Generation RENEW:  Eye On The Prize

Solving big problems like greenhouse gas emissions requires an examination of root causes, collective intelligence, and importantly a willingness to embrace a wide range of solutions. The energy transition toward cleaner fuels is happening, right now.  Some would argue for an immediate halt to burning fossil fuels, even if the current state of technology and economics make this impossible.  We emphasize the word “transition” implies some period of time, nothing abrupt, and therefore bridge technologies play a critical role in such a massive endeavor.  It’s with this in mind we highlight TransAlta Corp (TA.TO), an electric power generator known primarily for its presence in Alberta (western Canada).  On November 4th TransAlta announced it would fast-track the elimination of coal from its power generation portfolio and discontinue all coal mining by the end of 2021.  The company will achieve this desired outcome through a combination of newly constructed renewable generation assets and the conversion of some of its coal power plants to natural gas.  There may be some that frown on TransAlta’s increased consumption of natural gas, but we recommend they instead smile about its elimination of coal.  The transition to a clean future requires the elimination of the dirtiest fossil fuels (notably coal) and the construction of renewable electric generation capacity.  In both cases carbon emissions drop precipitously.  Eye on the prize!

Let’s first talk about TransAlta’s renewable energy contribution before we outline the merits of its transition from coal to natural gas.  TransAlta owns 74 generating facilities with 8,080 MW of capacity. Importantly, the company is investing heavily in wind, solar, pumped storage, and utility-scale batteries. We turn the spotlight on its “WindCharger” project (10 MW) as it would be the first utility-scale battery storage in Alberta and as its name implies sources power from TransAlta’s Summerview II wind farm.  For quite some time TransAlta Corp (TA.TO) and its partner TransAlta Renewable (RNW.TO) have been contributing to this conversion.  They may not be a high profile bellwether like Nextera (NEE) or Brookfield Renewable (BEPC), but TransAlta and the many companies like them are just as important if we truly want this transition to succeed.

         

Source:  Company data

So, let’s talk about TransAlta’s elimination of coal and have some fun with math at the same time.  Coal on average emits 216 pounds of CO2 per MMBtu compared to 117 pounds for natural gas.  TransAlta’s 2019 Annual Report shows 2019 coal combustion of 9,091,700 tons, which adjusting for Canadian coal production implies CO2 emissions of roughly 645,000 tons.  Converting this to natural gas implies a cut of nearly 300k tons of CO2 emissions from the atmosphere.  Before you send angry emails regarding this back-of-the-envelope calculation, ask yourself if your conclusion remains the same.  The conclusion that replacing coal consumption with natural gas represents material net progress, and we can promote this at the same time we encourage further conversion to pure renewable (zero emission) energy.  Eye on the prize!

Source:  Energy Information Administration (EIA)

Finally, we also use TransAlta as an example of how messy this conversion can be for investors.  For example, TA created RNW as a response to the market’s desire for a cleaner investment alternative.  The market’s desire for a cleaner alternative has likely underpinned RNW’s outperformance.  Over the last 12 months RNW’s stock is +16% versus 0% for TA.  Perhaps this helped accelerate TA’s decision to eliminate coal from its portfolio?  We think it’s likely that continued reversion of TA to RNW will ultimately lead to a re-combination of the two stocks, since they will so highly correlate to each other it won’t make sense to expense two public vehicles.  For the time being, both TA and RNW are constituents of the Eagle Global Renewables Infrastructure Index (ticker: RENEW), an index that continues to post compelling relative performance versus other market indices.  Eye on the prize!

Source:  Bloomberg

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Renewables Roundup

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Michael Cerasoli, CFA

Michael leads the Renewables effort at Eagle Global Advisors, including the development of active and passive strategies, and portfolio management. He is also the Co-Head of the Energy Infrastructure team and Co-Chair of the Energy Infrastructure Investment Committee.  He shares Portfolio Manager responsibilities for the firm’s four separate Energy Infrastructure strategies. Prior to joining Eagle in May 2014 Michael was employed by Goldman, Sachs & Co. for ten years where he covered Midstream for seven years and small/mid cap Oil Services for three.  Prior to Goldman, Michael worked for three years as a sell-side equity trader at various Wall Street firms. He earned bachelor’s degrees in Economics and History from Union College, and an MBA from the Hagan School of Business at Iona College. Michael holds the Chartered Financial Analyst designation.

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Curt Pabst

Curt is a member of the Energy Infrastructure Investment Committee and manages institutional client relationships for Eagle Global. Prior to joining Eagle, Curt held a similar position at an energy infrastructure asset management firm in Dallas, Texas. He has 39 years of investment experience.  Curt began his career at Kidder, Peabody in the institutional fixed income division, and spent a combined 15 years at Kidder, Peabody and then Merrill Lynch where he left as a Director of the firm. He has served as a partner/principal in both a hedge fund of funds and a venture capital fund. He received his bachelor’s degree in Economics from Grinnell College.

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