Oakville Energy requests lease extension for hydro generating station in Kagawong

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KAGAWONG – The Oakville Energy Corporation (OEC) has requested a lease extension for its hydro generating station in Billings Township. This would allow OEC to recoup significant costs it is proposing to invest in the plant over the next 10 years and to earn a reasonable profit over a longer period of time. OEC Generation Vice-President Patrick Gillette and Bill Touzel, an independent advisor for OEC, presented their proposal at a Billings Township special council meeting held on September 15. A lease extension beyond the current 2030 expiry date would benefit Billings by saving the township money and risk and would result in a more efficient power plant, said OEC.

The original lease for the power plant was between Kagawong Power and Billings Township and began in 1987. OEC acquired the right to operate the Kagawong generating station from a third party in 2013. The current lease, unless extended, will expire December 31, 2029.

“This is a request from Oakville Energy to extend their current lease. No decision will be made by council tonight,” Billings Mayor Ian Anderson told attendees. “There will be a discussion and a decision will be made at a later date.”

“For us to rationalize the type of investment we are looking at to make improvements to equipment at the power station that will provide efficiencies, for us to rationalize this investment we need more time,” said Mr. Gillette. 

He has worked in the electricity sector for the past 25 years and joined OEC a few years ago. At that time, he said, “The Kagawong power plant was in the second stage of a forced outage. We had a serious problem and were just lucky the breakdown occurred in the winter, not spring.”

Mr. Touzel has been involved with renewable water sources for the past 32 years. He explained that OEC has the right to operate the generating station owned by Billings in return for a royalty-type lease payment of 23.5 percent of revenue. “This is a slightly unusual arrangement,” he said. 

The current lease specifies that OEC bears all the risk associated with operating costs including responsibility for all maintenance and repairs necessary for the operation of the generating station during the term of the lease. “Billings has a good arrangement,” said Mr. Touzel. “We’re not negotiating a change of the agreement.”

OEC would spend between $500,000 and $1 million on the plant in the next two years if the lease extension is agreed to. “Some of the pieces of the plant may not make it through the next 10 years,” Mr. Touzel pointed out. “It is apparent that the powerhouse equipment is aging and becoming less reliable as time passes. Over the past few years, the maintenance and repair costs absorbed by OEC have become significant.”

“Since 2013, Billings has received approximately $464,000 in royalties, an average of roughly $58,000 per year over the past eight years,” he said. “During the same time frame, OEC has received net operating revenues of approximately $622,000 before deducting the costs of financing the purchase of the business. As of December 31, 2020, OEC’s net cash inflow before taxes was approximately $45,000, an average of $5,600 per year.”

OEC and external technical professionals have analyzed the condition of the generating station equipment and have concluded that several very significant components are nearing the end of their service lives. A substantial investment in refurbishment and/or replacement of parts is required and should include turbine bearings, electrical protection and control systems, transformer, hydraulic power unit, gearbox and generator. The station may require as much as $750,000 of investment over the next decade, in addition to the expected costs of ongoing operation and maintenance.

OEC is reluctant to spend a large amount  of money to make necessary refurbishments unless the lease is extended. “It is important to understand that by extending the lease and ensuring the station has a longer life, Billings benefits from higher lease costs,” said Mr. Touzel. 

Members of the public were allowed to present questions to OEC and councillors. Kim Neale asked whether council had looked into identifying an independent consultant to engage to assist Billings with the OEC lease request.

“This is beyond my expertise,” said Mayor Anderson. “Staff could investigate this further. I am personally happy with our working relationship with OEC. The municipality is in a really good position with minimal risk.” He noted he was personally comfortable with the report provided but council was not rushing the decision. 

Ms. Neale also asked about other market options and if others might be interested in a lease. “We’re not done yet,” Mayor Anderson responded. “There won’t be a decision tonight. In the interim we can explore some questions between now and our next council meeting.”

Barbara Erskine asked if OEC had set aside reserve funds or if a reserve is part of the lease agreement. 

“No,” answered Mr. Gillette. “We’ve had significant problems with this plant from the get go. All the money has gone back into plant repairs. Normally you have reserves when you are making revenues. This is a 100-year-old turbine. What we are doing now is fixing and replacing equipment for the plant. Eventually, when we are making money, we can set aside money. We make money, pay the lease and the balance of the funds go back into maintenance and repairs.”

Accessing public or private funding is not an easy solution, Mr. Gillette said. “There may be funding but it costs money to get these programs. The town will spend $20,000 to get $70,000 in funding. There’s not an easy solution to funding or we would be trying to leverage it.”

A question was raised about algae blooms as Lake Kagawong has seen several in recent years. Would water quality testing be considered in a long-term lease? “I have some familiarity with algae blooms,” said Mayor Anderson. “They happen on occasion, usually after a prolonged period of heat. I’ve never heard of one associated with a hydro generating plant.”

“The hydro generating plant is not causing blooms,” said Mr. Gillette. “Normally, organic material gets into a lake. Hydro power generating plants are not causing algae blooms.”

Mr. Touzel ran a company that did a lot of work with hydro generation. “I never saw any link to algae blooms,” he said. “I think I’d be reluctant to suggest OEC take on responsibility for monitoring that issue.” He noted Billings has a water management plan and OEC would be happy to help if they could but said, “The algae blooms aren’t related to us.”

When asked if OEC understands that Lake Kagawong is not completely in Billings, Mr. Touzel said OEC is aware that Lake Kagawong falls under several jurisdictions, including Mindemoya and M’Chigeeng First Nation. He noted there is representation from all three communities on the water management plan advisory committee.

In response to a question from Sandy Cook about other ventures OEC is considering on Manitoulin, Mr. Gillette said the Green Community Incentive Program provides up to $3 million to retrofit buildings for heat exchangers. OEC thinks retrofits are too expensive but is interested in solar retrofits such as the 250-kilowatt rooftop system installed on an Oakville recreation centre. They are generally looking at lumber mills or mining operations but would also consider community buildings such as arenas. 

“We would also like to engage Billings if there are ideas from the community energy project that we could assist with,” said Mr. Touzel. “Municipally owned buildings could be more energy efficient or solar.”

Ms. Erskine asked if OEC would be clawing back any profits made by Billings over the past 60 years. “There’s not any way to draw back on the lease,” said Mr. Touzel. “It’s 23.5 percent of gross revenues. The funding will come from OEC.”

“In typical arrangements we’ve seen, if the hydro operator cannot make money the pain is shared,” Mr. Touzel continued. “Billings has a good deal; 23.5 percent off the top goes to Billings. Then the government gets its share. Then we pay operation and maintenance costs. We’re not making a lot of money here. That’s why we’re asking for the extension.”

“What is the next step on community consultation in the process?” asked Ms. Neale.

“We have a few things that need further explanation. Residents will be kept up to date,” said Mayor Anderson. “We’re under no obligation and will entertain questions and comments after tonight’s meeting. We earn a significant amount of money. I understand their desire to continue with extension and hope everyone understands they are genuine and very reasonable regarding infrastructure repairs required. We’re not doing this without public input.”

Mr. Touzel will be in Kagawong for the next two or three weeks. “I’d be pleased to meet anyone for coffee who wants to discuss this,” he said. “I’m more than happy to meet anyone that might have some ideas to bring forward.”

The last word went to Mr. Gillette.  “We want certainty over a set period of time to make and recoup our investments. We’re asking that the lease be formalized to make this financial investment.”