By Professor Guy Holburn, University of Western Ontario
When the Ontario government recently cancelled its off-shore wind program it continued a pattern of unexpected policy change that plays into the fears of potential green energy investors. Recent research shows that wind energy companies favour policy stability more than they do subsidies when deciding where to build their businesses.
The current Feed-in Tariff scheme that underpinned the off-shore wind program appears to be repeating the history of the original Standard Offer Program: launched in November 2006 as the first of its kind in North America, it was abruptly suspended less than 18 months later, and then partially re-instated (for biogas only) 6 months after that. The long-term planning process for the industry has exhibited a similar start-stop pattern, creating additional uncertainty for investors. The recent cancellation of the Oakville generation contract with TransCanada after heavy NIMBY opposition is a further example of government flip-flopping driven by political exigencies.
A 2008 survey of 100 renewable energy companies by two colleagues and me showed that policy stability was a higher priority than subsidies for wind companies when deciding where to invest. Yet in moving from Standard Offer to Feed-in Tariff, the government’s response has been to ratchet up subsidy levels – a move that was probably less attractive to investors than leaving the program alone, and that was also more expensive for electricity customers. The survey also showed that policy churn was one of the worst aspects of doing business in Ontario. One executive told us that his board considered Mexico to be more stable.
So how can the government succeed in creating a stable policy framework? Fundamentally we need to reform how energy policies are made. The current system concentrates extraordinary power in the Minister of Energy which, from our enquiries, is unrivalled in many OECD countries. Ontario’s minister has significant authority to issue directives to, and control the decisions of, expert regulatory bodies such as the Ontario Power Authority and the Ontario Energy Board, including over renewable energy pricing.
This creates two problems. First, consultation with affected parties is not required, so ministers can quickly change the course of policy without warning. The lack of due process and absence of checks and balances increases the risk for policy errors; or, more darkly, the influence of special interests.
Second, given the revolving door in the Minister’s office, combined with the concentration of power in the Minister, there is no assurance that policy will exhibit long-term consistency. The tenure of Ontario energy ministers has been, on average, less than 12 months since 2003. Different ministers naturally have different preferences about policy objectives, implementation methods, and the pace of reform. In fact, each new minister has either initiated a new policy or else abandoned or significantly modified predecessors’ policies. In the private sector, this would be a recipe for corporate bankruptcy.
A major energy policy conference organized last year by the Richard Ivey School of Business, the Council for Clean and Reliable Electricity and the University of Waterloo identified one solution to this chronic problem of policy churn. The participants who represented industry, consumers, labour and other stakeholders overwhelmingly supported strengthening the independence and role of regulatory agencies in the sector. They endorsed restricting the scope of ministerial directive power as a necessary first step, especially on energy pricing. And they favoured reforming agency appointment processes so that appointees are insulated from immediate political pressures.
If Ontario wants to succeed in becoming a global green energy hub the government should pay careful attention not to the details of specific policies but rather to the processes that govern policy-making. Reforms here that limit the ability to make surprise u-turns without transparency and due process will inject much needed commitment and stability into the sector. And, more than ongoing subsidies, stability is what will make the province more attractive for investors while lowering the cost of green energy for ratepayers.
Professor Guy Holburn is Director of Energy@Ivey, at the Richard Ivey School of Business, University of Western Ontario. He has led a number of research projects on governance issues in the electricity sector.