3rd Annual Canadian Power Finance conference: outlook for 2012 and beyond

February 3, 2012

The 3rd Annual Canadian Power Finance Conference held in Toronto last week brought together a number of executives from some of the leading developers, investors and lenders in the Canadian energy market. Most of the sessions focussed on renewable energy, particularly wind, solar and hydro.

The tone was relatively optimistic for growth for a number of reasons including attractive medium-term renewables targets in provinces like Nova Scotia and Ontario and the need for large amounts of new energy infrastructure across Canada. Members of the developer panel were confident Canadian power purchase agreements will be attractive to lenders and other financing parties in late 2012 and beyond as procurement programs elsewhere in the world slow down. Most panelists anticipate significant consolidation and a lot of M&A activity this year. Still, there were concerns raised about the lower demand for energy and increasing government scrutiny over ratepayers’ costs.

Speaking in regard to independent power producers, panelists said they expect lots of requests for proposals (RFPs) to continue out of British Columbia for the foreseeable future. Alberta is also looking relatively attractive as it is expected to grow at 3% annually and to shut down a number of coal plants over the next decade or two. There should be opportunities for RFPs in Ontario, if somewhat lesser than had been expected given what may be a situation of oversupply in the short term. With a certain amount of attrition expected from Ontario’s feed-in tariff contract holders, the phase-out of coal, and the possible drop in nuclear energy production, panelists expect the need for supply in Ontario to increase significantly from 2016.

Domestic and foreign lenders were confident significant capital is available for good projects with experienced sponsors. Canadian lenders seemed to have a good amount of capital and were praising the flexibility offered by micro-perm tenors. Where European lenders may have slowed, Asian, particularly Japanese, lenders are increasing their presence in the Canadian market. While European banks expressed optimism, given market turmoil, it sounds as though the construction + 18 year tenors often seen from European banks may not remain the norm going forward and rates may not be as favourable from European banks given the cost of currency and Euro liquidity concerns.

The private equity and infrastructure fund panel was also optimistic. Because of their higher cost of capital, they tend to prefer projects with some issues where they can take on a more active role and provide more value-add.

Lenders suggest they are requiring a higher degree of due diligence for nuclear projects in the wake of the Fukushima disaster. There may be possibilities for new builds in Saskatchewan and New Brunswick, and maybe Ontario as well though there are conflicting messages coming out of Ontario in this regard.

Some activity in transmission line building is expected in the short term in particular to connect new energy to the grid: from Southern Alberta, down from Fort McMurray, and in Ontario along the north shore of Lake Superior. A current project running from Québec down to New York City is benefitting from little community pressure given the use of high-voltage direct current (HVDC) technology that is installed underground.

The topic of community and First Nations involvement featured prominently throughout the conference. Developers stressed that by engaging with local communities at the earliest stages of a project, maintaining transparency, and investing in the local economy, renewable energy projects are increasingly gaining widespread support not only for providing cleaner energy but also for stimulating economic development in otherwise stagnant regions of the country.

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