The Mining Report: Where is the renewable energy space headed in terms of profitability?
Rupert Merer: Most renewable power companies have long-term production contracts that provide a relatively low-risk return on invested capital. This is a capital-intensive industry with a lot of invested debt and equity capital. There is excellent visibility on cash flow and revenues—as long as 40 years out in the case of small hydro contracts. The duration of small wind and solar contracts is 15–20 years.
With steady cash flow, the renewables sector can provide dividends of more than 5% for income seekers, typically with good visibility on future dividend growth. As solar and wind power have seen rapidly declining costs over the last few years, they have also seen very high growth. We think that this growth will continue and there should be an increasing number of investment opportunities.
TMR: What are “sustainability investors”?
RM: There are a few funds in Canada, the U.S., and the United Kingdom that invest only in renewable power assets. Some of these fund managers believe that there is an inherent risk with fossil fuel investments. Of course, if governments start to tax carbon at a higher rate or introduce cap and trade, then that could be a limiting factor for using fossil fuels to generate electricity.
Investors in the energy sustainability space typically look for a ratio of more than 50% clean energy in the stocks in their portfolios. Clean energy includes renewables and power plants that use natural gas, provided that the plants are high-efficiency co-generation plants or combined cycle plants.
TMR: How does a renewable energy project secure a long-term contract?
RM: That depends on the jurisdiction. The Canadian power market is regulated at the provincial …read more