset must be acquired after February 22, 2005, and before 2012. Proposed Class 43.2 is necessary to implement Budget 2005 proposals and is intended to encourage the use of renewable and alternative energy sources. The assets eligible under Class 43.1 and the proposed Class 43.2 which are relevant to wind energy include: (i) the turbine, (ii) related generation equipment, (iii) support structures, (iv) transmission equipment and (v) related costs for engineering and design.

    Emissions Trading:

    Prior to the recent change of government in Ottawa, wind energy developers could look forward to the development of the proposed Offset System of Greenhouse Gases (the "Offset System") as greenhouse gas ("GHG") emissions trading would provide an additional source of revenue. The Offset System was released by Environment Canada in the form of a discussion paper on August 11, 2005 and was discussed in Focus on Climate Change on September 28, 2005.

    While it is uncertain whether the recently elected Federal Government will continue to implement the Offset System, the proposed system would allow wind projects to be recognized as GHG-reducing projects on the basis that wind energy displaces other electricity generation. As proposed, the projects would receive "Offset Credits" based on the generated wind energy which is assumed to displace the national GHG emissions average for electricity (in 2000, the national GHG intensity for electricity was 0.219 tonnes of carbon dioxide ("tCO2") per MWh); Offset Credits could then be sold to Canadian companies subject to emissions compliance - the "Large Final Emitters" ("LFEs"). While speculation, it is commonly understood that demand would immediately exceed supply in the GHG permit market for LFEs and such market would quickly price permits and Offset Credits at $15 per tCO2 - the ceiling set by the Federal Government for GHG compliance by LFEs. By assuming a GHG intensity of the electricity displaced by wind energy as 0.2 tCO2 per MWh, it is possible to approximate the additional revenue from Offset Credits as $3 per MWh or $0.003 per kWh of wind-generated electricity; equivalent to 30% of the revenue received from WPPI.

    Summary / Contact

    Strong provincial and Federal support for wind energy has resulted in rapid growth in the Canadian wind energy industry. FMC will continue to monitor this important progress.

    The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

    To print this article, all you need is to be registered on Mondaq.com.

    Click to Login as an existing user or Register so you can print this article.

    Events from this Firm
    17 Oct 2018, Webinar, Toronto, Canada

    Dentons and SheEO are coming together for an evening of #radicalgenerosity on October 17, 2018. Meet Vicki Saunders, Founder of SheEO, and learn about how SheEO is changing the landscape for female entrepreneurs.

    17 Oct 2018, Webinar, Toronto, Canada

    With the continued focus on Bill 148’s significant changes to the Employment Standards Act, Dentons’ Toronto Employment and Labour group is pleased to launch a new webinar series focusing on Bill 148.

    17 Oct 2018, Seminar, Québec, Canada

    Dentons is pleased to invite you to join us for a breakfast seminar as part of the Les Matinées Dentons series on issues relevant to you and your business.

     
    In association with
    Related Topics
     
    Related Articles
     
    Related Video
    Up-coming Events Search
    Tools
    Print
    Font Size:
    Translation
    Channels
    Mondaq on Twitter
     
    Register for Access and our Free Biweekly Alert for
    This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
     
    Email Address
    Company Name
    Password
    Confirm Password
    Position
    Mondaq Topics -- Select your Interests
     Accounting
     Anti-trust
     Commercial
     Compliance
     Consumer
     Criminal
     Employment
     Energy
     Environment
     Family
     Finance
     Government
     Healthcare
     Immigration
     Insolvency
     Insurance
     International
     IP
     Law Performance
     Law Practice
     Litigation
     Media & IT
     Privacy
     Real Estate
     Strategy
     Tax
     Technology
     Transport
     Wealth Mgt
    Regions
    Africa
    Asia
    Asia Pacific
    Australasia
    Canada
    Caribbean
    Europe
    European Union
    Latin America
    Middle East
    U.K.
    United States
    Worldwide Updates
    Registration (you must scroll down to set your data preferences)

    Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

    • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
    • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

    Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

    Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

    Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

    Please indicate your preference below:

    Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
    No, I do not want Mondaq to share my personal data with Contributors

    Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

    Yes, I am happy to received promotional communications from Mondaq
    No, please do not send me promotional communications from Mondaq
    Terms & Conditions

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

    Use of www.mondaq.com

    To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

    You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

    You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

    In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

    however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

    Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

    Mondaq’s Rights and Obligations

    Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

    Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

    Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

    Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

    Disclaimer

    The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

    General

    Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

    These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

    You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

    No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

    If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

    Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

    By clicking Register you state you have read and agree to our Terms and Conditions