Ontario Green Energy Act: What Can Alt Energy Legislation Do for Investors? 17 comments
Charles Morand
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Dedicated legislation has been at the core of some of the most impressive regional growth stories in alternative energy, most notably in Germany with the Renewable Energy Sources Act or in California with the various legislative solar initiatives. On Monday, the Canadian province of Ontario became the latest jurisdiction to join the fray as lawmakers introduced the Green Energy and Green Economy Act. Why should investors care? Because such legislation has been at the core of some of the most impressive regional growth stories in alternative energy.
As a bit of a backgrounder on Ontario, there is currently about 800 MW of installed renewable power capacity (~95% wind) in the province with around 2,500 MW under power purchase agreement [PPA] and scheduled to be brought into commercial operations in the next few years. In late 2006, the province introduced a renewable power feed-in tariff incentive, the first one in North America. This incentive was suspended in May 2008 due to transmission constraints. By then, there were about 500 MW of solar capacity under PPA linked to the incentive, including one of the world's largest solar PV farms.
To put these numbers into perspective, California, the largest solar PV market in the U.S. by quite a stretch, had around 500 MW of PV installed by the end of '07. Next came New Jersey at 69 MW and New York at 32 MW. None of the 500 MW under PPA in Ontario has yet reached commercial operation, and at least some of it will probably be canceled given current credit conditions. Nevertheless, these figures provide a good idea of the market's potential. The Canadian Solar Industries Association estimates that Ontario could install up to 16,000 MW of solar PV by 2025, with the potential on Toronto's rooftops alone estimated at 3,600 MW.
The Green Energy and Green Economy Act
The Act targets three main areas: (1) renewable power generation; (2) energy efficiency; and (3) the smart grid.
1) Renewable Power Generation
Perhaps the most significant measures here are aimed at removing what had proven to be critical barriers to renewable energy projects reaching commercial operation in the province:
- Renewable energy projects meeting certain criteria will be guaranteed a connection to transmitters and distributors' networks and will be given priority access over other forms of power generation
- Transmitters and distributors will have to make the necessary network upgrades to allow for the connection of renewable power projects and the eventual expansion of renewable power capacity
- Renewable power projects will be exempt from all forms of municipal permit requirements to counter a growing trend of NIMBY groups lobbying their municipal councils to block renewable energy projects
- A new office of Renewable Energy Facilitation has been created to help speed up the permitting process (e.g. environmental assessments, etc.)
On the revenue side, the legislation does the following:
- The feed-in tariff that had been suspended in May 2008 will be reintroduced once new rules have been designed (no time line provided but Q2 2009 has been thrown around)
- A system of PPA auctions for large-scale renewable power projects that has been in operation since 2004 will be maintained
Analysis
The measures aimed at removing barriers to renewable projects are significant. However, until the new rules around the feed-in tariff are released (e.g. pricing, eligible fuels, etc), the exact impact of the law will remain unclear. My own guess is that the government will be very aggressive with ramping up renewable energy installed capacity over the next five years as, as its name indicates, this law is also about the economy. If you believe the government, this bill is as much about creating a counter-cyclical effect as it is about cleaning up the environment. If my thesis is correct and this turns out to be a boon for developers, the following stocks should be watched:
| Name | Ticker | Description | Potential Upside Related to Legislation |
| Algonquin Power Income Fund | AGQNF.PK | Ontario-based renewable power developer with exposure to Ontario (income trust) | V. High |
| Boralex | BRLXF.PK | Canadian renewable power developer with exposure to Ontario | V. High |
| Canadian Power Developers | CHDVF.PK | Canadian renewable power developer with significant exposure to Ontario | V. High |
| Great Lakes Hydro Income Fund | GLHIF.PK | Ontario-based hydro power developer (income trust) | V. High |
| Innergex Renewable Energy Inc. | INRGF.PK | Canadian renewable power developer with exposure to Ontario | V. High |
| Macquarie Power & Infrastructure Income Fund | MCQPF.PK | Ontario-based renewable power developer (income trust) | V. High |
| ARISE Technologies Corporation | APVNF.PK | Ontario-based silicon and PV cell manufacturer with a module installation segment. The module installation segment is focused on the Ontario residential market | V. High |
| Northland Power Income Fund | NPIFF.PK | Ontario-based power developer with some exposure to renewables (income trust) | High |
| Brookfield Asset Management | BAM | Infrastructure development firm with exposure to Ontario renewables | Medium |
| FPL | FPL | FPL Energy unit is one of the world's largest wind park owners and has exposure to Ontario wind | Low |
2) Energy Efficiency
The Act introduced a number of energy efficiency measures with a focus on building efficiency:
- No real property can be sold or leased for an extended period of time without undergoing an energy audit
- Public agencies will be required to come up with an energy conservation and demand management plan
- Public agencies will be required to consider energy efficiency when making capital investments or when acquiring goods and services (although the devil will be in the details here with more precise rules to come)
- Energy distributors will be required to meet efficiency and demand management targets (see the brackets above about the devil)
- The Building Code will be reviewed to include stronger efficiency measures.
Analysis
Energy efficiency measures are clearly targeted at the building stock. There aren't really any good direct plays on this, and won't be until the government releases further information on what it intends to do with its own buildings. Building efficiency firms such as Johnson Controls (JCI) could benefit, although it's unclear whether this would be needle-moving.
3) The Smart Grid
Ontario has been somewhat of a leader in smart grid, with legislation passed back in 2005 requiring every home and business in the province to be equipped with a smart meter by 2010. Hydro One, the largest transmitter, has also begun smartening its network by embedding communication equipment from RuggedCom (RUGGF.PK). The Act contains provisions to expand smart grid capex. The Ontario Smart Grid Forum estimates that C$1.6 billion could be spent on a smart grid ramp up in Ontario over the initial five years of such a program. As I mentioned in a past article, while the absolute amount isn't huge, it is still a fair chunk of change for this emerging industry.
The smart grid measures are:
- A time line for rolling out the smart grid and apportioning spending responsibilities to different players (e.g. transmitters, distributors, retailers) will be released
- Communication standards and other technical aspects will be defined through regulation
- The regulator (called the Ontario Energy Board, the equivalent of a PUC in the U.S.) will be directed to take actions related to the implementation of the smart grid, although these actions aren't yet defined.
Analysis
Once all the rules are released, the legislation will have the effect of formalizing a patchwork of initiatives already underway. In my view, significant smart grid capex can be expected in Ontario over the next few years with a focus on the transmission and distribution infrastructure (rather than end consumers). There are several companies large and small entering the world of smart grid. My personal favorite play on this legislation is RuggedCom (RUGGF.PK): (1) it has already won contracts here; (2) it is part of the home team (based in Ontario); (3) it already generates EBITDA; and (4) even though its stock has withstood the latest storm in equity markets, it's still trading at a reasonable trailing PE compared to peers.
Conclusion
Many people in the investment world loathe government intervention into anything. However, alt energy has been and continues to be primarily driven by regulation and government policies. In the absence of government support schemes, industry growth rates would be a fraction of what they currently are, and solar PV would not be on the steep cost decline curve it's currently on. It is therefore critical to keep an eye on the policy side to know where growth opportunities will emerge next.
With this new Ontario legislation, my favorite play is the Canadian clean power IPP sector (stocks listed above). The smart grid initiatives will also be worth watching, although more clarity on the rules is required before potential winners can be identified.
DISCLOSURE: Charles Morand does not have a position in any of the stocks discussed above.
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This article has 17 comments:
> jack
The GLHIF/GHH-UN.TO is a huge opportunity to get some fabulous returns . Bruce Flatt's (BAM) recent investment through a BDF coupled with the overall weakness in the stock markets have depressed this fabulous utility trust's price to ridiculous new lows not seen in years. Adding to this unit's price weakness is the on going 1st quarter weak Hydrology/Hydrometry. Now we see this situation developing which is basically related to the carbon credits economic incentive trend. While of a different nature the thrust is the same. To economically advantage through development & tax policy "Green" energy. On top of all these issues that have created this buying opportunity we now see the Loonie teeter totting back and forth over the .80 mark.
GLHIF has just reported a record for production in the past 2008 year end results. Record production led to Record Gross and net revenues. With the 1st quarter hydrology coming to an end and the addition of $65MM/CD in new generating Wind and hydro capacity, it is very likely we are going to see some more strong production results going forward through the remainder of 2009. There will be lesser and less dominate High pressure weather in the hydro electric generating topography of GLHIF over the next 3 quarters. We are going to see the end of snow in conjunction with the melting of snow pack, adding to production.
An increase in the distribution is a lot more likely than any reduction in the near term. With yesterday's ex date knocking the unit price down another 12-15 cents a share we are seeing an opportunity to invest in this great income trust well below the Flatt entry of pre-dilution $16/unit in last Dec's BDF. The price is way down but the distribution is strong and sustainable! We currently see an 8.3%/7.0% effective distribution rate for both tax sheltered and non-tax sheltered accounts. With a non-tax sheltered investment the difference as a result of the Canadian with holding can be recovered with a foreign tax credit.
We have Mark Zandi, Moody's Chief economist calling Canada, "The best managed economy on earth". This was reiterated this morning on the Bloomberg web site in a story on Canada having the world's strongest banking system. Further we have Mr Dennis Gartman 4 weeks ago declaring himself "long of all things Canadian".
A move by Canada's commodity centric economy's currency back to 50% of the recent 52 week high would take these shares and more significantly the distributions 12% higher from todays valuations. That would be a 7.8% effective distribution yield! The shares recovering 50% of their 52 week high would be reasonably expected to rise to 18.5 Canadian dollars from the current $15.10.
Time to Buy!!!!!
Like in CA, where middleclass taxpayers subsized rich folks to purchase their PRIUS, some 1000's of dollars.
Now, a natural gas burning auto is running for the equivalent of near a dollar a gallon, and the up front price is much lower than hybrid, E-ICE, cars.
Look for a taxpayer backlash in CA, we will begin converting the state to low cost LNG, rather than rich folk trendy hybrids.
Low cost makes much more sense in a bankrupt state anyway.
Do we have any way of knowing each winter-to-early-spring how the ANNUAL hydrology looks for the coming year?
Is there a Canadian or U.S. FORECAST for North America on this hydrology phenomenon each year to get a sense of how the hydro-power trusts' earnings will fare as a result? I.e., some years there will be less snowpack (melting into water) and less precipitation to drive the hydropower engines, other years there will be more.
For folks living up in the NE of North America, it will be pretty obvious how the weather's doing each year, but what about us folks in Southern Calif?
On Mar 04 10:55 AM User 369391 wrote:
> An interesting article, you can go to ontarioenergyact.ca
> to learn more about the act.
A shame that most of these stocks are on the Pink Sheet,
a poor exchange in my view.
There is certainly a lot of confusion about pink sheets. Since Archipelago merged with the Nasdaq or was it the NYSE, the pink sheet listings are just a convenient way for US traders to now access companies listed on Foreign exchanges that do not have US ADRs. VWDRY is the world's oldest and most prominent wind turbine manufacturer. Of course trying to do an online $8 trade on the Copenhagen stock exchange may be difficult. You might get your broker to do the trade on the phone for $35, but they are probably not going to make it a comfortable easy trading experience. One should not confuse pink sheets with the bulletin board listings.
In the case of GLHIF the volume we see is just the US volume. The average volume of ~25,000 shares for GLH-UN.TO includes the US volume which is all merged electronically even calculating the exchange rate to the pip. There is actually no liquidity issue at all owning these stocks as there is more than adequate volume for fair price discovery. US companies that are pink listed are of course a different story.
On Mar 09 10:21 AM fg144331 wrote:
> I would think that any solar on roof tops in Toronto might suffer
> from SNOW.
>
> A shame that most of these stocks are on the Pink Sheet,
> a poor exchange in my view.
Only half the float of ~54 million units will be available to be purchased as the +50% of the units held by ((BAM) subsidiary Brookfield Renewable, will be held off the market until 3/18/10 when the offer/purchase program is scheduled to end.
We can expect unit valuation to benefit and most likely achieve the likely management target of at least $16CD which is what the $75CD Million recent BDF closed at this past Dec. The completion of the elimination of 1 million shares will most likely cost the trust around $16CD Million. It will eliminate $1,2CD million in distributions. The long term prospect will be extra capital for the trust to acquire additional generating capacity. Together with the new recent acquisition of new producing assets that became accretive in Feb, cash flow should be positive enough going forward post the buy back to at some point provide for a modest distribution increase? It would seem that these units would now have a new medium term target price. Based on +$15CD million bidding for 1/2 the float of units, $16.50 CD to $18CD would seem likely. The shares were up over 2% yesterday and by mid afternoon today have moved higher by near 1% today. At $12.19 US dollars this secuity has a 6.8% effective yield@ .788 on the Exchange. If the Loonie reclaims .83 to .85 as many market & currency strategists expect the effective yield against the cost basis would rise to over 7%. The unit price would also reflect an improvement in valuation as well on a stronger Loonie. Pretty good Whale following (Bruce Flatt) opportunity.