High price for green energy

Jan Carr, former CEO of the Ontario Power Authority


By Jan Carr and Benjamin Dachis
Financial Post

In attempts to stimulate the creation of “green” jobs and technologies, some jurisdictions around the world have created programs that guarantee renewable electricity generators payments per kilowatt-hour (kWh) that are much higher than market prices. This approach of paying a premium to certain generators to achieve renewable goals, while overcharging all electricity consumers, is of dubious economic wisdom. But insofar as governments insist on doing it some ways are less bad than others.

Consider the cases of Ontario and British Columbia.

Both provinces have adopted the guaranteed price approach of paying a premium for electricity generated from renewable resources using a “feed-in tariff” (FIT). In much the same way as consumers buy electricity at published prices that are updated periodically, so a FIT pays generators at a pre-established price rather than requiring them to compete for customers’ business. Ontario has such a program in operation, while B.C. has so far only announced its intentions to have one. The B.C. program promises to be much kinder to consumers’ pocket books than the program already in place in Ontario.

In early 2009, Ontario introduced the Green Energy and Green Economy Act. One of the centerpieces of the legislation was the creation of a guaranteed price for 20 years that producers of wind, solar and other non-emitting electricity sources would receive for every kWh of electricity they feed into the grid. It replaced a more-modest and lower-cost program that had been in place since 2007 by allowing larger projects to qualify for prices that were more than double some of the earlier prices. In other words, it exempted a wider range of generators from having to face competitive pressure on their prices.

There are now more than 1,200 approved projects that have FIT contracts in place, with even more projects in the application stage or approved but awaiting word from the Ontario Power Authority (OPA), the administrator of the FIT, on whether their projects can be economically connected to the electricity grid. The FIT in Ontario guarantees land-based wind producers 13.5¢ per kWh and large solar producers receive 44.3¢ per kWh. To put that in perspective, the existing nuclear generators produce power at around 7¢ per kWh and new gas-fired generators at about 11¢.

If all these approved FIT projects go ahead, they will provide about two-thirds of Ontario’s planned wind, solar and bio-energy capacity, according to the recently released long-term electricity plan. By our estimates, the currently planned projects will result in an annual expense on FIT-generated electricity of approximately $3.3-billion per year, which is $1.1 billion more than Ontarians would pay for the same amount of electricity produced by generators powered from natural gas. That works out to adding about $400 per year to every electricity bill. In addition to this, there are costs for the backup generation or storage facilities that are necessary due to the intermittency of the FIT generators — the wind doesn’t always blow or the sun always shine. And we are also not including here the companion microFIT program, which pays even higher prices for smaller-scale projects — up to 80.3¢ per kWh for a rooftop solar panel.

Not all of these contracted projects will be carried out, for various reasons, such as developers having their financing fall through or the excessive cost of providing some grid connections, which means that the likely future cost of current commitments is less than these amounts. This attrition gives Ontario an opportunity to revise its FIT rules to reduce the future costs of the program. Here, it can learn from how B.C. is considering designing its FIT.

Where Ontario has 20-year guaranteed contracts, B.C. proposes only five-year contracts.

Where Ontario has a potential annual cost in the billions, B.C. proposes a maximum annual cost of $25-million per year in excess of the cost of generating electricity from diesel generators (which itself is a very expensive way of generating electricity).

Where for most generator types Ontario has no maximum project size, B.C. has a limit on all projects of five megawatts of capacity.

Finally, the vast majority of future production in Ontario is expected to be from wind and solar, but these projects are ineligible for the proposed FIT in most parts of B.C.

To be fair, the Ontario government’s stated purpose for the FIT program is not aimed at generating electricity but rather at stimulating employment in the green-energy sector.

The government of B.C. has similar objectives, but the proposed B.C. FIT is clearly going to cost electricity users a lot less money than had they simply adopted Ontario’s approach. Indeed, one of the objectives stated in B.C.’s Clean Energy Act is “to ensure [BC Hydro’s] rates remain among the most competitive of rates charged by public utilities in North America.” There is no comparable statement in Ontario’s Green Energy and Green Economy Act.

Ontario will want to honour existing contracts with producers who live up to their end of the bargain, but every opportunity should be taken to renegotiate where possible. And it’s not too late for B.C. to rethink the wisdom of driving up all electricity rates to benefit a limited set of renewable-energy technologies. Electricity consumers deserve a better deal on renewable energy than they are presently getting.

Special to the Financial Post
Jan Carr is a former chief executive of the Ontario Power Authority. Benjamin Dachis is a policy analyst at the C.D. Howe Institute.

6 thoughts on “High price for green energy

  1. Should the GEA be found to be unconstitutional or “not in the best interests of the people” pursuant to an existing ruling of the Supreme Court, then it is essentially illegal as would be all actions resulting from it INCLUDING all contracts let there under.

    If any part of any contract is deemed illegal, the ENTIRE contract becomes null and void.

    Should this ever come before the Supreme Court, and this is almost a certainty, green energy under its current guise in Ontario and anywhere else in Canada under similar circumstance, will cease to exist!

    Were the constitution policed as is the criminal code for example, legislation akin to the GEA would have never even been passed, let alone entertained!

    B.B.W.

  2. “If any part of any contract is deemed illegal, the ENTIRE contract becomes null and void.”

    Not true — it depends on the contract.

    Many contracts have a clause which allows you to excise the offending (illegal) section and carry on.

    So yes, it would be interesting to see the contracts.

  3. Here is a reference — see severance…

    http://www.contractsandagreements.co.uk/what-are-boilerplate-clauses.html

    There Shaula also be a “Conflict of Laws” clause where contracts cover international “territory”.

    “Severance And Invalidity
    If a clause to a contract is found to be invalid, illegal or otherwise unenforceable, this clause allows the parties to remove the clause/words and continue performing under the contract. However there are limits–if removal of the illegal or invalid clause makes the contract unworkable, the contract will be void.”

    So that is what makes it interesting…

  4. If you are truly interested — read this…

    http://www.llbc.leg.bc.ca/public/pubdocs/bcdocs/454174/report_legally_defective_contracts_relief_final.pdf

    It’s an interesting issue and I have been involved in resolution of these disputes where part of a contract was apparently illegal in one jurisdiction — but not another and there was no conflict of laws clause. (…and the people and companies were all in different jurisdictions but there was another agreement to translate and re-domicile the contract to another jurisdiction for purposes of executing the agreement) So this can get ugly.

    It could well be worth pursuing… If the agreements were not secret. 🙁

    Go for it BBW! It can be fun!

  5. This piece reads as if it was written by a bureaucrat. Disappointing. Why not point out the inherent problem with all of these “green energy” programs;

    The government (as stewards of the power system) should focus on creating the conditions for a vibrant, flourishing economy. One way to do this is to provide clean,safe, inexpensive power (i.e. mostly hydro).

    Currently the power system is being used as a cash cow to create heavily subsidized temporary “green jobs” on the backs of consumers, driving up power costs, and sending legitimate tax-paying businesses scurrying to lower cost jurisdictions. That’s what you get when government tries to “create” jobs.

    Sorry, but just had to vent.

  6. I’m not sure how a contract whose very existence is in violation of a federal law or ruling of a federal court could stand, even in part. Obviously, parties to the contract injuriously affected could and likely would seek redress thru the courts which begs the question: Is ignorance of the law defense against prosecution or summary conviction under it?

    Clearly, green energy contracts benefit no one other then the operator. Were this not the case, the operators wouldn’t enter into them.

    If something appears to good to be true it likely is.

    I’m not very sympathetic.

    As for engaging the Supreme Court myself, I have more pressing matters in need of my attention and meager financial resources like the hungry mouths of my family. This common truism underlines the evil inequality embedded in our system of law. If one feels that their rights are being violated even by their own government, the onus is on the individual to seek redress at their own expense.

    There is no equality or justice in our federal law. It is for the benefit of the rich to the detriment of everyone else!

    Strangely enough, in this regard, anarchy has certain advantages!

    B.B.W.

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