Sunday, May 3, 2020

Consequences of Ontario's Green Energy Act warn against creating green new deals as stimulus

As economic activity takes a seat way back from the driving priority of halting the spread of COVID-19, recession is looming, and proposals popping up for spending to spur recovery. People, particularly those in Ontario, should be informed on the actions to spur stimulus during the last big recession, for two big reasons. This post will concentrate on the first - which is the cost, and benefits, of the actions initiated by the Green Energy and Economy Act of 2009.  I'll tally up costs incurred due to the electricity procurement than followed, and note the impact on post recession Ontario in quickly noting how those costs have been getting paid - and then I'll conclude with the second reason people need to know this history and its current impacts.

The Green Energy and Green Economy Act (GEA) was introduced to the legislature early in 2009, and received Royal Assent 3 months later. It provided the basis for a contracting orgy that persisted until the fall of 2011 before slowing to occasional carnal encounters. The impetus of the "green energy" push was a waning economy, as described by Karen Howlett and Renata D'Aliesio in 2011:
[Ontario Premier Dalton] McGuinty began looking at where to place his strategic bets during the global economic recession in 2008, when manufacturing jobs were quickly vanishing in Ontario. He solicited many opinions, said a source close to the talks, and the jurisdiction that kept coming up was Germany.
Mr. McGuinty turned to David Suzuki, Canada's best-known environmentalist, to set up a meeting with the father of Germany's green energy revolution, Hermann Scheer, in June of that year. The German parliamentarian arrived in Mr. McGuinty's office in the Ontario Legislature with a blueprint for building a new economy from scratch.
The McGuinty government heeded the now-late Dr. Scheer's advice. George Smitherman, then the new energy minister, adopted the "feed-in tariff" model that Germany used to become the world's first major renewable energy economy, committing to pay above-market prices for green power.
Liberal MPPs learned about their government's push into green energy in the fall of 2008 during a caucus retreat at the Benmiller Inn in Goderich, where Mr. Smitherman talked about the potential to create 50,000 jobs...
Ontario's green energy procurement were far from Keynesian economics. Instead of government borrowing to invest in the infrastructure that would aid productivity and grow wealth in the future, the government avoided borrowing by attracting private capital by offering generous contract terms trusting its existing global adjustment mechanism would allow the costs to be paid by electricity ratepayers. My understanding of economic theory is deficit spending on infrastructure during bad times allows for productivity to jump when better times return - but the GEA's contracting avoided growing government debt in return for making electricity more expensive in better times.
The Government of Ontario is committed to fostering the growth of renewable energy projects, which use cleaner sources of energy, and to removing barriers to and promoting opportunities for renewable energy projects and to promoting a green economy.
The Government of Ontario is committed to promoting and expanding energy conservation by all Ontarians and to encouraging all Ontarians to use energy efficiently. -Preamble to Bill 150 2009
The obvious costs from the GEA period are the due to contracts awarded under the feed-in-tariff (FIT) program and related Green Energy Investment Agreement (GEIA) - better known as the "Sumsung deal". Less well known are the Hydroelectric Contract initiative (HCI) and Hydroelectric Energy Supply Agreements (HESA). Another stated goal of the Green Energy was the promotion of a 'culture of conservation' - with 'energy efficiency' and 'demand management' prominent phrases being joyously bandied about in and about the legislation. I've pulled the figures for those contracts, and conservation spending, from my database of estimates:

The good news is that the increase in the costs incurred by the GEA contracting slowed significantly after 2016. Additional costs are still to come as the largest, most expensive, single feed-in tariff contract only entered service for the last third of 2019: a full year of operation will add another $75 million. Hydro output from sites contracted under the HCI and HESA initiatives have been producing less in the past couple of years, while global adjustment cost components reported by the system operation (IESO) for this group have been fare higher than my estimates - so I suspect the system operator is hiding payments for curtailment. I have not accounted for biomass contracts, although some exist: over 80% of contracted generation from biofuels is either on FIT contracts or is the converted-from-coal Atikokan Generating Station. Reporting on the global adjustment shows biomass responsible for $230 - $287 million annually over the past 5 years.

Precision is elusive, but I am confident the current annual cost from procurement programs initiated in 2009 is over $4 billion a year.

Wind and solar contracts are for 20 years. A handful of smaller hydro facilities have contracts for less than 20 years, but most are 40 and the largest, most expensive contracts are for 50 years (for facilities on the Lower Mattagami river). By multiplying $4 billion (per year) by 20 years it's clear the entire cost will be more than the $80 billion.

There are little bits of good news: not all contracts are fully indexed to inflation: wind is only 25% indexed and solar nothing at all. But inflation has not been significant - certainly not significant enough to bring an $80 billion nominal cost to an easier-to-stomach figure in real 2020 dollars.

The proponents of the spending in 2009 did not, in the end, contract as much they'd hoped. In 2010 the government announced"Ontario's target for clean, renewable energy from wind, solar and bioenergy is 10,700 MW by 2018 (excluding hydroelectric)," and in 2012 a review of the procurement plans announced the province was, "on track to procure 10,700 MW of non-hydro renewable energy generation by 2015."  Currently the province has 8,566 MW (359.2 bioenergy, 2,673.4 solar, and 5,533.3 wind). Had all gone according to plan the cost over 20 years would have been 25% higher at a tidy $100 billion.

What of the benefits?
The only easily quantifiable benefit is the market revenue, which averaged less than $20 per megawatt-hour (MWh) at the Hourly Ontario Energy Price (HOEP) - or 2 cents/kWh - over the past 5 years. This is not great as the contracted cost averages over $200/MWh during the same period. Due to the massive excess of supply in Ontario the HOEP is not a great indicator - but even at $45/MWh (roughly the regulated rate for publicly owned hydroelectric generators) the losses are over $3.35 billion annually - for all of 20 years (and some of 50). There is a capacity value to hydro, so the higher rate estimate might be justified there, and for solar (as long as Ontarians don't replace gas heating with electrical) - but very little to wind. Wind proponents claim it can have some value as a ramping resource, or in providing ancillary services to the gird, but it can only do so if it's curtailed. Many will claim value in avoiding greenhouse gas emissions, but for years now the Ontario grid has received enough low/no carbon emitting electricity generation from sources not contracted under the programs being discussed (FIT, GEIA, HCI and HESA) to meet "Ontario Demand" (annually - not hourly). 
If there is a monetary emissions benefit the Americans accepting cheap electricity from Ontario will need to recognize it.

The cost of of the Green Energy Act contracting is over $4 billion a year. The loss, after detracting for market rates and considering hand-wavy other benefits, is between $3.25 and $3.8 billion annually (including biomass). These are simply facts.

In recent years governments have moved to lighten the load of electricity bills on residential, and small business, consumers.The attempt to prevent deficit spending on building our infrastructure has failed as governments have answered public anger at rising rates with rising subsidies to consumers as the private owners of the infrastructure continue to realize the profits from their infrastructure. The public records show spending on "price mitigation" rising from $346 million in 2016-2017 to an anticipated $5.5 billion in 2019-2020. There may have been 50,000 con jobs created with the GEA, but it'd be nearly impossible for anybody but Merran Smith to find actual employment anywhere near that level.

There will be pitches made for "green new deal" spending using the same attractive elements of 2009-2011: no money down; jobs; clean, and righteous. The consequences of succumbing to the pitches a decade ago are one thing people need to remember. 

A second reason for people today to remember the Green Energy Act, and understand its failure, is that in popular culture the people who promoted the GEA are at least as influential today. Decades of advocating expensive failures have been richly rewarded with the title of "expert" in the elite culture of  financiers, lawyers, professors, bureaucrats, and ordinary aristocrats.

Today's environment is not one where spending on generation projects should be encouraged.

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