Friday, November 11, 2011

Reviewing Ontario's Feed-In Tariff: Part 1

The Ontario government's announcement of a review of the Feed-In Tariff (FiT) program raised alarms among observer's of Ontario's electricity system.  The review has been put in the hands of a senior bureaucrat from outside of the electricity planning process, de-emphasizing knowledge of Ontario's electricity system..  The government developed a survey and wrote; "All Ontarians are invited to participate in the review of the FIT Program and can provide feedback by answering an online survey or making a written submission at"    The government claims their review will "examine program rules and pricing to ensure the program remains successful and sustainable."  
Remains 'successful and sustainable'?
That is a disconcerting description, but the distortion seems even more bizarre in the official government survey.  Surely in order to comment on revisions to the plan, we should review the first two years to evaluate the accomplishments of the program thus far.  This is especially true as the first accomplishment was to halt comprehensive long-term planning of Ontario's electricity system

The first Dalton McGuinty government established the Ontario Power Authority (OPA), primarily as a full-time planner of Ontario's  electricity system (a history of planning, prior to that, is here).  The most important document for guiding Ontario's operations was to be the Integrated Power System Plan (IPSP).   The process to develop that document is for the government to provide the broad direction, through the Long Term Energy Plan (LTEP - I wrote on it here), and even more detailed direction in the Supply Mix Directive (SMD - I wrote on it here).  The OPA's IPSP proposal is then to go to the Minister of Energy, and then onto the Ontario Energy Board for final approval.  The first IPSP was submitted in 2007, but after some back and forth, died with the introduction of the Green Energy and Green Economy Act (GEGEA), which contained the structure that became the initial FiT program.  Historically, the FiT program replaced professional planning of Ontario's electricity system.

The latest Supply Mix Directive was delivered to the OPA in February.  The SMD directed the OPA to "plan for 10,700 MW of renewable energy capacity, excluding hydroelectric, by 2018."  The OPA then developed IPSP II, which is reported to have been delivered to the offices of the Minister of Energy at the end of the summer (prior to Ontario's election campaign).  The OPA's 2011 2nd Quarter report indicated close to 6000MW either in-service of under development (3944MW wind, 1654MW solar and 221 MW of bioenergy).  The recent, October 28th, OPA accounting of the existing FiT and microFiT programs, indicated application for 20,467MW, including 11822MW of wind and 8320 of solar projects.  Proposals submitted so far nearly double the figures the system is being planned to accommodate, offering up the scenario where long-term planning of Ontario's electricity system is once again cancelled by external, non-expert, renewables programs.

I had previously collected data (generators tab here) for a project to determine the impact of the supply mix on Ontario's generation (demand assumed to remain constant as per our LTEP, as well as US EIA forecasts).  In determining the needs of a system, a key figure is the contribution expected to meet peak demand.  This figure is sometimes referred to as a generator's capacity credit/vaue.  Peak electricity demand occurs during hot summer days, when wind's capacity value is small, and peak winter electricity demand (and peak overall energy demand) is during cold nights, when solar has no capacity value at all.  The supply mix basically recognizes these realities in expanding supply despite planning for relatively stagnant supply (I illustrated supply both with, and without, much of the 'renewable' supply, here)

The net impacts on consumers of these policies is poorly understood in most jurisdictions, but probably none more so than Ontario.  The guaranteed purchase of output that cannot be counted on to meet peak demand keeps other generators out of participating in the market.  This is due to the average output from a generator over a period of time (the Capacity Factor) being totally unpredictable.  In part due to this, Ontario has had to entice new natural gas generators with capacity payments, in the form of net revenue requirement clauses that cost Ontarians around $1 million each day.    To put all of that in a cost perspective, In 2011 renewable purchases are likely to be around $600 million, capacity payments over $350 million, and Hydro One reports close to $1 billion in annual capital expenditures related to politically driven supply changes (more here).

The figures relating to Hydro One's expenditures are important as they indicate why residential bills escalated in Ontario, while the wholesale market customers' rates remained much more stable.  This residential Hydro One customer has seen his actual delivery charge rise from about 3.2 cents/kWh to over 6.5 cents/kWh during the past 36 months, while wholesale market customers saw an increase to 1.5 cents/kWh from 1.2 cents/kWh over the same period.  To placate residential customers prior to this fall's election, the government introduced a 10% discount, calling it the Ontario Clean Energy Benefit, which essentially chose to pay the billion dollars in annual grid expenses that are unrelated to maintaining the existing grid, via taxes.  It was never entirely clear why these grid charges weren't hitting the wholesale market, nor is it clear how business will react to the rapid rate hikes (in the commodity charges) they are now starting to experience as more FiT contracts begin paying out.

Perhaps more troubling, Ontario's tepid moves towards a competitive market for electricity generation has collapsed.  I recently noted that electricity costs to consumers are based on less than 5% of generation, by costs, being purchased at a competitive market price.  The de facto elimination of competition among suppliers, and the related collapse of the market price (HOEP), both in average values and a diminishing differentiation in pricing between high and low demand periods, should eliminate any anticipated efficiency from the move away from public power.  Economically, it should be expected that this designed inefficiency will have a cost to the overall economy.  
Two years ago, the October 2009 Labour Force Survey showed Ontario with an unemployment rate of 9.3%. Currently, the figure is reported at 8.1%.  The improvement is only average within Canada though, Ontario's unemployment rate is now 0.8% above the national rate, and 2 years ago it was 0.7% above the national rate.  Concurrent with the FiT program, and broader GEGEA, Ontario also introduced extensive tax changes, reducing the burden on businesses and increasing the burden of consumption (value-addeed) taxation.  The government cited claims that those changes were to create 600,000 jobs.  Economically, it is likely the drag of increased energy costs is taking its toll on Ontario's economy.

The German Council of Economic Experts – Annual Report 2011/12 recently noted Germany's FiT program has been "very effective in fostering extra capacity, but is at the same time extremely inefficient."   Ontario's Fit program deserved to be credited with the same type of effectiveness.  It creates capacity of the chosen technologies.  But this is increasingly questioned as a goal.

The European experience indicates that renewables have neither meaningfully reduced greenhouse gas emissions (GHG's), nor increased energy security, nor had an overall stimulative effect on their economies. 

Measuring the effectiveness of the FiT program in building chosen technologies is simple.  Proving that FiT programs will almost always build obsolete technologies, inefficiently, will take more work ... and additional blog entries.

Continue to Part 2


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