Rising interest rates, increased demand for natural gas and the shedding of renewable energy tax credits are among the main factors that Brookfield Renewable Partners LP sees as inciting a "normalization" of wholesale power prices in the medium term.
After raising its quarterly distribution, the renewable generator in its fourth-quarter 2016 earnings release reported that funds from operations were down in 2016, primarily due to lower receipts in the U.S.
But the company still expects a gradual recovery in power prices, maintaining its constructive view on U.S. wholesale markets.
Brookfield Renewable CEO Sachin Shah described three main drivers behind a potential recovery, pointing first to the scheduled dissolution of federal wind and solar tax credits moving into 2021 and beyond.
"If wind and solar start to move into the normal wholesale market environment without the benefit of subsidies and you start to see them have to compete," Shah said on a Feb. 2 earnings call, "I think that will be a catalyst for a pricing improvement."
A more favorable regulatory environment could also facilitate the approval of natural gas pipelines intended to supply natural gas export facilities, another driver Brookfield noted as having an "additive" impact on U.S. gas demand, which could thereby have the effect of creating a higher price floor on power as spark spreads strengthen.
The prospect of higher interest rates could also act as a catalyst for a price recovery, owing to what would be higher return targets for new-build power generation projects, including thermal and renewables.
"If rates start to go up in the U.S., again, you willl see added pressure from cost of capital perspective, which will drive higher capital requirements across the board for people who invest in power, gas and renewables, and we think all of that will then drive higher pricing," Shah said.
But the threat of higher costs for new renewable projects and the phase-down of tax credits have not been enough to dissuade Brookfield from continuing its pursuit to acquire or become the primary sponsor of TerraForm Power Inc and TerraForm Global Inc.
Brookfield recently entered into exclusivity agreements with both TerraForm Power and TerraForm Global, giving Brookfield and the TerraForm management teams until Feb. 21 and March 6, respectively, to find a resolution on Brookfield's proposals.
With those deadlines in mind, Brookfield indicated that it is working with both management teams toward an imminent outcome.
"We are all working very hard to make progress prior to the end of the exclusivity agreement, and obviously that's the objective that's there in front of us," Shah said. "We are working towards having finalization and clarity prior to the exclusivity terminating."
Brookfield’s agreement to sell power to Facebook Inc. in Ireland is one example of how the company is pivoting into the corporate renewables market as one path to locating near term growth.
The company suggested that it is looking to leverage the entire Brookfield platform, notably its real estate business, to access and potentially cross-sell renewable power to corporate tenants with renewable energy procurement targets.
"We have the benefit in the broader Brookfield, where we already have pre-existing relationships with many corporates, because we are in the large-scale power business, and we have a large-scale real estate business," Shah said.
The company flagged a pair of early stage development solar projects in the PJM Interconnection market totaling 120 MW as an example of where it can match corporate renewable demand with nearby capacity, including existing hydroelectric facilities in the PJM region, particularly around a contract that addresses the intermittent profile of non-hydro resources.
"This would be an example of one of the unique things we have as an organization, where we can bundle solar and hydro and provide more of an all hours product to the market and corporate customer," Shah said.