A Great Time to Invest in Canadian Electricity Projects

In 2008, singer Kenny Chesney had a big hit with his recording of “Everybody Wants to Go to Heaven” (but nobody wants to die).   We can all smile at the humorous contradiction in the title of the song, yet our attitudes in other areas of our lives may be equally irrational.   An excellent illustration of irrational hope is found in public attitudes towards electricity.  Everyone wants their electricity to be reliable and “green” – that is like going to heaven.  But nobody wants to pay for electricity that is costly (green power) – that is like dying.

Much of the Western world's power generation is approaching the end of its useful life and will need to be replaced, just to maintain the present level of supply; and there is also a need for expansion.  In many European countries the price of electricity has been considerably higher than in North America, so their economies have adapted to such prices, but North American prices, traditionally relatively low, are rising, and are poised to rise more rapidly.  This is partly because of historical underinvestment in generation capacity, which now needs to be corrected, and, more recently, partly because of large government subsidies for high cost, small-scale hydroelectric, wind and solar projects.  As these projects are constructed and connected to the grid, their much higher cost per kilowatt-hour will be injected into electricity pricing.  Sticker shock in electricity is coming to North America.

Nuclear power has no greenhouse gas emissions, and so it might be classified as green power, yet opposition to it from environmentalists is probably the most aggressive of any form of power generation.  That may be why Germany is planning to phase out its nuclear generation. The serious incident at the Fukushima Daiichi nuclear power plant in Japan on March 11 of this year has made it more difficult to attract investment for nuclear generation everywhere.  Hydroelectric generation is also green, but the large dams frequently required to generate it have serious environmental consequences, are risky if constructed in earthquake areas, and often require long and costly transmission lines to bring the power to market.  Coal, which is abundant, inexpensive and capable of having very low emissions with current technology, faces such strong popular objections that it is being phased out entirely in Ontario, Canada’s largest province.  Even wind generators are frequently opposed by local residents on grounds of noisiness and “visual pollution”.  Only solar panels seem to have no strong opposition (at least, not yet), but solar power is far too expensive and intermittent to form the majority of any nation’s generating capacity.

Canada still has large undeveloped hydroelectric resources, good wind power sites on both the Atlantic and the Pacific coasts and at certain inland locations, and government support for wind and solar power projects. As well, the regulatory approval processes for environmental and licensing approvals have been streamlined, both federally and in the major provinces.  The time required to obtain regulatory approvals, and the difficulty in overcoming local objection to any new power generation are less severe in much of Canada than they are in much of the US, with its strong constitutional protection of property rights.  A shorter interval between capital investment and the beginning of revenue receipt reduces project financing costs and increases profitability.

Much of the nuclear capacity in Canada is owned by the Ontario government corporation Ontario Power Generation.  Some of these generators are aging and need to be replaced, preferably with public-private partnerships in joint ventures.  New nuclear generation in many countries receives some government support, and Canada is no exception.  Even in Alberta, with abundant coal, and in Quebec, with abundant hydro capacity, new nuclear power stations are being actively considered.

Canada is well-positioned to be part of the US power supply solution.  Most Canadian provinces are inter connected with US electricity grids, and frequently, export power to the US.  As US demand grows, Canadian generation, located close to the US border, is likely to provide an even larger share of the US supply.  Canadian generating capacity must also expand to meet Canada’s growing domestic needs.  Provincial governments that own large generating capacity (like British Columbia, Ontario and Quebec) are increasingly turning to private power generation to make their markets more competitive, thereby allowing private rather than public debt to finance this capacity expansion.

Canada’s banks, insurance companies and investment dealers have all survived the recession well, and, unlike US financial institutions, needed no government bailouts or loans.  They continue to lend to financially strong borrowers.  Several of these financial institutions have specialized units that focus on the electricity industry. With readily-available debt capital, there are excellent investment opportunities for both domestic and foreign investors.

An investment in the Canadian electricity industry does not guarantee financial heaven.  Nor is it likely to be a leading cause of death.  However, the level of risk in the Canadian energy investment environment, compared to some other jurisdictions, is relatively low, and there are good returns to be obtained.

Andrew J. Roman is a Partner at Miller Thomson LLP in Toronto. Andrew has over thirty years experience in all aspects of electricity law and policy in Canada, and with all forms of electricity generation and transmission and distribution.  He has worked on electricity files related to compliance with electricity legislation, regulatory approvals and financing.  Mr. Roman has advised clients from outside of Canada on proposed investments in the electricity industry in Canada.  

Mr. Roman is a frequent conference speaker or chair at energy conferences.  He has been a seasonal lecturer at four law schools and, in 1998, held the visiting Chair of Natural Resources Law at the University of Calgary.  His memberships include the International Nuclear Law Association.  He can be contacted on +1 416 595 8604 or by email at aroman@millerthomson.com 

The information in this article reflects solely the views of the author and should not be taken as, used or relied upon as investment advice or legal advice. Any decision to buy or sell any securities or otherwise make any decision relative to the subject matter of the article should depend on individual circumstances and many other factors and considerations.