December 18, 2011 / 3:42 PM / in 6 years

Upside lurking in battered green energy sector

TORONTO (Reuters) - Many stocks in Canada’s battered green energy sector may be set for gains in early 2012 as the Ontario government wraps up its review of the generous rates paid to producers and provides investors with much needed clarity.

Like Germany, Canada’s most populous province pays well above market rates for solar, wind and other renewable power under its feed-in tariff (FIT) program, in a bid to spur development of a local green energy industry.

Those rates are widely expected to fall after the review, which follows a provincial election in which the high cost of green power was a flashpoint.

Projects that are already in operation or near commissioning will not be affected by the new tariff, as they are locked into long-term power purchase agreements under the old regime.

But analysts said there may be upside lurking in companies with early-stage projects, to which investors are currently assigning little or no value. That could change if Ontario ramps the program back up in early 2012.

“For the public stocks, they are not getting any value for the pipeline,” said John McIlveen, an analyst at Jacob Securities.

“The junior developers are undervalued. If I look at what the values of some of these companies would be in the private market, I think their public market caps are below that.”

McIlveen highlighted Western Wind Energy Corp WND.V, a TSX Venture Exchange-listed company with wind farms in operation in Arizona and California and a pending FIT application for a solar project in Ontario, as one company that should be trading higher.

M Partners analyst John Safrance said larger developer Algonquin Power & Utilities Corp’s (AQN.TO) stock might see a lift after the review.

Late in November, Algonquin said it had acquired a 10 megawatt solar project with a FIT contract, along with an option on 10 additional projects with pending FIT applications.

“That would be a pretty significant undertaking for the company,” said Safrance of the options, adding the structure of the deal eliminates most risks inherent in the review.

“The option is based on these projects actually being awarded a feed-in tariff contract, but also on whether or not the economics makes sense.”

Among Algonquin’s developer peers, Northland Power Inc (NPI.TO) would seem to have its hands full with existing FIT projects, but Capstone Infrastructure Corp CSE.TO might look for new opportunities as the industry stabilizes, Safrance said.

To be sure, it is not difficult to see why investors are spooked by companies tied to Ontario’s green energy program, which guarantees 20-year contracts for renewable energy producers that use domestic content, like Ontario-made wind turbines.

Introduced by the Liberal government in 2009, the program became a political football, with the opposition Progressive Conservative party threatening to scrap it.

Even though they won this fall’s election, the Liberals lost their majority in the legislature, putting the longevity of the government and their green energy push into question.

The number of applicants hoping to lock into the high prices overwhelmed regulators, and a recent report from the province’s auditor slammed the cost and oversight of the program.

Investors also see falling tariffs in Europe and competition from Chinese manufacturers battering the renewable energy industry globally, especially in solar.

Nearly everyone agrees that Ontario’s rates for solar power will fall, perhaps as much as 25 percent. A smaller cut is expected for wind, as costs have fallen less in that sector.


While they see business picking up after the review, companies working in the sector are only too aware of broader problems it will probably not resolve.

Carmanah Technologies Corp (CMH.TO), which does engineering, procurement and construction work for mainly rooftop solar installations, said the election hurt its orders over the summer, typically its busiest season.

But other sources of frustration are the long delays in awarding contracts and connecting projects, some of which are caused not by the review, but the province’s limited transmission capacity.

“There’s a very large and intricate program with lots of stakeholders trying to be implemented in a very short timeframe, and not enough perhaps due diligence was done on the front end,” said Richard Wayte, general manager of Carmanah’s grid-tie division.

These regulatory risks are what steer Michael Clare, who co-manages an alternative energy fund at Toronto investment management firm Creststreet, away from smaller players.

“In the alternative energy or clean technology sector, scale is very important, and the opportunities we look at are companies that don’t necessarily rely on the subsidies, because there’s always the risk that they could go away,” he said.

While FIT programs are meant to shelter companies until they can compete on the global market, Clare notes they will eventually come up against bigger players like Arizona’s First Solar Inc (FSLR.O). Small manufacturers also face fierce competition from major Chinese equipment makers.

“There are already companies out there with enough scale that it makes it difficult for some of these smaller start-ups to compete,” he said.

Editing by Jeffrey Hodgson

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