Analysis: Canada energy producers seek growth by going green

VANCOUVER/OTTAWA (Reuters) - Traditional energy producers are diving into Canada's renewable energy space, a move that means more than buffing up their "green" credentials, it is also providing solid growth avenues for revenue and profit.

Oil and gas companies, and conventional electricity producers that use coal or natural gas, are snapping up wind, solar and geothermal projects, or even swallowing smaller companies whole, for reasons beyond good optics.

"No, we are not trying to placate green groups. Green projects from day one have been driven by the economic return," said Al Monaco, executive vice-president of major projects and green energy at Enbridge Inc, Canada's No. 2 pipeline operator.

"I will say, though, that the environmental benefits are important ... but this is not inconsistent with what our shareholders want as well," Monaco told Reuters in an interview.

Enbridge, in the headlines lately due to a U.S. oil spill from a ruptured pipeline, has investments in Canada's solar and wind energy sectors, and this month bought a stake in a U.S.-based geothermal project.

Its green energy ventures generally have returns in the same "low teens" percent range as its other businesses, Monaco said.

The economic viability of green energy projects is being helped in Canada by 20- to 25-year contracts from some provincial utilities. Others offer grants, tax breaks and carbon-offset incentives.

Ontario's one-year-old feed-in tariff plan, modeled on programs in Europe, has the richest incentives for renewable power in North America. The province has lured most of the country's new wind and solar expansion as it aims to shut down its high-emission, coal-fired power generators.

The federal government also provides tax incentives for the production of clean energy, primarily in the form of faster depreciation of assets, which can be used by companies as a tax shield, said Stonecap Securities analyst Michael Goldberg.

PROVISION FOR FUTURE

Investments in renewable energy by "dirty" power producers could also be a pre-emptive strike to avoid future difficulties if the federal government eventually imposes a restriction on CO2 emissions.

"Before any of those policies are really put in place, I think some companies ... are taking a proactive approach to reducing their environmental footprint," Goldberg said.

Power producer TransAlta Corp, which generates electricity from coal-fired plants and is one of Canada's biggest emitters of greenhouse gasses, last year bought the country's then-largest green energy firm, Canadian Hydro, in a C$755.6 million ($733.6 million) deal.

Green energy investments could also be a future source of revenue if a value is put on carbon credits, said NCP Northland Capital analyst Tania Maciver.

For a company like Teck Resources Ltd, Canada's biggest diversified miner, a foray into green energy is more prosaic: it's about power security in the future.

"As with all mining companies, we are a very significant power consumer," said John Thompson, Teck's vice-president of technology and development.

"Obtaining more of it where we need it and when we need it is important. In that regard, looking at alternatives beyond conventional is important to our long-term future," he said, after Teck announced a C$66 million investment last week in an Alberta wind farm with oil and gas heavyweight Suncor Energy Inc.

EASY SHIFT, MORE TO COME

The move by traditional power producers into clean energy is a small sidestep rather than a major leap, said Maciver.

"(They) know how integration works and the grid works. It does fit quite nicely and it is a strong growth area currently," she said.

Whatever the key motivation, traditional energy producers will continue to invest in green energy, companies and analysts say, as assets are reasonably priced again, thanks to the economic recession, and small and cash-strapped developers are looking for deep-pocketed investors.

Enbridge's Monaco said he could see the pipeline operator, over the next few years, doubling the C$2 billion investment it has made in green energy over the past four or five years.

Another company that may be on the prowl for purchases is natural gas pipeline operator Fort Chicago Energy Partners, which has already made three deals in as many months as it looks for growth opportunities.

As for targets, Stonecap's Goldberg believes Boralex Inc, once it has digested its income fund purchase, could be ripe for the picking, as it is trading at a discount to its peers and has a strong, diversified asset base.

($1=$1.03 Canadian)

(Editing by Rob Wilson)