association to protect
PO Box 6, 5695 Front Road,
Stella, ON K0H2S0.
[email protected]
AMHERST ISLAND
July 2016
Letter to Directors,
Algonquin Power and Utilities Corporation:
Reference: Algonquin Power/Windlectric Amherst Island Wind Energy Proposal
IN BRIEF
Algonquin Power/Windlectric has modified its Amherst Island wind energy proposal to
replace 33 2.3 MW turbines with 26 3.2 MW turbines.
With this modification, the proposal has been approved, with conditions, by the Ministry
of the Environment and Climate Change.
A technical and financial analysis of the Algonquin Power/Windlectric Amherst Island
wind energy proposal continues to find that the probable internal rate of return will be
negative.
Over-prediction of energy generation is endemic to wind energy developers.
Building on an island adds many extra risk factors.
After its detailed analysis, APAI asks why Algonquin Power continues to pursue this
project when its projects in other spheres carry less risk and are more productive.
The following submission represents the opinion of the Association to Protect Amherst
Island only, and is presented in good faith effort to promote and protect the public interest
relating to the Algonquin Power/Windlectrc Amherst Island Wind Energy Proposal.
The Association to Protect Amherst Island (APAI) is opposed to what it considers to be an illconceived and ill-developed wind energy project on Amherst Island in eastern Lake Ontario.
1
Algonquin Power may or may not be interested in the adverse social and environmental
impacts of the project. However, as Directors representing all shareholders, you should be
concerned with the viability and resulting negative profitability of the project.
The attached report presents a financial analysis of the project. APAI concludes that the
most likely outcome is that the internal rate of return over the 20-year life of the project will
be negative. This will perhaps come as a surprise and cause for doubt because slide 58 of
the Algonquin Power Company’s 2013 Investor’s Day presentation showed an internal rate
of return of 11%. Clearly APAI’s analysis has to be soundly based and we believe that it is.
A significant study reported in Spiegel Online International of 170 German wind projects
over 10 years also demonstrated far lower returns than were forecast. This reinforces our
assessment.
Essentially this material difference comes down to two main factors:

When announced in 2011 Algonquin Power was supposing 247 GWh (since reduced to
235 GWh) of energy production per annum; APAI predicts that production will average
close to 150 GWh per annum. Similar over-promise by wind energy developers has been
analysed by Fitch Ratings. In November 2014 Fitch stated “The majority of 19 operating
wind projects we analyzed in a recent report suffered chronic production shortfalls.”

A condition of approval is that Algonquin Power will decommission the project at the
end of its life. Algonquin Power has made a commitment in writing to the local
municipality that it will indeed be responsible for the decommissioning. Yet there is
no allowance in its economic assessment for that decommissioning. APAI has
included this as an estimated $50 million end-of-operation cost.
Compared to other wind energy developments, including other projects under development
or under construction by Algonquin Power, the Amherst Island project is expensive. This is
the result of developing a wind energy project on an island with a marginal wind resource.
The accompanying analysis has been professionally reviewed and, in the opinion of APAI, is
demonstrably sound. In the interests of their investors the Directors of Algonquin Power,
together with the minority owner Emera, would be prudent to seriously review the analysis
and the feasibility of the project, before more money is spent and there is more disruption
to our community.
Yours Faithfully,
John Harrison Ph.D. Vice President, Association to Protect Amherst Island
cc: Mr. David Bronicheski, CFO; Mr. Jeff Norman, VP, Business Development
2
PO Box 6, 5695 Front Road,
Stella, ON K0H 2S0.
July 2016
association to protect
AMHERST ISLAND
FINANCIAL ANALYSIS OF THE ALGONQUIN POWER/WINDLECTRIC AMHERST ISLAND WIND
ENERGY DEVELOPMENT1
INTRODUCTION
A financial analysis of the Algonquin Power/Windlectric Amherst Island (Algonquin) wind
energy project is presented. Windlectric is a subsidiary of Algonquin Power and Utilities
Company. In February 2011 Algonquin announced that it had a contractual agreement with the
Ontario Power Authority under the FIT 1 programme for a 75 MW wind energy project that
would generate 247 GWh/annum. The capital cost was to be $230 million. Subsequently,
Algonquin reduced its expected generation to 235 GWh2 and increased the capital cost to $260
million2.
In May 2015, on behalf of Algonquin Power/Windlectric, Stantec issued a site plan modification,
Modification #4, which reduced the size of the project from 33 2.3MW turbines to 26 3.2MW
turbines while leaving the overall nameplate project power at 75MW.
As demonstrated in a separate online appendix3 the replacement turbines have reduced
efficiency compared with the original proposed turbines.4 Three and six months after the
announcement of the modification, in its 2015 Q2 and Q3 reports, Algonquin has maintained
the expected generation at 235 GWh and increased the capital cost to $272.5 million5,
In August 2015 the project received conditional approval from the Ministry of the Environment
and Climate Change.
This capital cost of $3.6 million/MW compares to a weighted average of $2.0 million/MW for
other Algonquin wind energy projects either in development or under construction 2.
1
A fully referenced earlier version of this report, “Economics Report – March 2015” is available at
http://www.protectamherstisland.ca/issues/economics/ . The references in this 30-page report can be used for
fact checking all of the numbers included in this present report.
2
Algonquin Power Co. 2014 Q4 Report, pages 21 and 23.
3
http://www.protectamherstisland.ca/wp-content/uploads/2013/08/Annual-Energy-Generation-for-theWindlectric-Amherst-Island-Wind-Energy-Project-November-20151.pdf
4
This seemingly perverse reduction has a rational explanation: At low wind speed the power output is limited by
the blade circle diameter and not the generator size. The reduced number of turbines therefore results in reduced
energy generation. At high wind speed the energy generation is limited by the generator; the reduced number of
higher power turbines balance out the energy generation. For a range of wind speeds the net effect is reduced
energy generation.3
5
Algonquin Power Co. 2015 Q2 and Q3 and 2016 Q1 Reports
3
The energy generation that Algonquin expects corresponds to a capacity factor of 36%.
Capacity factor is the average power generated divided by the nameplate power of the project.
APAI argues in the analysis below that this capacity factor is an exaggeration. We believe that
the initial capacity factor will be closer to 28% and that it will decline significantly over the 20
year contract term. This is based upon a detailed analysis of the Ontario-wide wind energy
generating systems and in particular upon the performance of the nearby Wolfe Island project.
APAI’s prediction is that the initial annual energy generation will be 180 GWh and that the longterm annual energy generation will be 150 GWh.
With this energy generation prediction and the assumption of bank lending for 50% of the
project cost at 4.75%, an end-of-operation decommissioning cost of $50 million and
conservative assumptions for operation and maintenance costs, tax credits and royalty and
other payments, the internal rate of return is negative 1%.
There are many other risks which, together, put the project in further jeopardy. Some are
general to all wind energy projects and some are specific to Amherst Island. These include the
problem of cost over-run, wake-loss of turbine output with a high density project, the
possibility that the current tariff rate will be reduced (as in Europe), the mitigation measures to
protect the natural and cultural heritage of the island, the conditions required by the “net
benefit” permit for the protection of species-at-risk, the likelihood that turbine noise at homes
will be out of compliance with provincial regulation, the fire hazard on an island with a dry
micro-climate and limited fire-fighting capability.
PREDICTION OF THE ANNUAL ENERGY GENERATION FOR AMHERST ISLAND
The prediction for the annual-average energy generation of the Windlectric project is presented
in detail in a separate online report.3 The prediction started with the published idealized
power output versus wind speed for the Siemens 2.3-113 and 3.2-113 turbines and the variants
proposed for the project. These numbers were converted to idealized capacity factors and
annual-average project energy generation (AAEG), shown in Table 1. Added to the table are the
numbers for the larger Wolfe Island (W. I.) project which has been in operation since 2008. The
idealized capacity factors are comparable with those claimed by Algonquin Power for the
Amherst Island project (36%) and, initially, by TransAlta for the Wolfe Island project (40%).
The idealized power output data and hence the idealized annual-average project energy
generation are measured for an isolated turbine operating in a neutral atmosphere.
Table 1: Idealized Capacity Factor and Annual Average Energy Generation (AAEG) for
Several Siemens Wind Turbines
Turbine
Location
Idealized Capacity Factor (%)
Idealized AAEG (GWh)
2.3-113
A. I.
44
2.224-113
A. I.
45
290
4
2.942-113 2.772-113
A. I.
A. I.
38
39
250
2.3-93
W. I.
41
710
The reality is that the turbines are not isolated and through the year the conditions in which
they operate are not ideal. These include: turbulence in the atmosphere; most of the turbines
operate in the turbulence of upwind turbines and reduced wind speed caused by the wake of
up-wind turbines1; there is the probability that the turbines will operate in a high wind speed
gradient; there is the problem of icing of the blades. It is well understood that the turbulence
and wind speed gradient ensure that the inflow angle is non-optimum for efficient energy
generation.
In addition, there is wear and tear on the moving parts and erosion of the leading-edge blade
surface.
The actual initial one-year capacity factor of the Wolfe Island project was 29%, not the 41%
calculated in Table 1 above or the 40% predicted by TransCanada before the first year’s
performance was measured. This is a reduction of 30%. Subsequently, the capacity factor fell
by 1%/annum or a relative decline of 3%/annum.
Wolfe and Amherst Islands share similar end of lake meteorological conditions. Therefore, APAI
has applied the same 30% reduction in predicting the annual-average energy generation for the
Windlectric project. These conservative predictions are shown in Table 2.
Table 2: Comparison of Initial Realistic Capacity Factors and Annual Energy Generation for the
Originally-Planned 2.3 MW Turbines and the Recently-Proposed 3.2 MW Turbines.
Turbine
Location
Realistic Capacity Factor (%)
Realistic Annual Energy Production (GWh)
2.3-113
A. I.
31
2.224-113
A. I.
32
205
2.942-113
A. I.
27
2.772-113
A. I.
28
180
Over the 20-year contract, a 1% decline/annum will leave an annual average energy generation
of 135 GWh for the modified 26-turbine project. Given that icing and blade erosion are active
areas of research, there could be progress on the degradation of performance, but at a cost.
However, once built, nothing can be done about natural and wake turbulence, wake loss of
wind-speed or the high wind speed gradient expected for a substantial part of the year.
Therefore, APAI estimates the annual-average energy generation over the contract period
will be 150 GWh.
Algonquin is not alone in predicting an enthusiastic performance for its wind energy project.
Fitch, a well-known ratings agency, has analyzed the under-performance of 19 wind energy
plants in the USA. Quotations from the November 14th, 2014 press release that accompanied
the report are as follows:
 “Wind power production forecast inaccuracies have dogged the industry and
improvements to more recent forecasts remain to be seen, Fitch Ratings says.”
 “The majority of 19 operating wind projects we analyzed in a recent report suffered
chronic production shortfalls.”
5

“In our view, this underperformance is mainly attributable to an overestimation of
average wind conditions and underestimating the wake effects between turbines for
studies completed prior to construction.”
Perhaps more sobering for Algonquin Power’s directors and investors is a recent article from
Spiegel Online International, a well-respected German media source.6 The article was based
upon a study by the head of the investment committee at the German Wind Energy
Association. The study looked at the business affairs of over 170 commercial wind parks over
the course of 10 years. On average investors received an average return of 2.5%/annum
instead of the promised 6 to 8%.
Wolfe Island is not alone in demonstrating an annual decline in energy generation. An analysis
of 7-years of IESO energy generation numbers for the Ontario–wide wind energy system shows
that the 1%/annum is general1. Analyses of the UK, Danish onshore and Danish off-shore windenergy systems support the decline1.
FINANCIAL ANALYSIS
APAI accepts many of the figures presented by Algonquin in the 2013 Investor Day presentation
power-point slides. The most contentious figures are analyzed here:
Capital Cost: Algonquin increased the capital cost of the project to $272.5 million in its 2015 Q2
report and maintained this figure in the 2015 Q3 and 2016 Q1 reports.
Revenue: The FIT contract price is $135/MWh. Once the project is operating, if it operates, the
revenue will grow by 20% of the cost of living increase. Algonquin suggests 0.4%/annum and
APAI accepts this. Therefore we take an average price of $140/MWh. The annual revenue is as
follows:
Prediction
Annual Average Energy Generation (GWh)
Revenue/annum ($million)
APAI Initial
180
25
APAI Long Term
150
21
Algonquin5
235
33
Operation and Maintenance: APAI used wind industry sources to predict an O & M cost of
$20/MWh. Algonquin, in its 2013 Investor Day presentation, suggests $5.2 million/annum.
With its energy prediction of 235 GWh/annum this is $22/MWh. These estimates are very
close.
Bank Financing: APAI learned from a reliable source that in 2014 banks were financing wind
energy projects at 5.5%/annum. Since then the bank rates have been reduced by the Bank of
6
http://www.spiegel.de/international/business/wind-power-investments-in-germany-proving-riskier-thanthought-a-946367.html The subtitle reads: “Gone with the Wind: Weak Returns Cripple German Renewables”
6
Canada. In the following analysis a conservative lending rate of 4.75% and a 10-year term is
used.7
Additional Costs: APAI estimated that annual royalty payments would be $5,000/MW, for a
total of $375,000. Algonquin lists the total as $345,000 which is close. APAI also included
$10,000/MW for insurance and local taxes and benefits to the municipality. There is a
Community Benefit agreement signed by Algonquin Po9wer and Loyalist Township. These
items are missing from Algonquin’s figures.
Taxes: In a Feb. 20, 2015 news release Algonquin discussed its corporate tax attributes. It is in
a position where it will not need to pay corporate tax until 2022 at least. In its analysis APAI
assumed optimum depreciation of the capital cost of the project. The result was no corporate
tax until at least year-12 of operation of the project, or 2029.
Decommissioning: A condition of project approval is that Algonquin decommission the project
at the end of its operating life.8 Furthermore, Algonquin has given its commitment in writing to
Loyalist Township that it will decommission the project9. APAI estimates the full
decommissioning cost, net of salvage value, to be $50 million10. This is an end-of-operation
cost but an allowance needs to be made for the cost when evaluating the internal rate of return
for the project. At present Algonquin has an earnings ratio of about 5%, whereas the rate of
inflation is 2%. Therefore it benefits Algonquin to retain the decommissioning cost until end-ofoperation. The present value of that end-of-operation cost is estimated to be $30 million and is
added to the $272.5 million capital expenditure for a total rounded cost of $300 million.
Analysis: In summary, the numbers used were:
Capital Cost
Decommissioning Cost
Revenue
Operation and Maintenance
Bank Financing (50%)
Additional Costs
Corporate Tax
7
$272.5 million
$30 million
$140/MWh
$21/MWh
10 years at 4.75%
$15,000/MW
27% when depreciated
The APAI estimate is significantly lower than Algonquin Power’s own figure of 5.8% for its weighted cost of
capital. See page 17 of the 2015 Investor’s Day presentation:
(http://investors.algonquinpower.com/Cache/1500078288.PDF?Y=&O=PDF&D=&FID=1500078288&T=&IID=41422
73)
8
Clause M11 of the Conditions of Approval: “The Company …. shall ensure that decommissioning efforts return the
project location lands as close to pre-construction lands as possible”
9
To quote: “The project developer (Windlectric Inc. – a subsidiary of Algonquin Power Co.) is responsible (not the
landowners) for all financial issues (including safety and decommissioning costs) regarding the proposed
construction and operation.”
10
The estimate of $70 million for decommissioning the original 33 turbine project to pre-construction conditions,
assessed in reference 1, has been reduced to $50 million for the modified 26 turbine project.
7
The table below is based upon standard financial spreadsheet analysis. A copy of the
spreadsheet is available upon request.
Annual Energy Generation
Internal Rate of Return
APAI Initial (180 GWh)
1%
APAI Long Term (150 GWh)
-1%
Algonquin (235GWh)
5%
APAI notes that when it inputs the earlier Algonquin capital cost estimate of $230 million and
predicted generation of 247 GWh/annum and ignores the costs of decommissioning, insurance
and municipal taxes and benefits then it also finds the internal rate of return of 11% as shown
on slide 58 of Algonquin’s 2013 Investor Day presentation. However, those input numbers and
omissions were not and are not realistic!
SUMMARY OF RISK FACTORS
In addition to numerous adverse environmental impacts, health effects and socio-economic
factors associated with this project, the key risk factors for investors are:
 the initial capacity factor likely to be achieved (certainly not 36%, more likely 28%) and
the observed decline in capacity factor over time;
 the initial cost of development: $3.6 million/MW compared to $2.0 million/MW for
other Algonquin Power wind energy projects; contributing to the high capital cost are:
the underwater transmission cable and submerging it below the ferry bubble pipe
where they cross; building docks on the mainland and the island; barge transportation
across the 3 km channel of turbine components, construction equipment including
cranes, rock fill for the access road system, material for the concrete foundations and so
on; the poor road infrastructure on Amherst Island: building, operating and
decommissioning a temporary concrete batch plant on the island; taking water for the
batch plant either from the lake or from the mainland;
 the cost of the commitment required by the Ontario government and accepted by
Algonquin Power to fully decommission the project;
 cost over-run due to the uncertain difficulties of building on an island;
 the cost of O&M over a 20-year period (there is very little experience world-wide of
successful 20-year operation of wind energy projects);
 the likelihood that the current generous rate regime will be maintained (unlikely given
the current Ontario fiscal situation and the precedents set in Europe);
 The mitigation measures necessary to abide with the “net benefit” permits from the
Ministry of Natural Resources and Forestry;
 the moral and potentially enforceable obligation to satisfy internationally accepted
standards for shadow flicker, so far ignored by Algonquin and by the Ministry of the
Environment and Climate Change in granting conditional approval; presently 40 homes
will be out of compliance with the European standard for shadow flicker – this project
could not go ahead if it was in Europe;
8




the near-certainty that turbine noise will be out of compliance at a number of nonparticipating receptors11;
the problem with ice throw, so far ignored by Algonquin Power and by the Ministry of
the Environment and Climate Change;
the risk of a turbine fire on an island with a dry micro-climate, a volunteer fire service
and limited fire-fighting equipment;
to date, Algonquin Power does not have all of permits required to construct the project.
SUMMARY
This APAI analysis demonstrates that the Amherst Island wind energy project is not viable. The
prediction is a negative internal rate of return. It is an expensive project in a marginal wind
resource region of Ontario. APAI does not understand why Algonquin is continuing to pursue
this project when its projects in other spheres are so much more productive.
John Harrison PhD (Vice-President, APAI) [email protected]
ACKNOWLEDGEMENTS
The assistance from colleagues with a professional background in finance, banking, economics
and management is very much appreciated.
11
This has been demonstrated by APAI in responses to the Hatch noise assessment reports for the project.
9