GMP Research explains Ontario's big news for renewable power projects

At last, some good news for our friends in the alternative energy sector. Wellington Financial Fund III has done two renewable energy deals so far, Ventus Energy and Biox Corp., and we watch the sector very carefully.

The Ontario Provincial Government has really stepped up, and good for them. Commercial players may find the economics more appealing than residential types: a 12 year payback during a recession would be a dead end for most homeowners. But progress on other fronts is clear. Who knows, the Ontario Gov’t might turn their mind to helping to solve the challenges in Ontario’s venture capital market, as well.

This from GMP Securities‘ equity research department:

“Ontario proposes to introduce very attractive feed-in tariffs for renewable power projects

• Proposal would provide the world’s highest solar feed-in tariffs

• Program would benefit hydro, onshore and offshore wind, solar,
biomass, biogas, and landfill gas

• Provides for long-term price guarantees to increase investor confidence and access financing

• Directionally positive for our coverage group; specifically BLX, KHD, CMH

Boosts developers project returns

Following the February 23rd announcement of the proposed Green Energy Act (GEA), the Ontario government yesterday (March 12th) unveiled some details of its proposed feed-in tariff prices. The Act is
intended to generate approximately 50k jobs in the renewable energy sector, expedite the permitting process for renewable power projects, offer prices for different technologies and project sizes, and provide long-term price guarantees to increase investor confidence and access financing.

The government believes that these tariff levels would allow renewable energy producers to cover total project costs and provide a “reasonable” rate of return over a long-term contract of 20 years. The proposal will go through an 8 week consultation process from March 17 to May 5 where stakeholders will be given the opportunity to provide feedback on its details. In addition, eligibility criteria will be
determined. We note that there was no mention of min/max capacity that would be funding by this initiative.

The question of “reasonable” return needs to be considered for there was no explicit IRR mentioned. In addition, while costs assumptions were provided, there was no mention of assumed capacity factors.
The backgrounder on the initiative provided the following examples:

• Example 1: A homeowner in Ontario would be looking at a residential scale Solar PV project of about 3 kilowatts, which costs around $30,000. This would provide enough electricity to meet one third of their consumption and would generate about $7 per day. This payment
would result in approximately $2,500 in revenue per year for the homeowner, resulting in about a 12 year payback. In addition, the government is expected to introduce plans to provide groundsource heat pumps.

• Example 2: A farm based 250 kW bio-digester would cost around $1.7 million to install, and could earn back this investment in about a 12 year time frame, depending on its operation.

• Example 3: A 10 MW, community owned wind farm in Ontario would cost around $32 million to construct, and is expected to have a 10 year payback.

We note that the proposed tariff prices would represent North America’s first guaranteed pricing structure for various forms of electricity production.

Details of the proposed feed in tariff pricing include the following;

Biomass*

Biogas*

Waterpower*– Community Based

Landfill gas*

Solar PV
– Rooftop
– Ground Mounted ? 10 MW 44.3

Wind
– Onshore
– Offshore
– Community Based

These tariffs compare to the existing Ontario’s Standard Offer Program (SOP) which offers $0.11/kWh (2006 base) to producers of wind, biomass and small hydro energy and $0.42/kWh for solar
photovoltaic energy. The term of the contracts is 20 years with an inflation adjustment. In addition, the SOP has no limit to the number of projects that may apply for a contract, but the size of each project is capped at 10MW.

The new proposed tariffs would provide power project developers higher returns than the current SOP and encompass larger scale projects (>10MW).

Specifically for solar, the proposed levels would catapult Ontario to providing the highest solar feed-in tariffs in the world: Ontario would provide 44.3 cents/kWh for ground mounted solar installations less
than 10 MW, and 71 cents/kWh for smaller projects between 10-100kW. This compares to Germany that offers euro 41 cents/kWwh for roof mounted installations between 30-100kW and euro 32-34
cents/kWh in Spain.

INVESTMENT CONCLUSION

While the details of the program in terms of eligibility and total size have yet to be established, we believe the Ontario Green Energy Act is positive for our coverage group. Specifically we highlight BLX and KHD that may directly benefit from the proposal as a result of their uncontracted Ontario development projects. In addition, we believe the proposal is positive for CMH’s Solar Power systems division. We are not making any changes to our estimates, target prices or recommendations on these stocks.”

MRM