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  (Tim Fraser for The Globe and Mail/Tim Fraser for The Globe and Mail)

 

(Tim Fraser for The Globe and Mail/Tim Fraser for The Globe and Mail)

Power stocks could face profit squeeze, warns DBRS Add to ...

The possibility that Ontario’s highly politicized electricity market could face a perfect storm leading to higher power rates “is low but increasing,” warns credit rater DBRS in a new report.

The storm, should it occur, would be a concern to investors in power producers such as Algonquin Power & Utilities Corp., Innergex Renewable Energy Inc., and Brookfield Renewable Energy Partners LP.

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The Toronto-based bond rater is worried that pressure could build for electricity rates to start rising by 10 per cent, due to the high cost of new wind power and other renewable sources coming on stream, unplanned nuclear outages, and the eventual recovery in natural gas prices from current depressed levels.

Should power prices start rising this rapidly, the firm says there is a chance the province would reintroduce a rate freeze, as it did in 2002, to the detriment of electricity generators.

“Electricity prices have only one way to go: up,” it concluded.

For power industry investors, the DBRS warning should be kept in mind. A worry for any company supplying power in the province has to be rapidly increasing electricity prices that lead to ratepayer protests and pledges by politicians to limit the pain. Under such circumstances, it will be difficult for companies to pass on costs, and profits will sink.

Here are the three most likely pressure points for prices, according to DBRS.

Going green is great for the environment, but it costs money. Coal fired electricity, the dirtiest power source, is available for about 3 cents per kilowatt hour, or the amount of juice needed to run simultaneously 10 light bulbs each rated 100 watts for an hour. Wind and solar costs more than 10 cents a kwh. Ontario is shuttering its coal plants and increasing its dependency on wind.

Natural gas, now cheap and plentiful, is another worry. Should prices again reach $6 per thousand cubic feet (compared to about $3.50 currently) rates would rise as much as 15 per cent because the province has a heavy reliance on natural gas-fired plants.

The province’s aging fleet of nuclear reactors could also cause trouble. Key pressure tubes used to move energy around in the reactors have a history of mishaps, in which case plants may need to be shut for more than two years for repairs. Should this happen, the province will be even more dependent on natural gas, which is subject to wild price swings.

 
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