Canada's power sector today is at the intersection of a number of challenges and opportunities. Interest from investors in power sector assets, especially financial investors and Indigenous communities in Canada, is higher than ever. At the same time, the sector is working to balance regulatory and citizen concerns around consumer pricing for utilities which need capital investment in essential upgrades to keep the sector well positioned for the future.
Move from development to the secondary market
During the last 15 years, the energy space in Canada has been dominated by project development work in the generation sector, with significant renewable and gas-fired projects undertaken as various provincial governments worked to manage their supply mix. The result was a substantial addition of capacity across the country in power generation assets, including renewable assets like wind and solar. In recent years, we have seen many of those assets change hands, with Canadian domestic deal activity in the power sector rising steadily since 2016 (Figure 1). The majority of power transactions have involved Canadian targets which are independent power producers and electric and gas utilities (Figure 2). Since 2015, these transactions have mostly involved asset sales (Figure 3). Many sellers are looking to free up capital to deploy elsewhere.
Figure 1: YTD power M&A deal value and volume
These transactions have been attracting investment from institutional investors, particularly pension funds, and financial investor interest in the sector has increased significantly in the last few years (Figure 4). Power assets are particularly well suited for long-term investors, such as pension funds, which have corresponding long-term liabilities. The asset class offers long-term, inflation-indexed returns, which typically provide stability over time.
As institutional investors look for investment opportunities in this asset class, competition for power assets is intensifying and as a result, we are seeing Canadian institutional investors increasingly look both domestically and worldwide for opportunities in the sector, with strong outbound activity particularly in 2018 (Figure 5).
Figure 2: Industry breakdown
Figure 3: Target type
Addressing aging infrastructure and preparing for the future
After substantial investment in Canadian power infrastructure assets that commenced in the mid-20th century, utilities are in need of additional capital investments in a nowaging fleet of assets used to deliver electricity. Utilities are also looking to augment existing infrastructure to meet demand through localized generation, to integrate battery storage and to address the demand implications of electric vehicles.
In Ontario, applications are being made by utilities before the Ontario Energy Board to secure authorization for planned capital reinvestment, with ongoing rate applications being made to adjust distribution and transmission rates in order reflect mounting capital expenditures. Coincident with the industry's need to reinvest is the public policy objective to reduce charges for ratepayers. The future success in the sector— supported by a reliable system that seizes upon technological and other advances at a reasonable consumer cost—will depend on how adept the regulator is at balancing the priorities of utilities, ratepayers and the policy makers.
Figure 4: Investor type (as a % of deal count)
Figure 5: Outbound investor type
Indigenous involvement in power projects
Another development in the power space that we are seeing in Canada is the involvement of Indigenous peoples in power projects. Successful projects in Canada today must include meaningful involvement of Indigenous communities (learn more about Indigenous engagement in projects in "Getting new projects built under Canada's new assessment regime"); increasingly, Indigenous communities are seeking greater control over the projects in their territories, at every level of engagement, including equity ownership. We expect this will be a trend that will continue within the power sector and beyond for projects in Canada.
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