Ontario’s green energy economy got a big boost forward with the announcement of the first major round of FIT contracts. The domestic renewables industry will be active like never before, and international expertise will come to Ontario to bring all these projects to fruition. It’s a very bold initiative and one that has, unlike most previous attempts, been prepared to withstand a lot of criticism over its likely impact on electricity costs.
There is a sense of courage as well as determination coming from the Premier and the cabinet, who brought all this forward. Whatever the critics say, no one should deny Premier McGuinty full credit for showing leadership in greening the province’s power system.
However, there are a few challenges still ahead. These comments are not intended to minimize the FIT program, but to recognize the enormity of the undertaking. The path from the status quo to the green economy envisioned by Premier McGuinty may be a lot tougher than it seemed when the plan was first announced. There are signs of bottlenecks. Some of the projects recently offered contracts are likely to face difficulties getting the rest of their approvals. Many others are stymied by transmission constraints. It will be important to apply the same kind of resolve to completing the projects that went into getting them off the ground.
Under the Feed-in Tariff program, designed to be an open invitation to all renewable energy generation proposals, anyone submitting proposals after the first 60 days (meaning post-November 30, 2009) is being put into a “reserve” category, unlikely to get attention until a set of grid issues are resolved – an indefinite length of time for all except those in the Bruce area – a relatively fortunate sub-group who will soon be able to rely on a major new transmission line.
It recently came to light that Hydro One’s connection availabilities for generators were being severely reduced at many substations. (See “Connection availabilities reduced by Hydro One,” February 2010 on the APPrO website, https://magazine.appro.org/index.php?option=com_content&task=view&id=920&Itemid=44. At approximately the same time, the government confirmed it would be proceeding with the Samsung deal, which removes significant amounts of transmission capacity from general availability to applicants under the FIT program. Uncertainty over the specific transmission impacts puts more connection capacity in doubt. The pie seemed to be shrinking continually.
The news on grid build-out has not been particularly encouraging in recent months. Despite assurances that the development of transmission and distribution infrastructure would be expedited, indications in the field seem to be pointing to delays. Although Hydro One and the Minister of Energy and Infrastructure announced the initiation of a range of transmission and distribution projects last September, the instructions were never formalized into a directive, and aside from lines to Manitoulin and Pickle Lake, there are few indications of progress, to say nothing of accelerated process. Is Hydro One able to aggressively pursue so many projects at once? The indications are not clear. The distribution level green energy plans, which are the basis for the crucial process of expanding connection capacity at the local level, appear to be experiencing their own set of delays.
Paul Norris, President of the Ontario Waterpower Association, recently observed that “Hydro One began the Environmental Assessment process for the Nipigon to Pickle Lake line last fall, and is still developing the Terms of Reference for the undertaking – the first step in what could be a challenging process. Already issues of coordination across policy priorities have arisen. ...The renewable energy sector and all those who advocated for a Green Energy Act, the Feed-in-Tariff program and the other substantive improvements must bring to bear the same creativity, commitment and collaboration to the challenge of ‘enabling transmission.’”
It all adds up to an unexpectedly challenging picture for most renewable energy developers with hopes for Ontario. Described in press releases as “Ontario’s Landmark Green Energy Plan,” for many it may not be that simple. While acknowledging the program’s positive impacts it will be important to be alert to new difficulties, and the potential for accumulating delays, reduced expectations, and in some cases, disappointment.
To be sure, most of these issues are normal business risks that developers always have to bear in mind when they propose power projects. But that doesn’t make them any less of a concern in terms of achieving the goals of the Green Energy Act. With proper management these first rounds of the FIT program can be the beginning of a steady, long-term transition process, and minimize concerns that it will operate in a boom and bust mode.
There are many reasons for optimism of course. Larger projects procured before the FIT program are still moving ahead. Hundreds of mini- and micro-scale projects have been approved that could lead to a flowering of grassroots interest in renewable technology. Manufacturers, Samsung among them, appear to be building plant in Ontario. And certainly many of the new contracts for large scale renewables will bear fruit. But the question must be asked – are the key players doing everything they/we can to make sure the program is as successful as the original plan envisioned?
Meaningful prices
The concept of the Green Energy and Green Economy Act, to plan the development of renewable power production in tandem with the growth of an economic base in related green industry, is laudable. However, in order to attract and retain the investment necessary to establish the green economy in Ontario, the green energy opportunities must be economically attractive in a sustainable fashion.
A green economy, almost by definition, is one that places great value on efficiency and careful management of resources. This means higher quality services and generally speaking, less energy consumption per unit of economic output – which almost always means higher energy prices. Ontario’s difficulty is that it is trying to achieve a green economy without adequate increases in the prevailing prices for energy. Not only is it more efficient and effective to allow prices to encourage innovation in energy technology, it is questionable whether you can actually achieve the kind of green economic development envisioned by the GEA without substantial upward change in the pricing model. For Denmark, as reported elsewhere in this issue, deliberately increasing energy prices is part of a successful economic development strategy.
One of the most significant risks to the FIT program, perhaps ironically, is the difficulty of establishing meaningful market-based prices. Sure, project developers can build and prosper with contract prices, but these contracts are already prompting critics to question the entire program because of its impact on consumer prices. Unless the system is able to show increasing reliance on competition and market forces to determine prices, it will become increasingly difficult to explain to the public why rates make sense. Given the likelihood of price increases in the near future, relatively close to an election, the potential for public controversy over pricing and hasty political action is rising. One of the greatest risks to stability at the moment is the prospect of a politically-driven rate freeze followed by more long term debt.
As noted in an editorial last fall (“Preparing for the inevitable: When the GAM hits home,” IPPSO FACTO, September 2009) an informed public is the best defense against the risk of hasty, politically-motivated intervention in the market. There are few places where the gulf between good politics and good policy is so wide. If you want to encourage environmental responsibility and incent efficient decisions by consumers, investors and developers of power plants, it is important to let the market work its magic through prices. If you want to win political points quickly, you may be tempted to do the opposite: freeze or otherwise manipulate prices.
As consumers come to appreciate the inherent value of electricity that many of us take for granted, it will be easier to accept the inevitable increases in price. It certainly appears that the government of Ontario plans to explain a good part of this story as the cost of doing the right thing: Reducing air pollution and increasing the clean energy portion of our system will be paid for in higher electricity prices. Unfortunately the soft educational approach is likely to face off against the hard edge of resistance to rate hikes in the year preceding an election. The political opposition will try to exploit the issue and there’s no telling where it will end up. In the long run the best defense is to have prices that are driven as much as possible by competition operating within regulated rules, and a public that understands the difference between public policy that minimizes costs and public policy that claims to dictate prices.
Grid Buildout
It is becoming increasingly apparent that the primary obstacle to major progress in renewable energy in Ontario is the lack of transmission and distribution connection capacity. Hydro One has been working very hard to build up capacity, as have many distributors, but the sad fact is that the available connection capacity is less now than it was thought to be a year ago, and the processes necessary to expand connection capacity are moving more slowly than expected six months ago.
There is no single answer as to why the build-out of the grid is so slow in the first place, or to why it seems to get more complicated every time serious expansion is contemplated. It is a complex system, with many owners, stakeholders, and interests to consider (safety, propriety, physical efficiency, upgrading staff capacities, and adapting to new regulatory rules, to name just a few).
If government wants to ensure that grid expansion is accelerated, or that it meets the timelines envisioned in its green energy announcements, more systematic approaches to facilitation of the build-out are worth considering. A team could be assembled to study, consult and act on grid build-out issues. They will need to delve deeply into several areas that don’t have easy answers. Does Hydro One have the necessary authorities and instructions to move forward on the timeline intended? Are Hydro One business plans assigning priorities appropriately? Are other transmission developers being encouraged to participate as fully as possible in the build-out? Do rules and possibly legislation need changing to expedite build-out in a responsible way? It’s necessary to identify why some distributors are having difficulty finalizing their green energy build-out plans on schedule, and what can be done to enhance community acceptance of T&D facilities. This will require a concerted effort, applied over a period of time, with regular progress reports tabled in public, if it is to make a dent in the stubborn system of planning and approvals that has seen so little grid expansion in recent years.
A good part of the wisdom behind the Feed-in Tariff program is its readiness to think long-term, to take steps that may be costly now, but which will have long-term benefits. Just as important as taking those early steps, of course, will be ensuring that the processes that have just begun are properly managed and cared for in their various stages of development. A broad-based team will be needed to monitor progress, to work with developers and central agencies, to identify problems and propose solutions. No one technique will work on its own. Building clarity, transparency, competition, and confidence will be important. Tidying up rules will be necessary. Timelines should be set to convey urgency now and in the future. Communication will be paramount. This work could be a significant new focus for the Renewable Energy Facilitation Office (REFO). Whether it takes place inside REFO or outside it, any new group with such a grid development mandate will of course need to work closely with REFO.
Clearly, when Premier McGuinty created a combined Ministry of Energy and Infrastructure, this is exactly the kind of challenge it was intended to address.
The FIT program is large and ambitious. The sense of excitement it creates has the potential to attract global attention and investment, building on itself and becoming more than the sum of its parts. It is important now to address the impediments it faces to make sure that relatively minor obstacles don’t derail the overall achievement. The primary feature that makes a FIT style program attractive to developers is establishing confidence that viable power projects of any size will be assured of securing long term sales arrangements regardless of when the application comes forward. It now looks like significant attention needs to be focused on the FIT program and its related issues, to ensure that reality measures up to the vision.
— Jake Brooks, Editor