GMP Securities on alternative energy

Here is a neat snapshot from GMP Securities research team regarding Ontario’s pre election electricity spin:

Yesterday (Aug. 29) the Ontario Power Authority (OPA) together with the Ontario Electricity Board (OEB) filed their milestone 20-year plan for the provinces’ electricity future. The plan, which took two years to complete, is intended to be a roadmap to ensuring a reliable, adequate and sustainable longterm electricity supply for the province.

The Integrated Power System Plan (IPSP) is an action plan with a 20-year outlook. The IPSP will be updated every three years in order to adapt to the changing demands on electricity generation and to incorporate new opportunities or new technologies.

New 20-year plan calls for $60B of capital costs Conservation, renewable energy, nuclear and natural gas are all cornerstones of Ontario’s new plan.

Specifically the plan includes the following targeted goals:

• A doubling of the amount of renewable energy on the grid by 2025,

• The phase-out of coal-fired generation by the end of 2014,

• The refurbishment or replacement of the province’s baseload nuclear capacity,

• Transmission upgrades

Capital expenditure has been estimated at $60B over the next 20 years. Plan expected to increase electricity costs by 15-20%. A key goal of the plan is to phase-out greenhouse-gas emitting coal plants. This means closing 6,434 MW of coal-fueled plants. This initiative may jeopardize the provinces’ ability to adequately meet the demands for electricity. The concern is that the province may face power shortages as it reduces emissions and demand begins to exceed supply in 2014. Ontario delayed plans to shut down its coal plants by five years to 2014 to prevent blackouts just last year.

With the closing of coal-fired plants and the likelihood of demand for electricity outstripping supply, the Ontario ministry of energy believes that electricity costs are likely to increase by between 15 and 20% going from $90/MWh to $115/MWh by 2020.

We believe Canadian Hydro Developers and Boralex benefit directly from the doubling of renewable energy (KHD: BUY, Target $7.60; BLX: BUY, Target $19.30)

We believe that the IPSP provides a positive backdrop for companies that use renewable technologies for electricity generation. Our positive thesis on both KHD and BLX is predicated on a favourable policy environment that both encourages renewable energy generation with specific incentives and mandates its incorporation into the existing energy portfolio.

We expect that the goal of doubling the amount of renewable energy on the grid by 2025 will provide a direct benefit to both KHD and BLX as plant construction opportunities expand.

Universal Energy Group to benefit from pricing uncertainty (UEG: BUY, Target $22.25)

We believe that as the IPSP begins to take shape, any electricity pricing volatility will work to UEG’ s favour. As an electricity and natural gas retailer, UEG essentially sells an insurance product that protects customers from price volatility. The merits of the product can be demonstrated regardless of the commodity price levels but as price volatility increases so too will the value of insurance in the eyes of the consumer. We believe that UEG will see accelerated growth in its RCEs with a volatility laden electricity price environment.

MRM