Investing in the sun | how to invest in canada’s most abundant natural resource
By: Paul Ghezzi
The solar energy power generation industry has surpassed 30,000 Megawatts globally and continues to outpace the growth of traditional fossil fuels. What is fueling this growth? And what is the best way to participate?
There are three key factors driving solar energy power generation growth:
The first is related to the massive cost decline in solar panels. Since the year 2000 the cost of solar panels has declined by 80%, while the cost to extract a barrel of oil has more than doubled. The cost decline in solar panels has been terrible for solar energy stocks, which trade on the public markets, but conversely has been very beneficial for private infrastructure investment in solar power generation. The drive by manufacturers to consolidate and to continue to lower the costs of solar panels directly benefits those firms who are focused on acquiring solar panels for their solar energy power generation projects. This trend is expected to continue for the next 3 years as the solar manufacturing sector remains in the midst of a global industry consolidation.
The second reason is related to Feed-in Tariff (FIT) Programs which support the installation of renewable energy with guaranteed energy pricing and the stability of 20 year Power Purchase Agreements. Germany is the global leader in installed solar energy power and is now producing approximately 40% of its peak energy through solar energy. Germany, under its Federal Energy Act (EEG), has installed more solar energy power than twice the amount of energy which the Province of Alberta consumes on an annual basis. As the global leader in installed solar energy power generation, Germany’s renewable energy legislation has been adopted by many other countries and states.
In 2009, the Ontario Government passed into law the Green Energy Act with a FIT Program similar to Germany. Since that time Ontario has attracted over $20 Billion in private sector investment and awarded more than 2,000 megawatts of solar energy Power Purchase Agreements and 3,000 megawatts of wind energy Power Purchase Agreements. The Power Purchase Agreements issued by the Ontario Government include a guaranteed FIT rate, per kilowatt hour, for renewable energy power generators. A Power Purchase Agreement carries with it the rating of the underlying issuer, and in the case of Ontario Government an AA- rating. This makes Power Purchase Agreements attractive as a form of security for debt and equity financing.
However, Power Purchase Agreements also have their limitations. The amount of energy that can be sold into the electricity grid, under a Power Purchase Agreement, will depend on each specific renewable energy installation and how well each installation is managed. In this regard Power Purchase Agreements can provide revenue certainty and transparency but do not take away the inherent business risks of owning and managing power generation investments.
The third reason solar continues to grow at above average rates globally is the continuous improvement in the bankability and reliability of solar energy panels. The term bankability refers to the quality and reliability of the solar panels to produce a desired amount of energy output over the life of the Power Purchase Agreement. Solar panels, produced by the world’s leading manufacturers, have a useful life in excess of 40 years and a 25 year performance output warranty. The warranty provides that the power output of the solar energy installation will not be lower than 90% of the expected output for the first 10 years and will not be less than 85% of the expected output for the remaining 15 years. The bankability of solar energy power generation is attracting significant investment from traditional power producers who are diversifying their power generation assets. Most recently in Ontario, Enbridge and TransCanada have collectively invested over $1 Billion in the ownership of large solar energy power generation installations. These installations include the use of solar panels with a strong track record of performance and an underlying 25 year original equipment manufacturing warranty.
How can Investors Participate?
- Build to Own: Most Canadian homeowners, depending on locality, now have the opportunity to become their own power generator by building a solar installation on the roof of their home. The power they generate can either offset their electricity use or may be sold into the local electricity grid.
- Public Markets: Investing in pure play solar energy opportunities in the public equity markets is another option. While the public markets are liquid they are highly volatile and solar energy stocks have performed poorly. This trend will likely continue as the solar manufacturing industry continues to consolidate.
- Exempt Market Offerings: Private infrastructure investments in solar energy power generation, backed by long-term Power Purchase Agreements, offer investors an income and growth opportunity. Compared to the public equity markets, participating in the ownership of solar power generation assets, through a limited partnership or mutual fund trust can be more stable and less volatile. Private infrastructure investments are not meant to be traded like public stocks. In this regard investors who demand instant liquidity are likely not well suited to owning long-term energy infrastructure investments. There are also risks inherent in the ownership and operation of a solar energy power generation installation. Investors must carefully read the Offering Memorandum for any solar energy investment and clearly understand the risks associated with the underlying business of power generation and the Offering.
With the cost of solar panels continuing to decline many Provinces are seeking opportunities to grow their solar energy power generation portfolio. Ontario is now the leading Province in Canada to adopt solar energy; however the future for the growth of solar energy power generation across Canada is very bright.