(Nov. 26, 2010) Former executive director of Energy Probe Tom Adams tells the Toronto Star that the Green Energy Act is politicizing energy in Ontario and placing utility regulation in the hands of a cabinet that rules by directives.
Cap and trade
Whatever the public perception of George Smitherman’s political career, no one can deny that he exits a stage with verve.
The Green Energy Act, his swan song as Ontario’s Minister of Energy and Infrastructure before he left to run for mayor of Toronto, was as ambitious as the man himself.
More than a year after leaving Queen’s Park, Smitherman still pops up on the ministry website boasting that the GEA will propel Ontario to the status of North America’s clean-energy leader.
But like Smitherman’s mayoralty campaign, the GEA has wobbled on the way toward its goal of replacing coal-fired electricity in the province with clean, renewable energy.
Now being implemented by Brad Duguid, Smitherman’s successor as energy minister, the act looks less like model legislation for other jurisdictions and more like what happens when politics are allowed to compromise economic prudence.
The GEA began life as a clean-energy policy (with hefty input from greenish special-interest groups). But then the Liberals began broadening it to accommodate related economic objectives.
Tacking on a wish-list of additional responsibilities — such as job creation, export sales and support for aboriginal and community groups — compromised its original primary focus: a clean, reliable system that provides electricity to consumers at the lowest price. “It became an economic development policy as much as it was energy procurement,” says Adam White, an energy policy professor at the University of Toronto and a consultant at the Association of Major Power Consumers of Ontario.
Bruce Sharp, senior consultant at Aegent Energy Advisors Inc., compares the legislation to what happens when a golfer tries to correct a bad golf swing by adding different fixes one by one. “You add all kinds of crazy gyrations and machinations,” he says, “but you become so contorted you don’t have a chance of hitting the ball.”
Energy consultant Tom Adams, an acute observer of the province’s electricity industry and a former executive director of Energy Probe, is blunter. He says the GEA has politicized energy, placing utility regulation in the hands of a cabinet that rules by directives.
“I think it’s an unspeakable disaster and has devastating economic consequences. It has eviscerated the principles of independent public utility regulation in Ontario.”
Some consequences have already come home to roost. Premier Dalton McGuinty and Smitherman vowed at the time of the GEA’s introduction that it would add no more than 1 per cent to the average homeowner’s power bill.
Instead, electricity prices have soared 18 per cent this year. Sharp, who analyzed the electricity market through the lens of the GEA last summer, forecasts a 26 per cent hike in rates in 2011, which he said would translate into a price jump of 3.04 cents per kilowatt hour (kWh) and add about $304 to a typical consumer’s electricity bill in 2011.
By 2015 the typical Ontario household will be paying between 38 per cent and 41 per cent more for power.
Last week, Finance Minister Dwight Duncan — himself a former energy minister — corroborated Sharp’s numbers. To placate an electorate increasingly irate over energy costs, he added yet another entry to the electricity industry’s bewildering array of acronyms and programs.
The Liberals conceded that the 1 per cent rate increase promised a little over a year ago was wildly optimistic, and that the hike would be 7.9 per cent annually for the next five years. To cushion the blow, a new Ontario Clean Energy Benefit offers a 10 per cent rebate on electricity bills. Duncan calculated that in 2011 that would lop about $13 from the average monthly household bill of $128.
A week later Energy Minister Duguid got into the act, adjusting the rates paid during two evening hours from the peak price of 9.9 cents per kWh to 5.1 cents per kWh.
The changes have the whiff of micro-tuning by a government less than a year away from an election, rather than showing signs of a coherent long-term macro policy to address Ontario’s electricity picture.
As well-meaning as the GEA may have been in the beginning, it has increasingly contributed to the province’s electricity conundrum, according to some observers.
The GEA’s feed-in tariff component has become a lightning rod for critics. Under the Feed In Tariff (FIT) program, the province contracts to pay suppliers a premium price for electricity, provided it is generated from renewable sources and using equipment sourced mainly in Ontario. As part of the deal, the province is obligated to hook the electricity into the provincial grid.
But setting the FIT price to be both an incentive to the renewable energy industry and to also avoid distorting the electricity marketplace is more black art than science.
And it’s a skill the province hasn’t quite mastered, some argue.
The wholesale electricity price (which utilities pay for the power to distribute to their customers) fluctuates according to demand. It was about 4 cents per kWh in mid-November. Even at its highest, in July, it hit only 6 cents per kWh, according to the Independent Electricity System Operator that manages Ontario’s power grid. Yet under the GEA’s “microFIT” program, designed for small suppliers such as homeowners and businesses generating 10 kW or less from green sources — mostly roof-top solar panels — Ontario pays 64.2 cents per kWh for electricity. It pays bigger FIT participants, who generate more than 10 kW, 71 cents per kWh.
“Compared to any credible competition, the price being paid for solar (under the GEA) is crazy,” says Adams. He acknowledges that solar is a small part of the Ontario’s total power supply, so the effect is so far minimal. But the gold-rush style take-up on the FIT program by green-power generators eager to get onto the grid is evidence that it’s a good deal for suppliers, he says.
Tim Butters, a spokesman for the Ontario Power Authority, which administers provincial electricity policy, says the microFIT program, aimed primarily at homeowners and small businesses, has attracted 19,000 applicants. Until the end of the summer they were promised 80.2 cents per kWh — about 20 times the wholesale price of electricity.
Nor has lowering the fee to 64.2 cents per kWh for applications received after August proved discouraging. By the beginning of November, the OPA had approved about 1,900 contracts, primarily with small businesses and homeowners, to purchase about15 kW of power.
Supporters of the GEA — including equipment manufacturers who stand to profit from it — point out that encouraging development of new sources of clean energy to replace coal was the intent of the subsidized FIT component of the act.
But as more operators pump their renewable energy into the grid, it creates an unintended consequence — the need for more generation powered by fossil fuels.
Wind and solar are unlikely in the short term to replace the electricity still generated by the province’s four coal plants. Even Enbridge’s solar park in Sarnia, the world’s largest facility of its kind, produces only 80 megawatts of electricity (a megawatt, or MW, is one million watts) — which Enbridge says is enough to supply about 12,800 homes.
And wind and solar electricity generation are intermittent: something has to fill in when the sun doesn’t shine and the wind doesn’t blow.
Gas-fired plants have been earmarked as the alternative. But while gas is a cleaner fuel than coal, it’s still a finite fossil fuel that produces emissions, and whose price fluctuates.
Gas plants aren’t particularly favoured by communities, either. Indeed, a new one slated to be built in Oakville that would have supplied 900MW was cancelled this fall. Locals went so far as to parachute in famed environmental activist Erin Brockovich to help kill the project.
The disparity between the conventional price of electricity and that available with the green subsidy under the FIT program has made investment attractive to businesses with otherwise wasted rooftop space. The day after the Oakville plant was axed, IKEA announced a deal whereby it has been promised 71.3 cents per kWh from the province for power generated by solar panels on roofs of three of its stores.
That compares with about 10 cents per kWh the province would have had to pay for electricity from the Oakville gas-fired generator.
IKEA will spend $4.6 million to install the solar panels, which will generate a total of 960,000 kW. At the FIT rate, the province will pay IKEA $684,480 a year for 20 years versus about $115,000 it would have had to pay for electricity from the Oakville gas-fired facility.
Under the FIT rate, IKEA will pay for its solar equipment in 6.7 years.
The province also contracted to pay 71 cents per kWh to about 1,200 bigger operators generating 10 kW or more under FIT. “And applications are still coming in,” says Butters.
Not insignificantly, however, cancelling the Oakville plant may have had less to do with economics than politics: The area in which it was to be located — adjacent to a giant Ford plant — is served by two Liberal MPPs who fielded constituent complaints and whose seats the government was not eager to jeopardize.
In addition to concerns over high prices, some observers worry the 20-year contracts make no sense. Presumably, the idea is that as demand rises, so will wholesale prices overall, more closely aligning them with the price of green power.
But Adam White points out that demand has actually been in decline, from about 27,000MW in 2006 to less than 24,195 MW last year. True, that 3,000MW drop is due in part to the recession, which isn’t going to last forever. Conservation has played a role as well. But the effect in the short term has been to widen the gap between high-priced electricity from renewable sources and that from conventional sources.
White also worries that 20-year contracts lock Ontario into today’s prices and eliminate any benefit that new generating or conservation technology might introduce during the next two decades that lowers electricity costs. “It’s not like buying something and having buyer’s remorse for a year,” White says of power purchased under FIT. “We could have buyer’s remorse for the 20-year life of the contract.”
Adams goes further, suggesting that the FIT program in general is open to manipulation. He points to a deal announced last April that will see a Korean consortium of Samsung and Korea Electric Power Corp. develop 2,500 MW of electricity from wind and solar installations.
Ontario is also paying $437 million in incentives to the Koreans over 25 years in exchange for a commitment to build four plants between 2013 and 2015 that will manufacture wind and solar generating equipment.
Even without the incentives, Ontario made the deal attractive for Samsung. In addition to agreeing to purchase power from its solar and wind equipment, it also promised the Korean company priority access to the provincial grid.
But the grid is already close to capacity. Provincial favouring of Samsung has raised the hackles of operators of wind and solar projects who have struggled to get hooked up.
How could the government have miscalculated so drastically? In a recent speech, Duguid, echoing McGuinty, pulled out a familiar excuse andblamed the previous Conservative government for allowing the provincial electricity infrastructure to erode.
Some suggest that the government has been in thrall to the persistent lobbying of special interest groups. The 4,000-strong Green Energy Act Alliance claims to have been instrumental in the creation of the GEA, for instance. Curiously, much of its funding comes from public sources, including provincial ministries.
The Ontario Sustainable Energy Association, which also claims a role in the GEA’s creation, pushes government toward green initiatives to the benefit of its equipment manufacturing members. It’s funded in part by the ministries of agriculture and energy, and by the Trillium Foundation, funded by Ontario’s lotteries.
In other words, Ontario pays unelected non-government organizations to lobby the government.
Sadly, for all their manoeuvring, the Liberals aren’t much closer to reducing carbon emissions by 20 per cent, their goal when they took power. They’ve steadfastly avoided introducing a tax or a cap-and-trade system that would put a price on carbon generated by fossil fuels.
Adams contends the Liberals’ failure to develop a coherent energy policy could become their legacy. If McGuinty survives in power until 2012, Adams says, “he could acquire the dubious distinction of being the only premier of Ontario to have prices double on his watch.”
What: A market-based system designed to reduce greenhouse gas emissions.
How: A government issues a “cap” on emissions permitted in its jurisdiction. Companies that come under their emissions allowance, as measured by approved methods, build up a surplus allowance that they can sell. Companies that exceed their emissions allowance must purchase allowances from those who have a surplus.
Why: The idea is to encourage companies to introduce technology and conservation methods to create a commodity — a surplus emissions allowance — that has a price.
The value is established by supply and demand. If the allowance supply is high, the price remains low and there is little incentive for companies to spend to curb emissions.
Government, however, can steadily lower the cap, which pressures companies to purchase “cap room” allowances to comply.
As demand for the allowances goes up, so does their price. Eventually, companies operating using inefficient, high-emission methods recognize the economic value in curbing emissions to remain competitive.
Wayne Lilley, Toronto Star, November 26, 2010