Renewable power firms weather the storm

SHAWN MCCARTHY
Globe and Mail
October 27, 2008

Hit hard by the credit crunch and tumbling oil prices, strong green energy companies remain optimistic about growth

VANCOUVER -- Renewable power developer John Keating surveys the credit markets in crisis and heaves a sigh of relief, knowing how close he came to becoming another victim of the financial storm that has raged since early September.

In June, the TSX-listed, Calgary-based Canadian Hydro Developers Inc. closed two debt financings worth more than $700-million, money that is needed to complete construction of three wind energy projects that will add 500 megawatts of capacity to the company's portfolio.

"If I'm not losing sleep now, it's because we moved when we did to get our financing in place," Mr. Keating, Canadian Hydro's chief executive officer, said in an interview. "If we had waited two or three months, we would have had $750-million in projects not proceeding."

The financial crisis is rocking the capital-intensive renewable energy sector, driving up borrowing costs - where credit can be obtained - and threatening project profitability. At the same time, the slumping price for crude oil and natural gas has eroded the competitive position of alternative energy sources, in both the power and transportation sectors.

As a result, the global clean-tech sector has seen its share prices drop even more dramatically than the overall market. Analysts and company executives in the renewable energy industry expect a wholesale consolidation as weaker firms drop by the wayside, and the stronger ones take advantage of strong balance sheets to make acquisitions.

Still, many investors remain optimistic that the renewable energy sector will continue its long-term growth path, driven by public concerns about climate change and energy security, and by oil and natural-gas prices that are expected to climb again when the economic recovery takes hold.

"As the financial markets stabilize, many climate-change sectors should recover early, both in public and private markets, as they have regulatory support and strong long-term growth prospects," Mark Fulton, head of climate-change investment research at Deutsche Bank, said in a report last week.

In the meantime, however, there will be casualties as companies are squeezed by tighter credit or shrinking demand, Mr. Fulton wrote.

Well-established firms are still concluding debt and equity deals, particularly private placements that rely on pension funds, private-equity funds and other financial institutions that have specific allocations for clean-tech investments, said Sasha Jacob, chief executive officer at Jacob & Co. Securities Inc.

But in many cases, the cost of capital has risen sharply, undermining the rates of return expected by the developer, and demanded by their financiers.

However, the Canadian market offers clear advantages to both domestic and international renewable-power companies.

That's because most provincial utilities sign long-term power purchase agreements with developers, while renewable projects in the U.S. - and in Alberta - must compete to sell power to the utilities under a system known as the merchant model. The guarantee of cash flow from a financially solid government agency makes financing easier for companies than it would be if they were operating in a purely competitive marketplace.

Even as credit markets were tightening this summer, Mr. Keating managed to raise financing for wind projects that have guaranteed contracts with the Ontario Power Authority, including the $450-million Wolfe Island development near Kingston, and the $285-million Melancthon II near Shelburne, Ont.

It helped, Mr. Keating said, that the company has a portfolio of some 20 projects generating cash.

Like other industry executives attending the Canadian Wind Energy Association meeting in Vancouver last week, Mr. Keating remains optimistic about the longer-term prospects for the wind industry.

Provincial governments - spurred by commitments to reduce greenhouse gas emissions - are accelerating the expansion of renewable power supply.

Canada has increased its wind power capacity from 137 megawatts in 2000 to the current 2,400 megawatts, with another 1,000 megawatts expected to come online next year.

At last week's meeting in Vancouver, energy ministers from Ontario, British Columbia, New Brunswick and Prince Edward Island re-affirmed their commitments to renewable power - including wind, small-scale hydro and biomass.

However, the provinces have yet to assess the impact that the current economic downturn will have on future electricity demand, and therefore, how much additional power supply they will need.

Increasingly, international giants like French-based GDF Suez, FPL Energy LLC - a division of Florida Power and Light - and General Electric Co. are targeting Canada.

"This is a good market for companies like Suez to participate in," said Jeff Jenner, senior vice-president for the company's North American division. "The opportunities are bountiful and there are fewer potential barriers."

He expects to see a spate of mergers and acquisitions as smaller and medium-sized firms struggle with the capital-market fallout.