How To Make Money In Renewable Energy: NBF's Rupert Merer

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As the political and financial pressures on fossil fuels mount, investors are starting to explore the renewable energy space with an eye toward reaping its potential. Rupert Merer analyzes that growing energy sector for National Bank Financial and tells The Mining Report why betting on the future of renewables is a prudent strategy for profit growth.

Wind power

The Mining Report: Where is the renewable energy space headed in terms of profitability?

Rupert Merer: Most renewable power companies have long-term production contracts that provide a relatively low-risk return on invested capital. This is a capital-intensive industry with a lot of invested debt and equity capital. There is excellent visibility on cash flow and revenues—as long as 40 years out in the case of small hydro contracts. The duration of small wind and solar contracts is 15–20 years.

With steady cash flow, the renewables sector can provide dividends of more than 5% for income seekers, typically with good visibility on future dividend growth. As solar and wind power have seen rapidly declining costs over the last few years, they have also seen very high growth. We think that this growth will continue and there should be an increasing number of investment opportunities.

Chart 1

TMR: What are "sustainability investors"?

RM: There are a few funds in Canada, the U.S., and the United Kingdom that invest only in renewable power assets. Some of these fund managers believe that there is an inherent risk with fossil fuel investments. Of course, if governments start to tax carbon at a higher rate or introduce cap and trade, then that could be a limiting factor for using fossil fuels to generate electricity.

Investors in the energy sustainability space typically look for a ratio of more than 50% clean energy in the stocks in their portfolios. Clean energy includes renewables and power plants that use natural gas, provided that the plants are high-efficiency co-generation plants or combined cycle plants.

TMR: How does a renewable energy project secure a long-term contract?

RM: That depends on the jurisdiction. The Canadian power market is regulated at the provincial level. Ontario is the most populated province in the country and it has been the most aggressive at developing renewable power over the last decade. In the past, the government has offered fixed price contracts, or "Feed in Tariffs," for renewable power at a price that would provide an attractive economic incentive for developers. However, generally, in Ontario or in other provinces, firms will bid on, say, delivering 200 megawatts (200 MW) of wind power, under a competitive request for proposal. The contract will typically go to the lowest price bid from a viable entity.

In the U.S., contracts are often arranged between developers and utilities or businesses in the private sector. Projects have typically also included financial partners that have purchased tax credits from the developer.

TMR: Given that wind and solar intermittently generate pulses of energy into the grid, has the grid developed the capability to access renewable energy when it is live, while compensating for it when the generator goes temporarily fallow?

RM: The easiest way to compensate for intermittency is to increase transmission capability.

If the local area has more wind or solar power than it can use, it can send it to a neighboring region. Another way to manage intermittency is to decrease the use of power on the grid when there is a deficit of renewable energy. For example, operators can shut off air conditioning loads when there is a deficit of power. As the amount of renewable power grows, we will need to find better ways to store power.

Today, the best way to manage volatility in electricity supply is the regulation of hydropower production. With our hydro capability, Canada is a giant battery for the U.S! British Columbia controls about 13 gigawatts (13 GW) of hydro. It actively trades power back and forth with California. In Quebec, more than 30 GW of hydro leverages a storage capability that can trade power with the Eastern Seaboard. Manitoba trades 10 or 13 GW with the Midwest. This works for Canada today, but it may not be enough in the future.

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1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and ...

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Igor Livshin 3 years ago Contributor's comment

Still guessing the market?