In defense of feed-in tariffs…just not this one.

With the release of Ontario PC Leader Tim Hudak’s platform today, it’s clear where much of the focus of the campaign to be Ontario’s next Premier will be – on Ontarians’ electricity bills. Hudak announced no fewer than six major policy changes to Ontario’s electricity system:

  • An end to Ontario’s Feed-in Tariff (FiT) program;
  • An end to mandatory time of use pricing;
  • Closing down the Ontario Power Authority;
  • A return to centralized supply decisions, with a focus on gas and nuclear, with, “an open and fair process for alternative energy sources like solar, wind, and biomass;
  • Removing the provincial share of the HST from electricity bills;
  • Ending the debt retirement charge on electricity bills.

That’s a lot to cover in one post, so I won’t try.  Let’s stick with the FiT.

A FiT, if you don’t know, sets a fixed price which the government or power utility pays entities (homeowners, farmers, or corporations) for the electricity they generate from desired (usually renewable) sources, and feed back into the grid. Because I have been critical of the Ontario FiT program, many people see me as being anti-FiT in general, which is not really true.  In fact, I am generally in favour of the concept, but not the application in Ontario.   But, if you are a free-market, small government party, a FiT is a great tool to have in your arsenal, and one which should not be thrown away as quickly as Tim Hudak seems prepared to do.

So, what’s the problem with the FiT in Ontario?  The problem as I see it is that the prices paid were based on the costs of generating the electricity, not on the value of that electricity to the Province.  The program, for example, pays 44.3c/kWh for ground-mounted, industrial solar power.  Why?  Because that’s what you had to pay 2 years ago to make it possible for industrial solar operators to make enough money to justify the investment in the panels.  That is, and should be, irrelevant for Ontario ratepayers and taxpayers.  They should ask, “what’s in it for me?” and their government should be able to tell them…and in much more detail than simply saying green economy over and over again. When new natural gas power plants can make money at 7-8c/kWh, you have to be able to justify why solar power is worth more than 5 times as much.  It might be, but it’s certainly not worth much as a hedge against the high cost of fossil fuels. At a cost of $179,000 per job created, you can’t sell it on the basis of green jobs alone either.

The idea of a FiT doesn’t imply anything about how you set prices.  In fact, a FiT program could be the best way to get to Tim Hudak’s, “open and fair process for alternative energy sources like solar, wind, and biomass.”  But, to work for Ontario, the price paid for the power needs to reflect its value, not its cost.  If producers using a particular technology can’t make money in that system, oh well.

The closest example of what I’m referring to is the Clean Power Call used in BC.  The Clean Power Call asked potential power suppliers to bid their power to BC Hydro, defining all its attributes (location, generating technology, in-service date, etc.), the quantity and the price.  BC Hydro was then able to step back and ask which power offers represented the best deal for BC residents.  They adjusted for generation that was further away, that needed significant transmission upgrades, etc.  They didn’t adjust for job creation, but they could have.  At the end of the day, BC Hydro delivered a report to BC residents detailing how the projects were chosen and making the case that these projects represented the best clean power deals for them.  I challenge you to find a similar document for Ontario’s FiT…if it exists, I haven’t seen it.

So, here’s the challenge for Mr. Hudak.  Don’t throw the baby out with the bathwater – don’t make this about a FiT being a bad tool, make this about the fact that the case for the prices paid for electricity via the FiT was never made.  By all means, highlight the fact that solar power purchases made through the FiT program at up to 80c/kWh were re-sold to ratepayers at less than 1/10 of that price.  But don’t throw away the mechanism…you might need it.

It should be natural for a free enterprise, small government party to set out what they want to buy, and let the private sector and quasi-governmental organizations bid on the right to provide it. If a private firm can come to the table with a combination of gas and wind that delivers dispatchable, reliable power at a cost far less than new nuclear, I can’t imagine that a conservative government would not want to let them compete with Bruce Power.

A FiT need not be a boondoggle…it’s can be a policy that lets the government send clear price signals to the market and drive private enterprise to provide electricity at the highest possible value to ratepayers.  It will only work well if the prices which are set reflect the value of the product to the ratepayers, and whoever the next Premier of Ontario is can learn a lot from BC in this regard.

NOTE 2: Tim Weis of Pembina (@weis_renewables) made the valid point that FiT programs are generally applied based on the cost of production, and that this has become the accepted definition of the class of policies. I define a feed-in tariff as a fixed price or price schedule paid on a contract for a particular type of electricity supply, based on IEA p.92 here, but don’t include how that price is set as a requirement for being called a FiT.

NOTE: Before you comment about an Albertan writing about the Ontario election, take note. While I now live in Alberta, I grew up in Ottawa and did all my schooling in Ontario. My parents also still live in Ontario.  Hence my engagement in your politics.

17 responses to “In defense of feed-in tariffs…just not this one.”

  1. In defense of feed-in tariffs…just not this one. | Alternative Energy Sources

    [...] more from the original source: In defense of feed-in tariffs…just not this one. Share and [...]

  2. Daley

    Great post. I continue to be amazed by the lack of clarity on how FiT rates were justified, and have always thought that was a big problem with it. Also, the surprise that the government showed when uptake was so high. With such high uptake, there had to be something wrong with how the program was laid out.

    I hope, but don’t have much faith, that Tim Hudak’s PCs fine-tune their policies a bit as we get closer to the election, and adopt a more nuanced position on FiT. One along the lines presented here, that the program is fine once we set the prices appropriately, would be great.

  3. Surdas

    I wouldn’t use BC’s Clean Power Call as an example of a good renewable energy procurement policy. It had a lot of criteria on which the decision was supposed to be based, with little idea of how it was actually going to be decided. What’s the trade-off between aboriginal involvement or environmental impact and price or wind vs run-of-river? No way for a business to know.

    But more importantly, it’s not a standing offer. If you’re a company that’s planning on generating wind, you have a make-or-break RFP with little idea what you need to do to succeed, then if you fail you have no idea when your next opportunity will be. Hard to run a business based on that.

    SK has a policy close to what you’re suggesting. They have a standing offer of 9c/kWh or something for any renewable energy. Of course, that’s too low, so they aren’t getting a whole lot (which was presumably their intention). You need a standing offer in order to generate stable businesses/jobs in your province. I don’t totally agree with you that rates shouldn’t track production costs – it depends on the policy goal. Of course, I think it would be much less damaging than their current plan if Hudak were to simply drop the FiT rates for future contracts.

  4. Joel Wood

    A well argued post Andrew. I think where we disagree is mainly in semantics. I advocated scrapping the FiT in the National Post (http://natpo.st/miB24H), but I was purely arguing to scrap the FiT as it currently exists. I did suggest looking to more natural gas as an alternative, but I do agree that there are better ways to get renewable energy into the system rather than the FiT program as is (it was difficult to get this across in an oped due to word limitations). Your alternative FiT is much more appealing to me than the current program.

    What is really disconcerting to me at the moment is Hudak’s obsession with lowering people’s electricity bills. If anything, electricity rates in Ontario need to increase regardless of what generation capacity is invested in.

    Anyways, great post as always,

    Joel

  5. mat

    Curious, I asked a friend of mine who represents a solar company in Ontario. Here are his comments:

    Rates are too high.

    They should reduce semi-annually on a graduated program. These gives industry the necessary visibility to develop business plans and keeps everyone on consistent cost reduction road maps

    Right now an important aspect of reducing the FIT rates is to take speculators out of the market and get rid of the “gold rush” image of the program. Nothing angers tax payers more than thinking someone is unfairly profiting and getting sickly rich at their expense…

    Mat

  6. Rundle

    I know this might be anethema to many on this blog who have this Jaccardian conviction that change can only be induced by going after the price (rather than the quantity), but if you’d like to open your mind to a quantity approach, do look at the experience with Renewable Energy Certificates (REC) in the US. Most States with RPS obligations have them with carve outs for solar and other classes of generation. A REC program also figures as the main mechanism in all federal Renewable/Clean Electricity Standard (RES/CES) drafts to date.

    Beyond the fact that the market sets the price – equivalent to the marginal cost of production rather than some bureaucratic price selection game — the upside of a REC approach is that development occurs in an orderly pace, consistent with the schedule in the RPS. This avoids the boom and bust cycles that tend to be associated with FiTs as witnessed in Europe. Additionally, since the forward curve for RECs is almost always in backwardation — reflecting the market’s belief that equipment prices will fall in the future — the rate payer costs are front-loaded to the present. By contrast, a fixed price FiT, with a flat cost curve, neccessarily backloads a greater portion of the rate base’s cost incidence — a nasty liability someone will need to deal with in 10 or 20 years.

    The downside with RECs — a major downside — is that they are tough to finance against. Banks just don’t want to lend to a project where the main component of the cashflows is exposed to market volatility. As a result, the only developers who can obtain finance are generally those with deep pockets who can post some sort of collateral in lieu of the REC. This keeps the cowboys at home — perhaps a blessing in disguise based on the yahoos who seem to populate the ontario renewables gold rush!

  7. Twice the offsets, half the credibility for the offset system

    [...] of this risky investment.  Many of the same arguments are made in favour of solar power – I hear this every time when I criticize Ontario for paying 80c/kWh for solar power.  My question to the Alberta Government is the same as I would ask about a feed-in tariff – [...]

  8. OntarioSolarGuide

    Very insightful article!

  9. Jon Houle

    Andrew,
    Thanks for directing me to this article. It’s funny how it’s still relevant 2 years later! Unfortunately the political climate in Ontario is such that everything going wrong with the electricity sector is blamed on recent Liberal “boondoggles” (i.e: gas plants, “the Samsung deal”, higher rates).

    The reality is that the GEA and by extension FiT was an industrial policy crafted at the time when the economy was failing and green sentiments were at a high. The problem is now how the province goes forward. As many have mentioned in the posts above, a lowering of FiT rates is probably needed at a minimum. Other recommendations in my opinion would be to implement Net Metering of micro-FiT installations, curtail wind installations since the production schedule doesn’t align with provincial needs (causing a spike in the Global Adjustment due to having to pay other jurisdictions to take the power).

    I think the effect of long term contracting by the OPA has been the death knell. While most jurisdictions which have benefitted from the fall in natural gas prices, Ontario has not benefited from this putting us in an economically disadvantaged positing for large industry.

    Thanks again for the blog and pointing me here!

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