Ravi Sood: Renewable Energy Yield Companies Provide Unbeatable Returns, Despite the Oil Crash!

Palisade Radio Host, Collin Kettell: Welcome back everyone to another episode of Palisade Radio. This is your host Collin Kettell. On the line with us today is Ravi Sood. We had Ravi on the show about a year ago to discuss metals and mining amongst other topics. For our most ardent listeners, you may have heard our interview with Rick Rule in April where Rick stated his enthusiasm of getting behind the top financiers such as Ravi Sood, Lucas Lundin, or Ross Beaty. Certainly high praise from a guy like Rick and all the more reason you should tune in and listen to this exciting program today. Ravi, thanks for coming back on the show.

Chairman of Transeastern Power Trust, Ravi Sood: Thank you, Collin, always a pleasure.

CK: Ravi, you are the Chairman of Transeastern Power Trust which is a renewable power trust. We are going to talk about that a little bit later. But I want to stage the conversation today around renewables. This is not going to be an idealistic discussion about changing the world. That is certainly a day that we all look forward to when the world can be ran off of the power of just sun and wind alone. But I want to stage a business conversation today and find out what the hurdles are to getting to that point and far off we are.

The first thing that I want to ask you, Ravi, is about the oil price drop that we have seen over the last year. That certainly had some effect on fuel cost and other forms of power generation. Has there been much of an effect on the renewables space?

RS: Really, there has been almost no effect and there is a specific reason why, Collin. It is that very little oil itself is actually consumed in the generation of electricity. At today’s prices, yes, it would be competitive to use oil in many cases and burn oil even though there is a very low conversion ratio so that you lose about 50% of your contained energy by burning oil to generate electricity. But they regard it as a very small market and so the renewable drums continue beating and the role of renewables has continued unabated despite the drop in oil price.

CK: I guess what you are getting at there is there is an upfront construction cost to building any type of a renewable situation whether it is wind, solar, or hydro. But your operational expenditure is moving forward. There is no input of oil; it is simply maintenance. Once something is built the power that is generated from a renewable site continues moving forward and is not affected. To that point I want to ask you start out with solar, wind, and hydro, and what the costs are, generally speaking, worldwide, on what it costs to sell power from those three sources?

RS: Yeah, absolutely. I think that is a very important thing to understand for anybody looking at renewables, looking at how they can interact with things like coal, gas, and ultimately even oil. There are different views but they all center around similar numbers. The prices for building renewables, the costs plummeted in recent years for obvious reasons, particularly solar which was by far the most expensive and has had the sharpest move downwards. But you are looking at an all-in, fully-loaded cost. Remember this is almost entirely amortized capex. The cost that you have taken in upfront and are amortized over the life of your operations because your operating cost, your input cost with renewables is next to nothing..

You are running of water, you are running of wind, you are running of the sun. You start the low end. The least expensive average for hydro is about 8 cents per kilowatt hour. We are talking US dollars here, of course. Solar has come down precipitously, the range there is about 10 to 12 cents, and then on wind you are looking at 12 to 15 cents, so that order, hydro least expensive, solar in between, and wind higher. Of course in different scenarios the numbers move up and down depending on your water flow, depending on your solar radiation levels, depending on your wind profile, but basically that ranking.

The other important numbers to understand and it really affects our economic decisions here is how did that interact or compare to traditional forms of power generation? We are talking king coal and we are talking natural gas. Again, in the case of gas it does fluctuate a lot globally depending on what your input cost is. But in those two cases you are looking at much of your cost in your input if it is Opex, not your amortized Capex. But it is still way lower and we are talking half the cost of hydros. We are looking at three, four and five cents per kilowatt hour fully loaded.

What is not in that cost? The cost for the carbon or the environmental impact or social impact or what have you associated to burning fossil fuels and releasing whatever that releases into the environment. But straight up  economics, the renewable sector, despite the huge improvement in cost and operating efficiency, is still far more expensive than traditional means of generating electricity.

CK: Yeah. Ravi, another interesting conversation we had a while back is that there are two factors in how a power plant or a wind farm or a solar farm gets paid out. You told me that just because a wind farm is rated to put out five megawatts does not mean that it is actually going to get paid the same as a coal plant putting out five megawatts. What are the factors that are brought in when figuring out how much something is going to make for power?

RS: Absolutely! And it is not an apples to apples people quote typically when you talk about power plants. How many megawatts is it? What is your capacity, installed capacity? There is more to it. That is the case. That is not apples to apples comparison typically when you are talking about coal or natural gas because if you so desire you can run it full out all the time. You can have feed stock available you can keep running. You can have near 100% capacity utilization.

CK: Ravi, one thing that we spoke about a little while back is the different factors that go into play when you figure out how much the power you are generating is actually being bought for. For example, you were saying that a wind or a solar farm which obviously is not going to be generating power all night or when the wind is not blowing, even though it is generating the same at peak power it is going to be getting a lot less money than something that can provide a base power situation. Can you talk about that a bit?

RS: Absolutely! It is an important thing for people to understand when they are looking at investing in power or investing in renewables in particular. We need to talk about actually three things: what is your feed-in tariff, what you are getting paid per kilowatt hour, and in many jurisdictions you get a premium price and you need that premium price in many cases for renewables, for green power.

Number two is capacity factor, another term you could use for that is utilization factor. A wind farm, on average, is going to feed 20 to 22% utilization rate for an onshore wind farm. It is not going to be windy enough 100% all the time. A coal plant, however, you can be running a hundred percent at a time so, again, that is a lot of the reason for the difference in cost. Solar, you are going to do a bit better typically, 25% is the good rule of thumb. Hydro, better still, typically about 50% for run of the river hydro 40-50% anyways.

Get a look at of all those numbers, what do you get paid for the power? What are your capacity factors so how much power are you actually going to generate? And the third factor is what is called balancing. In many cases – most cases – you do lose some of your revenue to cover what are called balancing costs. What are balancing costs? Well, if I knew exactly when the wind was going to blow my wind farm would turn and I would generate electricity with no one to sell it. If I had an auction on  a wind farm, I cannot tell the person who is buying my electricity exactly when I am going to give it to them. They have to take on that risk and for that risk they charge to cost or different intermediaries charge to cost. That is called the balancing cost.  And its a significant factor to look at it is just the reality of renewables and it is another one of the inputs. But, again, it speaks to you. You cannot make an apples to apples comparison between a five megawatts here and five megawatts there. You have to understand what are the balancing costs? What is the feed-in tarrif and what is the capacity factor? How many actual hours of megawatt hours of electricity am I going to produce from this asset?

CK: Ravi, putting aside any type of credits that the government might be giving in order to incentivize people to build these plants, is there a model that you can run, some type of mathematical model that tells us what year in the future technology is going to allow us to produce solar, wind, or hydro at a price cheaper than coal, oil, etc?

RS: Well, as it currently stands ..... is an absolutely miraculous breakthrough. There is no allocation of carbon cost or other environmental cost to traditional generation sources. You are not going to beat coal and you are not going to beat natural gas. Perhaps if someday in the indeterminate future where we run out of gas or peak oil and so forth, the price of hydro carbon is either going to be so high that renewables will beat it because the efficiency increases, etc. But as it stands now we are not going to see that in the next one, five or ten years. That is something that is really a technological leap or major sea change away from us.

In terms of becoming economic on a standalone basis versus prevailing electricity prices, that is something I will not say we could come up with mathematical formula, Collin, but that is something closer to the horizon for two reasons. Number one, there is continued improvement in cost and operating efficiency particularly on solar where every year it gets a little bit better. It has plateaued a bit. It has come down on the order of 10 to 1 so its costs have come down on the order of 90% over the last five or six years. So it has been a huge improvement. I should say five to seven years.

It has been a huge improvement in solar and that rate of improvement start to slow down but getting to a point where it is getting close to prevailing electricity prices. But that is coming from one side. Coming from the other side we are looking at prevailing electricity prices and the realization that, yes, still most of that electricity that we consume is generated by burning fossils fuels whether it is coal or natural gas, in some cases base load power from nuclear. In most cases there is no cost producing that associated to environmental cost or social cost and that is coming. We are seeing it coming.

The prevailing price of electricity paid by consumers, individuals, retail buyers, wholesale buyers, industrial buyers, that is going up so even though we are seeing technological improvements all these new technologies coming at us the reality is we have recognized these generate electricity. We have created power. We have had the industrial revolution and beyond, but we have never ascribed the direct cost to the damage done by converting these fossil fuels. As we do that we are going to cross an inflection point at some point in the next ten years. Renewables, on a standalone basis, at that point will be viable without any additional government incentives or feed-in tariffs.

CK: Up to this point in the interview I am thinking renewables definitely are not a very good business, yet I had it mentioned that you are the chairman of Transeastern Power Trust and you found a very, very good business model in a market that is in the renewable space. I am kind of curious if you can explain to the audience what the opportunity is here, how you found a niche or an idea, and part of it is based off of creditor put in place, incentives, in order to get this ball rolling on solar and wind. You have created a power trust with huge investors in it Eric Sprott, Rick Rule put millions into this deal, several other big people that is paying a very large yield. Ravi, tell us about Transeastern Power Trust, the idea there.

RS: Well, a few angles again, Collin. One is the big picture and the second is more of a micro or bottom up approach around why it is such a great opportunity. Number one is the return profile of the world then. In my view the world that we're in we are going to increasingly face long term returns that are lower and harder to come by. Any assets that can generate long term consistent cash yields are going to continue to attract investor interest and continue to be valued dearly and be ascribed high multiples. We have seen it already. We have three different types of NLTs and investment trusts in Canada where they've got very good multiples, excellent investor following in Canada, Europe, North America, everywhere, and I believe that's going to continue to be the case.

Renewables fall into that with the proviso that, yes, you are dependent on these renewable assets on government incentives, but the reality is the winds are blowing in that direction or continue to blow that direction. The likelihood of these being yanked out from under you in high quality jurisdictions like the EU, North America, Japan is very low. The fact is we need not only be just investing in  renewables to continue to operate, we need a lot more. Remember we are talking about the capacity factors. Replacing one coal-fired plant requires a massive investment in renewables, multiples, because if you have a lower factory capacity it is not going to generate as much electricity. If there needs to be huge incentivisation and that is going to continue. I am not terribly concerned about that in short term as long as you are operating in reasonable jurisdictions. I am very much focused on places like the EU and North America as well.

The second part of it we call it that is the big picture. The first part is we are targeting the opportunities where it can generate long term cash yields from stable low risk assets. No big investments, no big bet on technology, no big bet on how the world is going to shape up as long as you keep using electricity. This is going to be a market for our product. The second aspect of it is I will call the bottom-up opportunity. This is our big picture. We are going to target this kind of assets. The bottom-up is where are we  going to do it. As I have said our very big focus on jurisdiction so you want to be in safe places.

What happened in the last many years with Europe it has fallen completely out of favor, and yet two forces at work. One you have a market place that is out of favor and second you have cost of capital that is very low. Half of Europe has negative interest rates. Even in Romania which is the first country that we targeted at Transeastern where we have got fantastic opportunity ahead of us, ten-year interest rates are below 4%, five-year rates around 2% so incredibly low rate environment, ability to borrow cheaply, and walk-in rates at very reasonable levels and by existing operating projects.

We are not talking construction risk. We are not betting on what the wind profile is going to look like really, what the efficiency of the project going to be really. We are looking at projects that had been built and because Europe is so out of favor and the periphery of Europe even more out of favor and investor interest has waned over the years, there is a huge opportunity to aquire existing operating projects at construction cost or even below construction cost. That is important for many obvious reasons. Number one is we do not have to fund and have a big time period and ramp up until we are seeing cash flows.

Number two is our opportunity for returns in operating these businesses not now profitably while the beneficiary of new incentives, but afterwards even when those incentives roll off which is between ten or fifteen years from now, we bought at prices which are sufficiently low, sufficiently compelling that we can operate these projects profitably forever without the benefit of any incentives. Right now we enjoy them. It is very important to our business. It is a core part of our business. But we will continue operating these assets even fifteen years from now until the incentives wore off.

CK: Yeah, Ravi, just to reiterate essentially you are going in and picking up projects that are already built below construction cost or at construction cost and they are already operating with cash flow and you have set that up into a structure that is providing a very high yield. First of all I should say that I am a shareholder in Transeastern as is Ravi, of course. Right now the trust is paying probably around 13 or 14% yield at current share prices. It is just an incredible opportunity if you are an investor that is seeking a yield situation. Ravi, I want to ask you as things move forward, acquisitions, does it make sense to continue to growth the portfolio? What point does it not make sense to continue to grow?

RS: Well that's just it. Right now one of our we call it our major issue, in fact, is scale. We are small. We generate electricity from three hydro plants and two solar parks. We have 30 million shares outstanding and a relatively modest market cap. The institutionally  broad interest that we have attracted is limited. We have got some very smart people like Rick Rule involved for sure. But there are people who are able to look at these more called special situation little bit smaller, little bit earlier stage, and they are able and they are flexible enough to do the work in analyzing and become involved as investors.

Our objective and really critical for us to get re-rated and achieve a much higher value and create a lot of value for ourselves as shareholders, is to get bigger. We are very much intending to continue to grow by acquisition. Romania, again, as being in the EU, I believe it is now in the 9th year of being in the EU, was where we decided to start and it is where we will continue to be at least for the next year or two years because of the huge wealth of opportunities there from an acquisition standpoint.

One of the key reasons it became a major renewables market is simply geographical. It is incredibly suitable for hydro. It has got the Carpathian mountain chain so you have vertical drop and you have water. Number two it is very suitable for wind. It is actually the windiest place onshore in Europe onshore the Black Sea in the site of the large onshore wind installation in Europe. It is also somewhat counter-intuitively in the southern part of the country, very suitable for solar. Not talking about Mediterranean levels of solar radiation, but much better than, for example, Germany or Poland or anywhere in Central or Northern Europe. It attracted well over a gigawatt of solar installations make it a major global market for solar as well. It is the absolutely perfect place to start in the EU, but discounting being in the EU and being on the periphery.

Number two enough opportunity to get the critical mass in each of the three key generation types in one county and that is important. These are low touch assets. They are unmanned facilities, but still it is critical to have mind and management close to where your assets are whenever you are involved in a company operating overseas.

Our chief executive is based in Romania. He lives in Bucharest with his family. Our entire operating team is in Romania so we have got feet on the ground. We see the deals. We are close to our assets and we are very comfortable there; a lot of opportunities here. To answer your question clearly, are we going to continue to attempt to grow by acquisitions? The answer is yes and it will continue to be more of the same existing operating projects that we know what the cash flows and the production is going to be. For the time being they will all be focused in the EU or based in the EU at least for the short term we are focused on Romania. So more of the same from us all in that regard.

CK: Okay, and one question that is outside of the scope of this interview but you have a lot of expertise in the space. I just want to ask you about the mining and metals world right now. The beginning of January certainly been a roller-coaster ride so far of the general markets. Gold is going up a little bit here. What do you think is going on there? Is 2016 going to be a new kind of year?

RS: Well, I like to make predictions without making them time-bound, Collin, so eventually I will always  proven right. Gold, I think gold is separate from everything else in mining. I will definitely hide it off as a separate beast. I think a lot of commodities are plagued by what may be a multi-year supply-demand issue where you have demand contraction and certainly a slower than expected growth while you still have this hangover of the huge supply boom. We are talking about the obvious one like iron ore on the bulk side and maybe even some of the other base metals. But gold is a different beast. It is a currency, i t is not industrial commodity. It has now been four plus years when it already peaked in August 2011. That was still technically an up year for gold. But since August 2011 we have been going down. We are well into the bear market on gold. We are now at the territory where most producers on a fully-loaded and truly fully-loaded basis are not able to make money.

You are talking about even formally world-class tier one companies like .... Gold operating with cost that are above the prevailing commodity prices. It cannot be burning money every day the lights are on. That cannot continue indefinitely. At the same time we have seen in January, just in the first few weeks of this year, an escalation in the global currency wars. We have seen China become extremely aggressive and surprised everyone. We have seen huge events in different countries around the world. We have seen this confusing rate hike increase cycle in the US which we will have our views on. Of course, no one is sure how it is going to shake out and mounting uncertainty geopolitically.

The fact that oil price is so low and it appears to be trending lower should  on balance be good for the global economy. However, it is clearly very, very bad for many states and some of the most unstable and dangerous states in the world. The likelihood is that will lead to greater geopolitical uncertainty and even beyond uncertainty. I would say it is almost certain to lead to major escalation in conflict in certain places in the world. All of these should on balance be positive for gold. Will this be the year where you truly see a turning point when you see gold in its first up year in many? I think so. I really do. When gold does start to move I believe it will move sharply because there is simply dynamics of a coiled  spring are at play here. When it actually happens? I am not sure. But I do believe 2016 is our first year that we see a change in direction and it is our first up year in many.

CK: Okay, Ravi, thank you so much. I just wanted to remind our listeners Transeastern Power Trust, it can be found on the venture under TEP.UN. Ravi, if you want to provide any contact detail for yourself so that interested listeners can reach out and find out more information that would be great, and if you have any points to add go ahead.

RS: The best way to reach us is through our website or directly to me by email rsood@transeastern.com. The key thing to understand about Transeastern is we are committed to continuing to build a portfolio, a diversified portfolio of renewable generation and generate a steady, consistent cash yield for investors year after year. That is our focus and we are determined to deliver that for everyone.

CK: Okay, Ravi, thank you so much for coming back on the show today.

RS: Thank you, Collin.

To listen, visit: http://palisaderadio.com/ravi-sood-renewable-energy-yield-companies-provide-unbeatable-returns-despite-the-oil-crash/

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