TransCanada: Madness or Genius?

tl;dr: TransCanada’s decision to sell solar assets to buy pipelines may well be the right one, perhaps even brilliant.

So in an analysis today, Mitchell Beer says “TransCanada may be listening to bad advice” by selling off76 megawatts of solar capacity and invest[ing] the proceeds in new natural gas capital projects.” Specifically pipelines, although it’s my guess that they’ll be investing in flex-fuel (gas/oil) combined cycle gas generation (CCGT) as well.

“It looks like TransCanada has given up on even pretending to take climate change seriously,” said Greenpeace Canada Senior Energy Strategist Keith Stewart.

“The company is doubling down on a sunset industry because oil and gas is what it knows,” he added. “But long-term investors should recognize that selling your solar farms to finance pipelines is the equivalent of cancelling your Netflix subscription so you can get a premium membership at Blockbuster.”

Why am I not surprised that a Greenpeace “Energy Strategist” would take such a simplistic and short-sighted position?

Of course, it’s possible that TransCanada has stopped “tak[ing] climate change seriously”. But it’s also possible that they’re just a bit smarter than “Energy Strategists” who seem to think the only way to cross a big hole is to walk straight at it and ignore the emptiness under your feet.

Sure, world-wide solar deployment has been growing exponentially at the same rate since 2012 (same or higher than today since 1996):

Semi-log Graph of Global PV Capacity, from Here (Public Domain).

But the cost per watt capacity for utility PV has been dropping exponentially:

Price History of PV cells through 2015, from Here (Public Domain).

These two factors are related by a “law” called Swanson’s “Law” for PV, itself a special case of Wright’s “Law” (also called Learning Curve) which relates cost of manufacture to deployed volume:

“Swanson’s Law” for PV Log/Log graph, from Here (Public Domain).

Now it’s pretty clear to me that this process can be expected to continue for many years. Basically, every 4–5 years the cost is cut in half. Which means the longer you wait to buy your solar, the cheaper it’s going to be.

Moreover the solar facilities they’re selling appear to be contracted with a feed-in tariff, which means they have “guaranteed” purchase for all the power they produce, at an already contracted rate.

Now, most of the energy business appears to accept the very pessimistic standard forecasts for solar growth, with its associated cost drop. Never mind that these forecasts have been consistently wrong:

From Here.

So what difference does it make? Well, selling 70 MWatts of capacity now, and building new power plants in five years means you get to use the money for those years, and then only spend half or less to replace the capacity.

Not to mention the risk that those Power Purchase Agreements (PPA’s) may end up getting abrogated once everybody realizes how much less the power will cost, (True, the link is about China, but Canada and the US are making progressively more socialist noises.) Best to unload while there’s a sucker, er… investor, willing to pay full price on that 20-year PPA.

Now, what about gas?

TransCanada’s decision to “invest the proceeds in new natural gas capital projects” also makes sense. The key to this is Power-to-Gas (P2G), in which solar (or wind) power is converted to methane and fed into existing gas storage, transport, distribution, and power systems.

Now, there is a definite loss of energy in this process, typically the estimated bus-to-bus efficiency for Solar-Hydrogen-Methane-CCGT is around 30%. Which means in 8–10 years, when the cost of solar power is around 1/4 what it is today, this process will become cost-effective.

This means that investments in gas infrastructure won’t be “stranded assets”. Instead, in a decade or so it will make economic sense to start a massive build-out of solar P2G, and use the output in place of fossil gas.

And notice something else: Canada is hardly the best place for solar power:

North American Available Solar Power, from Here.

This means that it will be more efficient to build the solar P2G facilities in Texas, Nevada, or perhaps California (or Mexico if they fix their problem with violent cartels) and pipe it to Canada than to build the whole thing in Canada. Pipelines are a relatively cheap way to transport energy, orders of magnitude cheaper than transmission lines.

Summing it all up

TransCanada’s decision might look like madness, “doubling down on a sunset industry because oil and gas is what it knows,” but it actually strikes me as excellent good sense, offloading an asset with a risk they understand (and buyers don’t) to invest in facilities that are likely to remain very valuable for many decades.

Note: this is NOT investment advice. Do your own due diligence!

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