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Ontario renewable energy subsidies under attack, Canadian wind and solar firms threatened

|Includes:Canadian Solar Inc. (CSIQ)

Tim Hudak, leader of the Progressive Conservative Party of Ontario, announced on Tuesday that if elected his government would scrap the renewable energy subsidy known as the Feed-in Tariff (NYSE:FIT) program.

Ontario's Feed-in Tariff program for was meant to dramatically expand green energy capacity in the province. Under the program, renewable energy producers receive prices far above spot for electricity fed into the grid. So long as producers meet the minimum Canadian-origin requirements for labor and material inputs, producers large and small enjoy a government-subsidized price per kilowatt hour as high as 80.2 cents -- about 2400% higher than the typical spot price for electricity in Ontario.

A credible threat from the leader of the Progressive Conservatives is a very bearish development for Canadian renewable energy producers. Hudak's is the latest voice in a growing chorus of commentators who denounce the FIT program as an unsustainable initiative that is significantly increasing electricity costs for households in the province.

Could the provincial Conservatives win in October?

The next provincial election is scheduled for October 6th 2011 and the outcome is anyone's guess. While Dalton McGuinty's Liberal Party won a sizable majority in 2007, there has since been a pronounced rightward shift in the Ontario electorate. Right-leaning populist Rob Ford handily defeated Liberal Party insider George Smitherman to become mayor in Toronto's municipal election of 2010. And Stephen Harper's Conservative Party annihilated the Liberals in the national election earlier this year, handing the once-dominant party its worst defeat in Canadian.  Some of the most surprising and decisive Conservative victories in the federal election were in Ontario ridings.

Voters are increasingly conscious of Ontario's ballooning budget deficit and spiraling debt levels which, by some measures, outstrip California's fiscal hole on a per-capita basis. They have also grown suspicious of the Liberal government for introducing new stealth taxes, most notably the infamous Harmonized Sales Tax. And combined with the prospect of higher interest rates on the horizon making home mortgage payments even more expensive, Ontario residents may well be inclined to vote for the party with the most realistic plan to relieve some of the pressure on household budgets, especially with respect to tax and energy expenses.

Adding to the likelihood of change or elimination of the FITprogram is a formal complaint filed at the WTO by Japan in September 2010, alleging the program illegally discriminates against Japanese firms due to the minimum levels of "Canadian content" required to qualify for the subsidy. Soon after Japan's initial filing the United States and European Union formally joined the complaint on September 24 and 27, 2010, respectively. 

How to play it:

One company that looks particularly exposed to these developments is Canadian Solar Inc (NASDAQ:CSIQ). CSIQ's revenue sources are uniquely exposed to changes in Ontario government energy policy due to high geographic concentration in the province. Canadian Solar Inc has benefited from the current policy in two ways. First, it has enjoyed inflated revenues from artificially high prices received for clean energy through the FIT program. Additionally, it has benefited from the FIT program's stringent Canadian content requirements on labor and materials which prop up demand for its products and services solely because the company happens to be Canadian. The WTO complaint specifically threatens the Canadian content advantage, while a Conservative victory in October could be toxic for CISQ on all fronts.

Stocks: CSIQ