It has been a while since I’ve had the chance to post about a forthcoming IPO - a shame because historically, IPO Watch has been one of the most popular sections on this website.

So I was pleased for more than one reason to learn of National Hydroelectric Power Corp’s plans to sell a 13.8% stake in an IPO to raise $580m. Growing at over 8% per annum, India needs a lot more power and they will need all the capital they can get to obtain it.

Apart from which, I like Hydropower - it is proven technology, can deliver clean energy in gigawatt scale and does so at the lowest possible cost compounded over the lifetime of the plant - up to 200 years. So my personal view is that exploiting fully amortized hydropower is an excellent long-term bet. But selling off only 13.8% of your company strikes me as a bit blasé - and some would unkindly sum up the attitude behind it as this;

we want your money, but we won’t concern ourselves with what you think and will care even less, because you will always be a minority shareholder.

I’ve just been reading a fascinating and revelationary book by Eric D. Beinhocker “The origin of wealth - evolution, complexity and the radical remaking of economics“. and I was very taken by one point (amongst many) that he made - essentially that mankind has evolved a system for fairness and reciprocity in business, but if the conditions for reciprocity, fairness and trust are not replicated following the business transaction, then civilization does not advance much beyond the Machiguenga people of the Peruvian rain forest (I abbreviate and exaggerate for effect, but it’s not an unfair synopsis).

Why am I saying this?

Because there is another Indian hydropower company Jaiprakash Hydro Power, which although much smaller, continues to earn respect and good ratings, not least because far more of its shares are traded on the open market.

Going public with an IPO is about trusting the market and the investors to have the best interests of your company at heart. That’s why deep down, I believe that anything less than a 50% offering is a long-term mistake.

So I hope NHP reconsider and think big by trusting big. And I dearly hope many other alternative energy companies do not eschew the market either.

Because the public markets still leave the venture capitalists and the banks for dust when it comes to raising larger amounts of capital at lower overall cost.

Canadian Hydro Developers - a developer, owner and operator of 18 renewable energy generation facilities totalling net 230 MW in operation with an additional 384 MW nearing construction has just announced Q3.

Buried within the detail, I was amazed to find out that they had actually signed last July one 20 year and even three 40 year Electricity Purchase Agreements from BC Hydro for the supply of 44.5 MW of electricity from hydroelectric projects.

With a 40 year power purchase agreement, all manner of investments become economically viable as they can pay for themselves and more within that time period. Typically in Europe the ppa lasts just 15 years and not many power plants can recoup costs that fast - probably only gas and partially subsidised wind. That’s why capital intensive industries like nuclear are screaming for 40 year carbon contracts. As I have opined here before, fully amortised hydropower assets produce the cheapest electricity bar none. This I’m now beginning to realise is best achieved with long-term ppa contracts. So why not extend it to some of the other renewables?

This may be a cheaper way of subsidising alternative energy.

Yet Canada has the advantage over European nations of being a growing country and can make a bet on future electricity demand, regardless of who its customers might be in 40 years. In Europe, 15 year ppas are based on an established client base and demand levels that will probably not change much.

It’s hard to judge - how can you do this optimally?

I hope to come back to this theme and explore it again shortly.

I like Hydro - it really is the most inexpensive form of electricity generation bar none. That’s only true of course if the hydro plant’s capital costs are fully paid off, because levelled over a lifetime of up to 200 years just about everything looks cheap.

And so there’s a lot to be said in holding mature hydropower generating assets, which may be why Infratil has just taken a majority holding in Trustpower.

New Zealand receives 70% of its power from hydro and as a young country that encourages skilled immigration, I doubt very much that there will be any let up in demand for Trustpower.

An interesting piece here about Brookfield Asset Management (link to be functional within 12 hours) - making the point that BAM ” . . . with a focus on hydroelectric generation, . . . is one of the lowest cost producers of electricity in North America. They generate, transmit and distribute electricity in Ontario, Quebec, British Columbia, New England, Pennsylvania, Maryland, New York State, Louisiana and Brazil”.

What is striking about the company is that it has over $1 billion in free cash flow generated annually.

With hydropower, the only thing that can really interfere with the steady cash flow is an inadequate rainfall period. This can raise hydropower prices quite quickly, although BAM by having diversified hydro resources is reasonably hedged against this.