Expensive paid for Hydro-Quebec

Expensive payment for Hydro-Québec


With its US$2 billion, Hydro-Québec paid twice the amount paid by the seller ArcLight Capital Partners, barely 5 years ago, to buy Great River Hydro in New England.

The acquisition of Great River Hydro and its hydroelectric fleet should generate additional revenue for Hydro-Québec from the first year, but the long-term profitability of the investment will greatly depend on the market price fluctuations. 

Recall that ArcLight Capital Partners, a Boston-based private equity firm, acquired these 13 hydroelectric power plants in 2017 for US$1.07 billion, the half the price paid by Hydro-Quebec.  

“I have my reservations about the price paid by Hydro-Québec in this transaction. At the moment, the value of these assets is probably the highest we have seen for at least 12 years, which is why Hydro has paid dearly,” underlines Jean-Thomas Bernard, professor in the Department of Economics at the University of Ottawa.  

In stock market terms, one could say that Hydro bought Great River Hydro at the “peak”. 

Risky bet 

The electricity market in North America is a mature market, explains Mr. Bernard. The price of natural gas, which varies hand in hand with that of electricity in the American Northeast, has exploded this year. But there is no guarantee that it will remain so high.  

“With the shale gas revolution around 2008, the price of gas had dropped dramatically, around US$3 per MMBtu (million British thermal units), a measure comparable to the kilowatt hour for electricity. But it's come up a lot since then. Today the prices are high. We are at more than $6 per MMBTU. This is double the price of the last few years! Hydro's bet is that the price of natural gas will remain high. But if it goes back to $3 like before, it won't be such a good deal,” says Jean-Thomas Bernard. 

Carbon market 

But one element works in favor of Hydro-Québec: the Regional Greenhouse Gas Initiative (RGGI). 

Pierre-Olivier Pineau, HEC Montréal

“The New England market is part of an 11-state carbon market, including New York. This market is specific to the electricity sector and has decreasing ceilings until 2030,” points out Pierre-Olivier Pineau, holder of the Chair in Energy Sector Management at HEC Montréal. 

< p>Since natural gas emits greenhouse gases, natural gas power producers will have to pay more and more. “It is certain that the price of natural gas is going to be relatively high until 2030 and probably beyond”, he adds. 

He calculates that at this moment, the carbon market (RGGI) accounts for about 70 cents of the natural gas price of US$6.4 per MMBtu. 

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