by Jameson Berkow, Financial Post
Shortly after Atlantic Wind & Solar Inc. heard about Ontario’s lucrative incentives for green energy projects, the company did an about-face.
The publicly traded alternative energy developer had largely ignored its home market for years, opting instead to focus on expansion abroad. Then Ontario’s Liberal government passed the Green Energy and Green Economy Act in May 2009 and the feed-in-tariff [FIT] program was born.
“It was a 90% focus shift, it was an instantaneous ‘lets go there right now, drop what you’re doing and run’,” said Martin Baldwin, chief financial officer for the Toronto-based company.
Considering the FIT program offers companies who build alternative power plants in Ontario up to 64.2¢ for each kilowatt hour of electricity they produce — nearly 10 times the current market value of power in Ontario — for a guaranteed period of up to 20 years, it was a pretty smart move. There was one catch. To qualify for such profit-driving prices, wind, solar, hydro and biogas companies had to ensure a certain percentage of each project used Ontariomade components.
Yet what started as a program with a goal of weaning the province off coal power while rebuilding Ontario’s floundering manufacturing sector has quickly become a muddled mess.
FIT has sparked a World Trade Organization challenge from abroad and a political battlefield here at home as Ontario enters an election year. FIT rates have already been lowered for small ground-based solar projects, while the government on Thursday said it will cut electricity rates for consumers by 10% for the next five years in a bid to quell mounting outrage over bills that are set to rise 46% over the same period anyway — a big chunk of which is to pay for the green conversion.
Meanwhile, the Opposition Progressive Conservative Party in Ontario has vowed to scrap the program if elected next October.
The uncertainty has left companies wondering if an alternative energy industry will even exist in Ontario in a year’s time, while underscoring the pitfalls of trying to create an industry through government policy alone.
“We would likely have to scale right back, lay off most of our staff, and go back to the skeleton crew that we had before [if FIT is scrapped],” said Adam Webb, president of Sentinel Solar Corp.
Andrew Leach, a professor of environmental and energy economics at the University of Alberta’s School of Business, said the kind of ongoing uncertainty experienced in Ontario could be spotted a mile away.
“If you have a plan that is only viable under that very restrictive government program, then if anything happens to that program, even if it is a one or two per cent chance that program goes away, then there is a one or two per cent chance your plant never makes money,” Mr. Leach said.
“Suppose we wanted an automobile industry in Alberta and we said the government will hire auto workers at $44 per hour and sub them out to industry at $6, we would have an auto industry in Alberta tomorrow.”
To meet the expected flood of demand for Ontario-produced components created by FIT, Mr. Webb’s Woodbridge, Ont.-based company spent more than $10-million to undergo an immediate and massive expansion.
“We went from roughly a 10,000-square-foot facility into a 30,000-square-foot location and increased our staff from 13 total … to now over 70 all in the last year because of [FIT] domestic content requirements,” Mr. Webb said.
If FIT does disappear, he has no intention of scaling back down without a fight.
“The Ontario government and the OPA would find themselves in a class-action lawsuit brought by every manufacturer that has spent the money to come to the province and open up a manufacturing facility,” Mr. Webb said.
Mr. Baldwin agreed there “would be some basis” for such a case.
“It is going to be a very intricate argument but I am sure it is one that some of the companies could try and make,” he said.
Few would have raised the possibility of a lawsuit as recently as last May, when nearly everyone seemed happy with FIT. More than 180 renewable-energy projects had been announced through the program by then, totalling more than $8-billion in investments and promising to increase Ontario’s supply of green power and bring 50,000 badly needed manufacturing jobs into the province.
Then May became June and anti-FIT voices began to speak.
Japan announced it was considering a formal legal challenge of the program through the World Trade Organization. It filed its official challenge in September, arguing the program’s domestic-content requirements were protectionist and a violation of international trade agreements.
The challenge has since garnered support from the European Union, the United States and a major solar industry group led by Mitsubishi Electric Corp., which released a report last month calling the made-in-Ontario requirements “poison.”
Ontario’s policy has also come under attack for being tied so closely to Samsung Corp. after Queen’s Park promised additional subsidies totalling $437-million for the South Korean company to build four wind and solar manufacturing facilities in the province — which, says Samsung, will be the largest in the world.
Brad Duguid, Ontario’s Minister of Energy, says the challenges from abroad pale in comparison to the opposition the program is facing here at home.
“I think it is safe to say the biggest threat is not external to Ontario, the biggest threat is right here in Ontario,” Mr. Duguid said in an interview.
“Tim Hudak’s reaction [to FIT] has been irresponsible and very insensitive to the need for Ontario to move forward in a competitive way.”
“Irresponsible’ is the same term Mr. Hudak, leader of the PC Party, used to describe the contracts the province was signing with various companies through the FIT.
“I certainly do not support the massive subsidies through the FIT program,” Mr. Hudak said.
“I just don’t think it is good economic policy to build an industry dependent upon massive subsidies…. We support renewable energy, but it must be at rates that are affordable to the consumers who pay the bills.”
“Investors no longer find Ontario a safe and stable environment in which to invest in energy projects,” Mr. Hudak said in a speech to the Ontario Energy Association (OEA) in October.
Mr. Duguid argues, however, that a safe and stable environment is exactly what the Green Energy and Green Economy Act was designed to create.
“One of the things that investors are looking for is certainty, so we have tried very hard to provide as much certainty as possible and reduce the risk as much as possible for investors,” he said.
Try as it might, the government is finding it increasingly difficult to convince investors that such an environment exists while Ontario taxpayers are being subjected to diametrically opposed narratives about the potential impact FIT will have on the provincial economy.
Mr. Duguid steadfastly believes FIT will draw 50,000 new manufacturing jobs to the province.
Mr. Hudak fires back, suggesting numbers like that are “more fantasy than meeting reality,” arguing the restrictive nature of the legislation is actually chasing potential jobs away from the province.
The Mitsubishi-led solar group supports that view, specifically claiming the FIT program’s domestic-content requirements will cost Ontario 9,000 jobs and $2-billion in potential investments.
California-based Enphase Energy Inc. invested in manufacturing in Ontario in March. Having already started exporting products from Ontario to the United States, the company plans to invest more in the coming years. Should the FIT program be repealed, “clearly all of that [investment] would stop,” said Paul Nahi, the company’s CEO.
Still, many in the industry say the program will ultimately survive, in some form or another.
Though it has flown under the radar, Quebec has had similar legislation on the books since 2006, while California’s policy appears even more protectionist.
“The U.S. is now localized to the point where if you want to do work in California you must be a Californian business, absolutely everything must be from California and many federal projects are that way as well,” said Mr. Webb of Sentinel.
Mr. Baldwin of Atlantic says that if the PCs win the next election, he will quickly discover repealing the Green Energy Act is “easier to talk about than to actually do.”
“I think he’ll find a way to love it,” Mr. Baldwin said. “Now he may not like the FIT program but he will like the Hudak FIT-er program. It is otherwise too important for the province.”
Robert Hornung, president of the Canadian Wind Energy Association, notes that a FITless Ontario wouldn’t be all bad.
“From one perspective [repealing the domestic-content requirements] would open the market to more vendors, and so from the perspective of a wind energy project developer that means more choice, more competition, and increases the likelihood that there would be some opportunities for lower costs in that regard.”
Speculation on what the future has in store for alternative-energy policy in Ontario is likely to continue right up until next October.
As the uncertainty remains in the interim, investors are likely to keep their distance.
“Those considering investment will have to postpone the decision and those already invested will have to make moves to adjust downward their risk in Ontario,” Mr. Baldwin said.