by Guy Holburn, Associate Professor, Director Energy@Ivey, Richard Ivey School of Business, University of Western Ontario
This article is based on a paper, co-authored with Kerri Lui and Charles Morand, forthcoming in Canadian Public Policy
The ability of governments to attract private investment in renewable power generation depends not just on the attractiveness of regulatory incentives, such as feed-in tariffs and power purchase agreements, but also on perceptions of policy risk. As the time frame for investor returns lengthens – 20 years is common and 40 years is not uncommon in electricity infrastructure projects – the impact of policy risk in the assessment of the overall regulatory environment becomes more central. Even though governments are generally unlikely to renege on signed PPAs, firms are exposed to changes in regulatory policies during project approval and assessment periods, which can be lengthy, and also during the course of multi-stage investments that roll out in a jurisdiction over an extended period of time. In a recent survey of more than 100 renewable power generation and technology firms active in Canada, my co-researchers and I found that policy stability consistently ranked among the most important three factors in decisions about where to locate investments: even in jurisdictions with comparatively favourable market conditions and feed-in tariffs, heightened policy risks would significantly deter firms from making large scale commitments.
In the same survey, firms also rated the stability of renewable energy policy especially poorly in Ontario as compared to other jurisdictions. The low rating for policy stability is consistent with the ‘start-stop’ history of competitive procurements and of feed-in tariff programs in the province, as well as with the halting long-term industry planning process.
Two factors have contributed to above average policy instability and hence risk in the province: first, in contrast to the United States, where multiple political checks and balances confer a degree of autonomy on Public Utility Commissions, regulatory agencies in Ontario are less insulated from political control, exposing the electricity sector to a greater degree of direct political intervention. Although both the OPA and OEB are separate administrative institutions from the Ministry of Energy and Infrastructure, the Minister is able to exert a considerable degree of control over their decision-making through initiating directives, which require no legislative approval, and by controlling agency board appointments. For instance, the Minister has the authority, as approved by Cabinet, to control by directive the OPA’s process for procuring renewable energy – determining specifically both the magnitude and timing of procurements. In addition, the Minister can specify through directives the long-term renewable capacity targets included in the OPA’s long-term planning forecast, the IPSP. The Minister can also order a review at any point. Under the Green Energy Act, the Minister’s legal powers were significantly and explicitly expanded. Inter alia, the Minister can dictate whether a competitive or non-competitive procurement process will be used, and select the pricing and economic factors used by the OPA, thereby making pricing an explicitly political decision.
The concentration of key policy-making authority in the Ministry, coupled with the ability to issue directives without extensive stakeholder, legislative or public consultation, puts at risk the long-term stability and credibility of policy. Regulatory goals and policies are susceptible to revision in response to shifting party political priorities, lobbying by organized stakeholder groups, sector-specific shocks or events, or to changes in the general economic climate which may alter consumers’ willingness to pay for a green energy premium.
The second factor contributing to policy risk in the province has been the revolving door in the Minister’s office. The tenure of individual ministers has been exceptionally brief: since 2003, the average ministerial tenure period has been less than 12 months. Different ministers have different preferences about policy objectives, implementation methods, and the pace of reform. They also have different relationships with the sector agencies. While some ministers may continue the programs commenced by their predecessors, others may wish to delay, modify or even effectively halt them. New ministers can initiate entirely new programs, some of which may need to be finally implemented by their successors. In any event, proclamations about long-term policy goals and intentions, either by agency heads or ministers, tend to lack credibility since industry participants will rationally expect that a new minister will soon be appointed and that he/she may well change policy course.
A comprehensive approach to renewable energy policy thus requires an integrated assessment of regulatory policies and of regulatory governance structures. In Ontario, improving policy stability and thereby reducing regulatory risk may be achieved by undertaking reforms in regulatory governance rather than in specific policies – e.g. in the institutional processes by which policies are formulated and implemented. Reforms that ‘hard wire’ policy commitments would reduce the degree of political discretion that underlies observed aspects of policy instability. One option would be to enshrine specific policies in legislation. Even though the majority party in the Legislature controls the legislative agenda, the legislative process provides opportunities for public debate and consultation that are not required for ministerial directives. Extensive consultation has the benefit of reducing the risk of policy errors since multiple parties have an opportunity to provide information on policy consequences and alternatives that may not have been anticipated by the sponsoring Ministry. Enacting legislation also demands time and resources from the initiating parties, implying that once enacted, legislation is not easily reversed or modified. Specific long-term renewable power capacity or electricity generation sector emissions targets would be candidates for legislation, as has been the case in many U.S. states.
A second approach to stabilizing policy over time would be to strengthen agency independence from political control, as has been the practice in other jurisdictions such as the U.S. and U.K. that have also encouraged private sector investment in the utility sector. Further policy decision-making authority could be conferred on the OPA or OEB, subject to administrative procedural requirements, but without the need for explicit ministerial initiation or approval. For instance, the authority to establish a renewable capacity procurement schedule – including magnitude and timing of contracts – could be delegated solely to the OPA rather than permitting the Minister to control such actions through directives. Independence from political pressures would be further enhanced by reforming appointment processes: lengthening terms of appointment to fixed five year periods, and staggering the appointments of board members would insulate the OPA or OEB from immediate political exigencies.
Finally, extending the tenure of Ministers to several years could inject greater predictability and certainty into policy-making, thereby encouraging longer-term horizons in the private sector.
Undertaking such reforms would reduce the risk that policy development is especially sensitive to shifting political pressures, thereby increasing the attractiveness of Ontario as a location for renewable energy investments.