Canada’s dirtiest province is cleaning up its act, and that’s expected to result in $7 billion (US$5.2 billion) in new debt from power companies such as TransAlta Corp. to fund green energy projects in the coming years.
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Alberta, the nation’s largest provincial carbon polluter, will need to replace about 6,000 megawatts of coal generation capacity with cleaner fuel sources such as wind and natural gas to meet the government’s deadline for 30 per cent renewable energy and to rid the province of coal by 2030. Half of that new power is expected to be financed by debt, said Stephen Goltz, a Toronto-based credit analyst at Standard & Poor’s said.
While investors are hungry for long-term assets like electricity generation, lenders will likely need to see government support for renewable energy before taking a wager on companies already suffering from weak power prices and the risk of stranded assets.
“These are long-term projects that are highly finance-able like other major long-life predictable infrastructure,” said Robert Mark, director of research at money managers MacDougall, MacDougall & MacTier Inc. in Toronto. “Markets want to lend to this kind of project and tend to be highly skewed to debt. That’s because investors want that and rating agencies approve of them.”
Alberta Premier Rachel Notley unveiled last month sweeping changes to the province’s climate policy, including the faster transition from coal to more renewable and natural-gas power; an economy-wide carbon price and a cap on oilsands emissions. Coal currently generates more than half of the province’s electricity and the government plans to use renewable energy certificates to provide an incentive for companies to build new wind turbines and install solar panels.
Alberta’s largest generators TransAlta and Capital Power Corp., along with city-owned utilities Enmax Corp. and Epcor Utilities Inc., already have more than $8 billion in outstanding notes, according to data compiled by Bloomberg.
Both TransAlta and competitor Capital Power are rated BBB- by S&P, one step above non-investment grade. TransCanada Corp., which owns more than 11,000 megawatts of generation in other parts of Canada and the U.S., is rated A-, while Enbridge Inc., with more than 2,000 megawatts of renewable power capacity, has a BBB+ rating.
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Power company debt has already been struggling this year. The price for TransAlta’s $400 million of notes with a 5 per cent coupon maturing in 2020 have declined 10 per cent this year as the company settled price-fixing charges and faced lower power prices in Alberta while carrying almost $5 billion of debt. Enbridge’s US$800 million of U.S.-dollar denominated debt maturing in 2023 has fallen 7 per cent this year.
Alberta has been an “attractive” place for wind and renewable power developers, Enbridge spokesman Glen Whelan said in an e-mail, referring to comments Monday by Chief Executive Officer Al Monaco.
“To encourage private sector investment, several things need to come together: good wind resources and transmission infrastructure, financial and operating capability to build new generation and a strong policy framework that drives robust commercial structures,” Monaco said in a statement with other industry leaders. “We see all three coming together in Alberta.”
Alberta, Canada’s fourth-largest province by population, is the country’s largest carbon emitter because of its use of coal for electricity generation as well as its expanding oilsands industry. Notley has promised more details on the phase-out, compensation and specifics on how to support renewable energy.
That will be critical for investors who are considering making investments in Canada’s only deregulated market for electricity, said Duane Bratt, a professor at Mount Royal University in Calgary.
“For investment to happen, companies are going to need long-term purchase agreements,” he said.
Not all bond investors have had luck with renewable energy. Abengoa SA, the struggling Spanish renewable energy producer, filed for preliminary creditor protection last week as it negotiates with its debt holders. The company has been seeking to reassure investors that it can generate enough cash to service a consolidated gross debt pile of about 9 billion euros (US$9.5 billion).
Even an incremental increase in renewable power will require investment and financing for grid and transmission equipment to distribute electricity from a large number of smaller production sites.
“There’s a significant investment that’s going to be required in the grid infrastructure,” said Gerard McInnis, a partner at Ernst & Young LLP, who leads the power and utilities practice in Canada. “A lot of renewables by their nature are more distributed, and getting them tied into the main transmission lines is also not insignificant in terms of the investment.”