By Jan Carr and Benjamin Dachis
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.