I think that if you asked most oilsands opponents to categorize their objections to the industry, their responses could be classified under one of three headings. First, they might cite the lack of appropriate planning, monitoring, and mitigation of local environmental impacts (see the RSC report executive summary here). Second, they might cite a failure to consider global implications of oil sands extraction, specifically as they relate to climate change. Third, there would likely be many who would cite the fact that Albertans are simply not getting their fair share of the benefits from the expansion of activity in Northern Alberta despite owning the resource. In general, I think most opponents would agree (and please correct me if I am wrong) that most of these problems boil down to a government policy that focused on ramping production up as quickly as possible, and where the primary measures of success were investment dollars coming into the province and barrels per day of production. The government was unwilling to “touch the brake” on the industry that its own policies had created. I think that the Government of Alberta is now learning some hard lessons and finding that their approach to oilsands development has significantly eroded the social license of the industry both at home and abroad. To their credit the Government has shown signs of turning the tide on this. I believe the government could and should go further, but at least we no longer have our Premier talking about the myth of environmental damage from the oilsands. In the meantime, I believe there is a lot that advocates who would grant a free pass to poorly designed green energy policy can lean from the errors of the past in Alberta.
So, what can green energy advocates learn from this? Well, whenever I discuss programs like the Ontario Green Energy Act with people, the first thing they look to is the number of installed megawatts as a symbol that this policy really is working. In fact, today Ontario announced that $3 billion of new contracts, for 872 MW of installed capacity, had been signed, bringing the total to over $8 billion in contracts for 2400 MW of installed capacity since the program began. Now, using installed MW as a measure of success is great, but when the program is explicitly designed to guarantee an 11-12% inflation-hedged rate of return on these projects, I am not sure Ontario should really be patting themselves on the back. After all, if you guarantee people a 12% rate of return on digging giant holes in the ground and filling them back in, I don’t think many people would look at the number of holes dug and re-filled as sufficient evidence that this was a successful policy. People would naturally ask the question “how much value is there in digging a hole?”.
So, here’s the first thing green energy advocates can learn from the oilsands – in the same way that Albertans not in the oilsands industry began to ask what was in it for them during the boom times of 2004-2008, Ontarians are beginning to ask the same questions about green energy. Luckily for Ontario, they have a regulatory body which is supposed to determine whether provincial expenditures in the electricity sector are in the public’s best interest: the Ontario Energy Board. Oh, perhaps not so lucky, since if you read the fine print of the Green Energy and Economy Act, you will find a line that reads, “the OPA’s recovery of its costs and payments related to procurement contracts shall be deemed to be approved by the Board.” In other words, when it comes to Green Energy, it’s not important or permissible for the body whose mandate includes a responsibility to “promote economic efficiency and cost effectiveness in the generation” to provide any input…their approval is taken for granted. Could you imagine the outcry in Alberta if we were to pass an Oilsands Economic Activity Act in which all projects were deemed approved by the ERCB? Perhaps Greenpeace should be delivering a giant rubber stamp to the Ontario Ministry of Energy?
Last week, a giant uproar when Ontario suspended new approvals for offshore wind projects, citing the need for further environmental research. Now, I do recall a discussion in Alberta when some people were calling on Premier Stelmach to do just this for oilsands projects. In fact, just last month, there was a great uproar that RAMP data were used as part of the ERCB approval for the Total Joslyn mine despite m0unting evidence that these data are not world class. Now, I don’t pretend to be a wildlife biologist, but I am quite sure that there are some impacts from building concrete platforms in the great lakes to support wind turbines, and that perhaps these turbines will have some impact on birds and other wildlife. I do not believe that green power advocates do themselves any favors by suggesting that the trade-off between emissions from other power sources and the damage caused by the installation of turbines should not be carefully assessed. As with any project, you have to know your opposition, and you should know that there is an army of people waiting for one of these turbines to be installed in such a way that it has a very deleterious impact on wildlife so that they can use this against any future development. In the same way as environmental groups have benefited disproportionately from those images of ducks struggling on the Syncrude tailings ponds, don’t think for a second that there are not people hoping for a similar image of a flock of Canada geese flying into a wind turbine. Think I’m wrong?
Finally, the last thing I think that Green Energy advocates can learn from the oilsands is to remember that the benefits are not universal. Take the case of a person in Ontario who has recently installed a solar system on their roof. No question they will pay that system off in a short time with feed-in tariff rates of 82c/kWh. In fact, the rates are designed to provide that payback. The program is also designed to create jobs, and many proponents will argue that the program is industrial policy, not green policy. Well, that’s fine as long as you consider the total effects. Yes, there will absolutely be green jobs created, and business and homeowners will profit handsomely from the FIT. However, there will also be losers and the net effect is what will really matter for Ontario. The FIT will increase electricity prices or taxpayer funding of electricity, and it simply can’t be any other way. If the FIT prices were not set higher than the expected future wholesale prices of electricity then I would agree with you that they would have no effect on price…but if that were true then there would be no point in having the FIT. Plain and simply, the FIT pays a price premium to some supply and so increases the average cost of electricity in the province which increases the cost to live, work, and do business in the province. The benefits enjoyed by the few who will work in the new factories and installation service industries that the Act will create will be paid for by costs imposed on many. This is a real problem for Ontario which , among other things, has always enjoyed comparatively low electricity prices which have allowed the province’s electricity-intensive industries to remain competitive. In the same way as the oil sands boom made it much more expensive to operate a shoe store or a restaurant in Alberta, the FIT program will do the same. In the long run, you have to be able to sell it to all of Ontario, not simply those making a locked-in 12% rate of return and those wearing the green collars.
Renewable energy, like oil sands, is a long game. Alberta made many mistakes by focusing their policy on getting the industry up and running as fast as possible, and by not being willing to touch the brake in favour of maintaining the social license. I can’t help but wonder, as Adam Radwanski does here, if poorly thought-out green energy policies could have the same impact. That in the rush to get as many MW in the ground as quickly as possible, that government will sacrifice the long game and lose the political license to run these programs. If, as green energy advocates are quick to suggest, we are only a few years away from solar at or close to grid parity, will Ontarians be happy paying 40-80c/kWh for the next 30 years? Will they be ready to back the next government with a good and ambitious environmental plan? They might think twice, and that can’t be a good thing.
Great post.
Perhaps there is another lesson to be learned here? A lesson for greens to follow the AB oil industry example; invest as fast as possible while the going FIT is good, and deal with the consequences in the future.
I think it’s in the AB oil industry’s interest (but perhaps not the Gov’s) to build as fast as possible. It’s much easier to build quickly and then defend current facilities and jobs in the face of criticism, than to go slow and advocate for expansion later if public perception changes.
Most fallout over developing too fast hits the government not a company’s bottom line, and AB has too much invested for the oil industry to significantly lose its social license to operate it’s current facilities. So for companies; build fast, build now, and fight off the public and environmentalists later.
In a similar vein it may be in the interests of green advocates to push for even poorly designed FITs, or make claims (solar power parity next year!) that they know is likely wrong. Convince the public to support as much green investment as possible, lock it in, and weather any following public relations or public opinion storms.
Under this approach, hopefully people will adjust to the new prices (how much does 82c/kWh averaged with the majority of low cost conventional power really increase the bill?), criticism will wane, and Ontario will be left with a nascent green power industry. Repeat.
If people have short enough memories, then one in the hand is better than two in the bush, and green energy advocates should be in favour of even poorly planned FITs.
Alastair,
Thanks for reading as always. I agree in the short term, but I think in both cases the oilsands industry and the green energy industry could suffer. If voters start thinking that green energy always means “half as much power for twice as much money” then the damage could be just as profound as the cost of dirty oil to the oil sands industry. The difference I find is that if you are speaking up against FIT-type policies, people tend to put you in a box as being either anti-environment or NIMBY-ist. I would not want a wind turbine in my backyard, but I do think there is a growing place for renewable power on the grid and in our energy mix, and so to have people not willing to change their ways of thinking b/c one government over-cooked it a little would be sad.
I am not a strategies, but I think that making promises you can’t keep can come back to haunt you. Again, the oil sands promises are pertinent here. If the Alberta government really thinks that emissions per barrel will continue to shrink, why are they so worried about low carbon fuel standards? The world’s oil mix is not getting less emissions-intensive over time, so we shouldn’t have anything to worry about if we are going to keep improving here, right? It’s the same for renewable power. If there will be grid parity in 10 years, let’s wait 10 years before investing in assets that live for 20 or 30 years, and before locking in to paying 10 times the grid price for the next 30 years.
Always appreciate your comments.
andrew
Andrew,
Great post as usual. I even found it hard to come with anything to add since the post was so thorough. But I’ll give it a shot.
It seems to me that the FIT program has been such a feeding frenzy with no thought for the long term general equilibrium effects mainly due to political economy reasons.
First, there are highly mobilized environmental and industry groups that stand to greatly benefit from the program http://www.cleanairalliance.org/ (although I am still confused why the environmental groups would support this policy in its current form, maybe it is a “victory” they can spin and sell to their members). It takes much more time, effort, and money to organize ratepayers (consumers and small businesses since big business will get cheap rates on the wholesale market or through subsidized deals with the province). Traditional power producers might like the FITs since they might get price increases when they back up the intermittant supply of many of the FIT projects.
Second, I have gotten the impression that Dalton McGuinty is all about the narrative instead of sound policy (I know, almost all politicians are). This is true with his post-secondary education policies as well. This gives him incentive to award FITs as fast as possible and delay the price increases until after the election (hence the 10% rebate to consumers). He can then campaign as a leader on green energy and job creation (since the jobs destroyed by green power are are hard to pinpoint and are spread across the economy). Also, the opposition’s alternative is to build more nuclear, which is a very hard sell to many citizens as nuclear has a long history of massive cost overruns.
Third, as Alastair pointed out, it is harder to stop a policy once it is heavily entrenched creating major losers from a policy reversal.
Joel
Thanks Joel! I agree with your three points. There is no question there is capture involved, whereby both environmental groups (some) and clean energy producers are very self-interested in promoting the benefits of the FIT. Not sure that the FIT-> spinning reserve calculus is that important, but certainly some players such as Enbridge see a win-win where they can meet their environmental goals (net zero energy for pipelines in Enbrige’s case) while earning a rate-of-return along the way. Same would be true of TransCanada, Capital Power, etc. I also think the point that Dalton McGuinty is looking for easy soundbites is bang-on. People want renewable energy? Okay, let’s get them more renewable energy. People want jobs? Look, here are some jobs that we “created” and no one can dispute that those jobs would not exist without the FIT. You are right on that the jobs that will be lost to higher electricity prices and the payment of higher rates and/or taxes will be spread much more widely and over a longer term so harder to blame on McGuinty. Alastair is partially correct, although I think the difference between a physical asset like an oil sands plant and the infrastructure that goes with it, i.e. pipelines, etc. are a little different than a policy. Policies are easier to overturn if people don’t support them…want an example, look no further than the “new royalty framework” here in Alberta.
Andrew
I’m really enjoying your blog sir, I wish more profs wrote them. If there are any others you follow, could you add a blogroll to your front page?
done. Check out Worthwhile Canadian Initiative (http://worthwhile.typepad.com/worthwhile_canadian_initi/) or Globe and Mail Economy Lab for some other econ prof blogs. Also check out Mankiw (http://gregmankiw.blogspot.com/) or James Hamilton’s blog. Mike Moffatt had this list a while back of lesser known econ blogs: http://economics.about.com/od/interestingandfunny/tp/economics_blogs.htm.
Andrew