Can 20 year contracts be amortized over 30 years?

written by Gary Mooney, and reproduced here with permission.

I contacted the Ministry of Energy by phone to ask if 20-year electricity generation contracts – e.g. wind and solar -- were going to be extended to match the government’s new 30-year amortization period for capital expenditures.

The answer that I got back was:

* There will be no negotiations to extend contracts at this time.

* But generators will be offered the opportunity to continue producing electricity beyond the 20-year point, at the market price (or a negotiated price, not sure which was mentioned).

This is consistent with Minister Thibeault’s comment, in justifying a longer amortization period, that wind turbines have a useful lifetime of 30 years.

The idea of an extension of wind contracts will be a major concern to those living with turbines, as they have been expecting that the problem will go away after 20 years. And worse, if there are no negotiations now, these folks will have to live with uncertainty for anywhere from 10 years (the earliest contracts) to 20 years.

To make an extension of the amortization period work, the province needs continued power generation over the whole period out to thirty years, either:

* at a somewhat lower price from the generator now for the remaining period out to 30 years, or

* at the same price to the 20-year point, and the market price (i.e. zero cost over the HOEP) thereafter.

Emerging experience with wind turbines indicates that:

* They become gradually less efficient over time (a point made by physicist John Harrison);

* They require replacements of the gear box at least once in 20 years, or several refurbishments of the gear box.

What this means is that, at 20 years, wind turbines will likely need major work to extend their lifetime. Therefore, owners will need a continued high price beyond 20 years but, as noted above, the government can pay only the market price.

Either the two parties won’t be able to agree on the continuing price, or the government will give in and pay too high a price.

Really, the government’s plan to extend the amortization period only works if contracts are renegotiated now, with a lower price that continues out to thirty years. But it looks like this is not going to happen.

For the reasons described above, it is expected that the government will run into trouble regarding its accounting treatment of these extensions. It is preferable that this issue be dealt with sooner rather than later.

It would make sense for the Financial Accountability Officer to review the financial plan at the outset. Failing this, it will be necessary to wait for a review by the Auditor-General.

 

Gary Mooney, Prince Edward County