The Danish port town of Esbjerg is dominated by a towering smokestack surrounded by enormous piles of black coal. Even on a windy, wintry day, the air around the DONG Energy site has a slightly oily smell. But it's not just the plant's sheer size and the 250-metre chimney spewing smoke that makes it stand out; it's what lies just beyond.
Here on the west coast of Jutland, the peninsula that separates the North Sea from the Baltic Sea, the DONG plant sits right smack next to an offshore wind-turbine marshalling yard occupied by Siemens, the German engineering giant that has emerged as one of the world's biggest makers of wind turbines. The yard holds most of the equipment necessary to build the vast Gemini offshore wind park in the North Sea's Dutch sector. Look one way and you see a grubby monument to the fossil fuel era; look the other way, and you see the future of clean, renewable energy.
The yard's other distinguishing feature is that almost every piece of equipment stored in it, from the neat rows of blades to the turbine towers, is owned by Northland Power of Toronto. The small company is the lead player in two North Sea wind projects–Gemini and the smaller Nordsee One, off Germany. Gemini is a €2.8-billion project; Nordsee will cost €1.2-billion. Their combined spend is about $6-billion at recent exchange rates. That's about two-thirds more than Northland's $3.5-billion market value. (That said, as 60 per cent owner of Gemini and 85 per cent owner of Nordsee, Northland doesn't cover the entire bill.)
In August, 2013, when Northland announced it had acquired the rights to the Gemini stake, no one in Europe's renewable-energy industry had heard of the Canadian company. Today, Northland is one of that industry's top names. Gemini, along with the London Array project in the outer Thames Estuary, are the biggest wind farms in the North Sea and among the biggest in the entire world.
"At the onset, the industry was surprised that there were no European companies prepared to take on the Gemini risk," says Pieter van Oord, CEO of Van Oord, the family-owned Dutch marine contractor that is building the Gemini project. "Suddenly, everyone is now talking about them. They've handled Gemini very well."
Van Oord's flotilla of ships installed Gemini's first wind turbine 85 kilometres off the coast of Groningen, Netherlands, on Feb. 16. Thirteen days later, it produced its first power. Another 149 Gemini turbines are to be installed this year. When commercial operations begin in 2017, the project will generate 600 megawatts – enough electricity to supply the needs of 1.5 million people – without, of course, emitting planet-warming greenhouse gases.
John Brace, Northland's CEO, seems somewhat astonished that Gemini is nearing completion. When he started at the company way back in 1988, it was busy banging together biomass plants in the wilds of Northern Ontario. Now it's working with the top names in the renewable energy industry and building world-scale power projects. "When we go out and see what we've actually created, we go, 'Wow! We actually built this,'" he says.
Everything about the Gemini and Nordsee One projects is big, and the engineering works are astonishing. The latest generation of offshore monsters make land-bound turbines look like children's toys.
Brace, 58, and his European front man and company vice-president, Boris Balan, 57, want me to learn as much about Gemini as possible in a single-day tour, which means visiting three sites in Denmark: the first two near Aalborg, a city in the far north of Jutland, the last in Esbjerg. We pile into a cramped six-seat Piper Seneca puddle-jumper at Hamburg's airport and, covered in wool blankets, bounce our way through the frigid January skies. No business jet, the piston-engine Piper is a reminder that Northland is still a relatively small company.
Brace is afraid of heights and I am afraid of flying, so our conversation is punctuated by long pauses as each of us tries to compose ourselves. Still, along the way, Brace manages to give me a rough outline of the European offshore wind industry. The North Sea is to wind power as Saudi Arabia is to oil, he says; theoretically, it has enough wind energy to power Europe four times over. That's because the North Sea winds are consistently strong. In the Gemini area, the average wind speed is 36 kilometres per hour. Turbines in the North Sea can produce electricity about 8,000 hours a year, and will run at the equivalent of full output for about 4,500 hours a year. Turbines on land, where the winds are weaker and less reliable, may produce power for well less than half as many hours.
The North Sea has other advantages. It is immune to NIMBY (not-in-my-backyard) syndrome – the Gemini and Nordsee turbines cannot be seen or heard from the Danish, Dutch or German shores. And the water is fairly shallow – 28 metres to 36 metres in the Gemini area – which means construction costs, while high compared to onshore installations, are not outrageous.
Our first stop is Bladt Industries, the Danish metal bashers that are making the substation–the massive platform, topped with a helicopter landing pad – that will collect the electricity from Nordsee One's 54 turbines, convert it to 155 kilovolts and deliver it by subsea cable to a land station in northern Germany, where it will be fed into the grid. Gemini requires two substations; Nordsee one. The base for Nordsee's substation, called a jacket, is 51 metres high and weighs more than 1,000 tonnes. The three-storey topside of the substation sits on top of the jacket like a house on a cliff.
More impressive yet is the Siemens blade factory nearby. It's the size of a big-city airport because it has to be. The willowy, tapered blades, whose bases are so wide that they seem like the cross-sections of submarines, are fantastically long and getting longer. The blades used in the Gemini turbines are 63 metres long (Siemens also produces 75-metre blades). Including the rotor, the diameter of the turbine is 130 metres – almost twice the length of an Airbus A380.
But all that engineering and manufacturing is only part of the challenge of offshore wind power; there's also the job of installing turbines offshore, often in conditions that would leave landlubbers frozen and seasick. This is where Van Oord, which recently completed dredging to expand the Suez Canal, comes in.
In the early part of the past decade, Van Oord leveraged its long history in the offshore drilling and dredging businesses to ease its way into the offshore wind business. It lost money at first; the company realized that to turn a profit, it would have to take total control of the engineering, procurement and construction aspects of projects. Pieter van Oord calls this "de-risking the client" – shunting the construction risk onto the contractor.
Gemini is the embodiment of contracting simplicity. Sundries aside, Northland signed only two contracts: the first with Siemens for the turbines, the second with Van Oord for everything else, from sinking the subsea towers (known as monopiles) into the North Sea floor to spooling out the electrical cable that connects the wind turbines to the shore. "We are entirely responsible for the supply chain," van Oord says. "If, say, the monopiles are delivered too late, that's my risk, not Northland's."
Van Oord, the company, has the process down to a fine art. During the height of the Gemini installation, some 40 vessels–from a robot machine that digs the seabed trench for the electrical cables to a hotel ship that houses the 500 engineers, technicians and sailors – will be at sea. The niftiest ship is the 139-metre Aeolus, a floating crane that sinks the monopiles into the seabed. To ensure stability and precision – satellite positioning is used to place the monopiles within 10 centimetres of their target – the ship uses four giant jacks (called "spuds") to hoist itself fully clear of the water.
Brace, the Northland CEO, calls the installation manoeuvres by the Van Oord flotilla "beautifully choreographed, like a ballet."
Northland's project development is a ballet, too, though one largely confined to the company's headquarters in Toronto. In its European life, Northland is essentially a financing operation that leaves the grunt work to the likes of Van Oord, Siemens, Danish steel specialist Bladt and a small number of other contractors.
Northland was founded as a limited partnership in 1987 by Jim Temerty and Alex Juchymenko, two power pioneers aiming to exploit the partial deregulation of the Ontario electricity market that was then under way. Temerty, who was born in Ukraine and who built ComputerLand's Canadian retail franchises, is Northland's chairman and biggest shareholder; Juchymenko, also born in Ukraine, worked for Ontario Hydro for much of his career. He was Northland's chief engineer and resident expert in co-generation – the simultaneous production of electricity and usable heat. He retired in 1996.
One of their first hires was the unflappable John Brace, a Toronto boy and Queen's University graduate in engineering physics who, slowly and patiently, worked his way through the risk management, development, construction and operations departments before landing the CEO's job in 2005, eight years after Northland, a former income trust, listed its shares on the Toronto Stock Exchange.
Northland has a long and largely uneventful history of building solar, thermal (natural gas, biomass, landfill gas) and wind plants – never coal – mostly in Ontario, but also in Quebec and Saskatchewan. In the late 1980s, Ontario was reeling from the cost overruns piled up by Ontario Hydro's decades-long building spree, which included the outrageously expensive Darlington nuclear plant. The high costs translated into high electricity prices. Private power producers like Northland were invited into the market to build cheaper sources. The scheme would also transfer any cost overruns away from the taxpayer to the plants' private investors (Ontario Hydro was later split into segments including Ontario Power Generation and Hydro One, the transmission and distribution company).
Providing competition for big, bad Ontario Hydro wasn't the only reason behind the government's decision to encourage independent power producers. As "global warming" and "climate change" began to enter the everyday lexicon, it also wanted to seed renewable energy. To do so, the government was prepared to pay what Brace calls a "political-societal" price. In Ontario, as elsewhere, including Europe, that meant paying above-market rates.
Thus was born the feed-in tariff. Broadly speaking, a feed-in tariff system offers long-term contracts that reflect the cost of the new technology. Offshore wind farms, for instance, are offered a higher price than relatively inexpensive onshore wind farms. Some tariffs ratchet down over time, all the better to encourage the development of cheaper technologies (the prices of photovoltaic cells have plummeted).
Critics of renewable energy cite the often enormous gap between the feed-in price and the spot, or "pool," price. In Ontario, the spot price has recently ranged from 0.5 to 3.2 cents per kilowatt hour. That amounts, at most, to a quarter of the 12.8 cents per kilowatt hour now offered to small wind projects under the province's feed-in tariff program.
To label the entire gap a subsidy isn't accurate because the spot price does not reflect the cost of building new capacity, nor the value of greenhouse gas emission reductions. Still, countries with lavish feed-in tariffs have earned the ire of old-school power producers and consumers. In Germany, feed-in tariffs are estimated to have boosted consumer electricity prices by about €200 a year, leading to accusations that some low-income families face "fuel poverty."
The various feed-in tariffs across Canada have resulted in steady, if unspectacular, growth in renewable energy. Wind, the fastest-growing renewable, supplies about 5 per cent of Canada's electricity demand, putting the country seventh in the world for installed capacity. But that's small compared to Germany, where wind power supplies 9 per cent. In the Netherlands, the figure in 2014 was 5.2 per cent, but the Dutch government has set an overall renewables goal of 14 per cent by 2020. Gemini will play a big role in achieving that goal.
Northland's first plant was powered by biomass – forestry waste – in Cochrane, Ont. It acquired its first wind operation in 2004. Today, the company operates 23 solar, thermal and wind plants in Canada, a few of which are partly owned by First Nations communities, as well as two onshore wind farms in Germany (Gemini and Nordsee One are not counted in the tally because they will not enter commercial service until next year). Virtually all the projects went smoothly. The standout duds were four solar projects in Northern Ontario that collectively went about $100-million over budget – no pittance for a company of Northland's size. Brace blames the contractor for the overrun.
Northland's greatest skill is its ability to raise long-term debt to finance its projects. The company was a pioneer in "project" financing, meaning the lenders – banks, life insurers, bondholders–have no recourse with the company itself if the project they back defaults and goes bankrupt. Northland is carrying about $5-billion in debt but the vast majority of that amount has been pushed down to the projects themselves, whose capital structures typically carry as much as 80 per cent debt. None of Northland's projects has ever defaulted.
Northland has recruited some of the biggest names in Canadian and global finance to get its projects built. The lenders take comfort in the fixed-tariff regimes on the projects – typically set for 15 or 25 years – and the generally high credit ratings of the utilities buying the electricity. The non-recourse financing for the Nordsee One project, arranged a year ago, was oversubscribed and included 10 lenders. Among the participants: Bank of Montreal, Export Development Canada, National Bank of Canada, Commerzbank of Germany, Rabobank of the Netherlands and Bank of Tokyo-Mitsubishi.
Balan, Northland's European man, says the mismatch in size between Northland and Gemini scared some potential European investors. "I had one of the funnier exchanges with a banker we had initially approached for Gemini financing," he says. "He said 'no.' I saw him after we closed the financing and he said: 'I couldn't believe you did it. That was great. I feel so bad we didn't take up the opportunity to join the syndicate.'"
All that said, Northland's perennial challenge is finding enough money to keep its fat dividend intact – the company pitches itself to investors as a yield play – when spending on projects is relatively high and cash flow is relatively low because those projects have yet to produce revenue.
Northland's annual dividend is $1.08 a share, for a yield of 5 per cent, based on the recent share price. In the three years ending Dec. 31, 2015, Northland paid out about 100 per cent of its free cash flow on cash dividends. When the payout ratio is above 100 per cent, credit lines can be used to finance the deficit. (Northland says it has had to dip into its credit lines twice in the past five years, but not to cover the dividend, and for only one fiscal quarter each time.) The payout ratio for 2016 works out to between 100 per cent and 116 per cent because Northland is investing so heavily in Gemini and Nordsee One.
Some analysts have said that Northland understates its payout ratio by using a distorted and aggressive definition of free cash flow, and that the real payout ratio might be 200 per cent or higher under a conservative definition of the metric. The company, for instance, excludes from its tab any capital spending designated for growth purposes. "Northland is currently in the midst of a major transition and has stretched its balance sheet and cash flow payouts in an attempt to have the best of both worlds," Accountability Research analysts Michael Ruggirello and Mark Rosen said in an October, 2014, report.
But investors don't seem overly concerned whether the payout ratio is north or south of 100 per cent. The shares are up about 20 per cent in the last 12 months, handily outpacing both the S&P/TSX composite and utilities indices. And Northland is one of the few independent North American power producers to retain its investment-grade rating from Standard & Poor's.
For Northland, the bigger issue is finding projects that can sustain its growth. The company had a good run in Canada but found itself running out of options, partly because of deindustrialization, which reduced the need for new power sources, partly because fossil fuel energy is cheap by global standards, and partly because government has been unwilling to open the subsidy taps as wide as the Europeans have. (The European Union, along with Japan, challenged Ontario's Green Energy Act in 2010. They won a repeal of Ontario's domestic-content requirements for the feed-in tariffs, but the tariffs stayed in place.)
Growth of offshore wind power in Canada is exceedingly slow; in the Great Lakes, it is dead (see "Four Strong Winds," previous page). "There is not much need for new power in Canada," Brace declares. "As Canada declines, we've been looking elsewhere."
Yet Northland's leap into the top rank of the European scene was almost accidental. Northland had no strategy to lunge into the European market; it did so opportunistically after it learned about development turmoil at Gemini.
The EU in general and northern Europe in particular have been at the epicentre of the renewable energy industry. An EU directive set the goal of obtaining 20 per cent of all energy from renewables by 2020, and Germany, the United Kingdom, France, Netherlands, Belgium, Scandinavia, Spain and Italy have thrown fortunes of taxpayers' money into energy subsidies.
With farmers' fields and barn roofs across Europe getting cluttered with turbines and solar panels, offshore wind – out of sight and out of mind – is becoming the hot growth area.
The initial subsidies for all types of renewable power were lavish; some are only slightly less so now, much to the anger of traditional power giants, like Germany's RWE and E.ON, whose margins on coal – and gas-fired generating plants are getting squeezed by the renewable energy onslaught. (Like Denmark's DONG, however, those companies also have moved into renewables themselves. The Thames Array has four owners: E.ON, DONG, a third sooty hedger from Abu Dhabi, and Quebec's top pension fund, the Caisse.)
The contract for Nordsee One, which will have a capacity of 332 megawatts, is a sweetie (one megawatt is one million watts, or enough to power about 300 homes).
Northland will sell its power into Germany's grid at the spot price, currently about €25 per megawatt hour. The spot price reflects the wholesale price from the blended sources of electricity–coal, gas, renewables and nuclear – available on the grid at any point in time. (By one calculation, Germany's power is about 50 per cent fossil fuel, a bit more than 30 per cent renewable and 14 per cent nuclear, with the remainder coming from other sources.)
The German government will catapult that figure to the contract price of €194 per megawatt hour for the first eight years. For the next 1.6 years, the top-up price falls to €154 per megawatt hour. So, assuming rates don't change substantially, Northland will be receiving more than 500 per cent of the spot market price for the electricity it produces. Generally speaking, electricity produced by German offshore wind farms is the second most expensive source of power, after biogas, and about three times more expensive than coal-fired generation.
Gemini has a convoluted history. In 2010, the project was awarded to a company controlled by Russian-German energy tycoon Arngolt Bekker. He then flipped the project to a Dutch company called Typhoon Offshore, which, according to Brace, lacked the offshore wind experience to persuade the banks to back the monster project.
Three years ago, Northland heard about Gemini, did its homework, and realized that it ticked all the boxes–from the secure power contract to the big-name equipment suppliers–and pounced. Northland took Typhoon's 60 per cent of Gemini. Siemens came in for 20 per cent. Van Oord and HVC, the supplier of power to Dutch municipalities, each took 10 per cent.
Northland's edge was speed and the knowledge that the big German utilities would be incapable of mounting credible bids in a hurry as they struggled to meet new environmental standards while competing with the renewable surge. The Canadian company also had the ability to raise a lot of debt from its banking squad. "It doesn't surprise me that a company like Northland got [the Gemini and Nordsee One] projects," says Jens Eckhoff, president of the German offshore wind foundation and a former state of Bremen senator. "Northland was very fast stepping into the market, much faster than the big utilities. We like companies like Northland. They will get more important here."
Pieter van Oord is not convinced the offshore wind game is a breeze, so to speak. He notes that plummeting prices for fossil fuels used in electricity generation will ensure that the old, belching coal and gas plants in northern Europe won't die any time soon. Coal-fired electricity generation in Germany, he notes, is unlikely to go gently into the night, since the country has to get juice from someplace as it phases out its nuclear plants. "Coal and gas are cheap," he says. "Wind relies on subsidies and that makes the wind industry vulnerable. The challenge is to get the generation price [of wind power] down. In Holland, we want to bring down the costs for new projects by 40 per cent in the next six to seven years."
Brace doesn't seem perturbed by the idea that subsidies will one day disappear. He says that the financial plans for Gemini and Nordsee One made that assumption. "For Northland's projects, the project debt is fully repaid during the term of the legislated tariff."
The elimination of the projects' debt will reduce costs substantially, he says. When the subsidies get crunched – they may not be entirely eliminated – the projects will sell electricity into the grid at market rates and perhaps profit from selling carbon credits on the carbon market.
Northland is so confident that it's already plotting Nordsee Two and Nordsee Three, which would add as much as 800 megawatts to Nordsee One's 332.
That would make Northland one of the biggest players in the North Sea wind industry. "Coming to the North Sea? A few years ago, that wasn't even on our radar," Brace says. "If you look at history, we have grown at a compounded 10 per cent total shareholder return over 10 years. So our ambition is to deliver that or better over the next 10 years. Thanks to the North Sea, we'll be more than two times larger than we are now."
That's what you call punching above your weight.
Four strong winds (but no Canadian offshore power)
As the sun sets on a spring day in Toronto, the sight of hundreds of sailboats criss-crossing the sparkling horizon of Lake Ontario is a dreamy scene, seemingly far removed from workaday concerns and planetary peril. Yet the vista is also a reminder of a massive clean energy resource begging to be harnessed.
Enough wind blows over the Great Lakes to meet Canada's demand for electricity three-and-a-half times over. It's a better wind compared to the onshore variety–more consistent, predictable, reliable, and closer to power-hungry big cities. Yet to the delight of lakefront residents who tolerate the massive footprint of conventional energy but not changes to their views, not a single wind turbine has been erected in the Great Lakes.
Prospective developers, on the other hand, have been frustrated for years. "It's low-hanging fruit," says John Kourtoff, president and CEO of Trillium Power, which in 2006 announced a plan to build Canada's largest wind farm in Lake Ontario. Its first project, Trillium Power Wind I, would have been located about 40 kilometres southwest of Kingston, where winds average 35 kilometres an hour–approaching the strength and reliability of winds in the North Sea. It was planned as the first of four projects representing $15-billion worth of investment.
On this file, however, Ontario has been a tease. In 2006, the province's Liberal government banned development until environmental risks could be studied. Satisfied with what it had learned, Queen's Park lifted the moratorium in early 2008. It included offshore wind as part of the province's feed-in-tariff (FIT) program for renewable power, introduced in 2009. That meant developers like Trillium, if approved, could sell power into the grid for 20 years at a premium to onshore wind.
A handful of developers pursued the opportunity. Vestas Wind Systems, which vies with Siemens to be the world's largest wind turbine manufacturer, hinted it might set up shop in the province. A consortium of Ontario steel, cement and equipment manufacturers declared itself ready for business. The Conference Board of Canada hailed the multibillion-dollar economic boost and job creation that offshore wind development could bring.
Then, suddenly, the political winds stopped blowing. In February, 2011, the government abruptly kicked offshore wind out of its FIT program and slapped another moratorium on development, citing the need for more research. Five years later, the studies drag on.
Jolanta Kowalski of Ontario's Natural Resources Ministry says four scientific reports have been completed and another two–one on noise and one related to end-of-life decommissioning of turbines–are in the works. Studies conducted so far seem to have raised no showstoppers. "Further analysis and scientific research are necessary," says Kowalski, repeating a line that has been used for several years.
Meanwhile, offshore natural gas drilling continues on the Ontario side of Lake Erie. The practice, banned on the U.S. side since 2001, has been permitted since 1913; about 500 wells remain in operation. "It's ironic," says Lorry Wagner, president of the Ohio-based Lake Erie Energy Development Corp. (LEEDCo), which plans in 2018 to install six wind turbines in Lake Erie near Cleveland. "We're doing offshore wind but can't drill for gas. You guys can do gas but not wind. Go figure." If LEEDCo succeeds, it will be the first to generate wind power from the Great Lakes.
Observers like Wagner suspect Ontario's early enthusiasm began fading as anti-wind protesters found their voice. That 2011 was an election year, and that electricity consumers were irate over rising rates, didn't help matters. "It just got out of hand," says Wagner, adding that Ontario already had plenty of onshore wind and solar projects coming on stream. "Given that it became so contentious, the reaction was, why don't we just wait until offshore technology becomes cheaper?"
That's little comfort to Trillium Power, which sued Ontario in 2011 for $2.25-billion. It later revised its suit after an appeals court tossed out most of its claims. The company now seeks $500-million in damages. Ontario is also at the centre of a $568-million NAFTA claim launched in 2012 by Windstream Energy which, like Trillium, had plans to develop a project near Kingston.
With those challenges outstanding, Ontario is unlikely to wade back into the waters. Kourtoff, for one, isn't giving up hope. Meeting climate targets agreed to in Paris last December means running more vehicles, industries and homes with clean electricity. The path forward for Ontario entails co-ordination with bordering states as part of a new binational clean-energy dialogue, he believes.
Globally, the trend is clear. The offshore wind market is booming, with Britain, Denmark and Germany leading growth. China, which only entered the market in 2009, has come on strong, approving more than 40 projects since 2014.
In Canada, Beothuk Energy of St. John's has four massive projects at various stages of development off the coasts of Newfoundland, New Brunswick and Nova Scotia. The only other active developer appears to be Vancouver-based NaiKun Wind Energy, which has struggled to find a buyer for the power its project would generate.
Beothuk CEO Kirby Mercer says the North American market is beginning to find its legs. The continent's first offshore project is expected to begin operation later this year off the coast of Rhode Island. Turbines are getting larger and more efficient, development costs are falling, and environmental best practices are well established thanks to European leadership. "What's happened in this sector over the past five years is tremendous," says Mercer, adding that Ontario should be part of the growth story. "Now that national and provincial policies are aligned in this country, it's time for them to push forward."
Kourtoff couldn't agree more, as long as past missteps and controversies can be avoided. That means starting small, with only a few projects far from sensitive "no go" zones and at least 15 kilometres from shore, he says. Knowledge gained from those out-of-sight but closely studied projects would be used to fine-tune the rules.
LEEDCo is taking a similar approach. "We're hoping Ontario looks at what we do and decides to jump back in," says Wagner, citing the benefits of building regional scale. "It can only help the industry and will help bring down costs."