One of the key assumptions behind Ontario’s Green Energy and Green Economy Act (GEA), and one of the key points on which it is being challenged, is the degree of study to which a complex capital investment proposition must be subjected, before it is authorized. There is little doubt that the private component of new investments will be carefully scrutinized, but it’s less than crystal clear how the investments required by public utilities, the costs of which will surely find their way to the consumer, are to be studied and assessed.
The GEA appears to be based on the assumption that there exists a social consensus in Ontario that renewables need to replace fossil fuel quickly and that a certain amount of transitional costs are acceptable. The thinking seems to be that, as long as the generation is built reasonably competitively and the system enhancements are checked for prudency, the cost of infrastructure shouldn’t be allowed to become an obstacle for new renewables. There are pros and cons behind this way of thinking. While no one would argue the principle of trying to encourage cleaner power, setting the appropriate level of costs requires careful consensus-building. One of the key problems is that if you seek to build and connect new capacity too quickly, before the system is naturally ready for it, you can push up the transitional costs significantly. Partly because of grid limitations, Ontario hasn’t yet crossed that line in a huge way, but it appears to have been dancing on the edge of doing so, dangerously close some would say, without a clear idea of how far to go in terms of expediting renewables when their costs are particularly high.
Examples of how current green energy policy may be at risk of pushing up costs faster than it needs to are relatively subtle. Some have pointed to the government instructing the OEB to set the terms for approving green energy plans from distributors before the Board had seen any plans or determined whether such plans would be appropriate in the first place. Another example is the use of a standard Feed-in Tariff price for all size categories when possibly some of the proponents could build their projects for less than the standard offer price, using more competitive processes. The generalization of the standard offer approach to large projects has led the OPA to skip resource cost analysis when it compares transmission expansion options. The Green Energy Act creates a “right to connect,” which excludes uneconomic generation proposals, but makes few economic distinctions between connection proposals beyond that. George Vegh wrote in 2009 that “The Green Energy Act is unconstrained by traditional notions of public utility regulation – it is green energy unbounded.”* Another indication is that distributors in Ontario have universally found themselves unable to develop and table green energy plans on the schedule expected in the policy.
A key problem for the power sector is that the ECT and DAT processes (Economic Connection Test and Distribution Availability Test respectively) assume that a full set of quantitative comparisons will be made. How can such processes be reconciled with policies that essentially say build it, unless it’s demonstrably out of range?
Arguably, the incremental value of detailed economic analysis diminishes as you seek to extract finer and finer levels of detail out of the data. At some point further economic analysis adds costs to the system in its own way, either by creating a mini bureaucracy to study costs and their dynamics as circumstances change in infinite detail, or by causing delays in needed investment.
A fully responsible policy on green energy needs to have its own view on what is considered prudent and on how prudency will be judged. The GEA left a lot of these prudency questions to the regulators. The OEB is consulting on how infrastructure investments should be assessed, and the IESO is consulting on how market rules should be adapted to deal with increasing amounts of variable generation. In fact, grid management experts throughout the sector are currently focusing to a large extent on questions of how to sensibly adapt to a system with much larger proportions of renewables on it. Their work could be helped immensely by a public policy on just how far the system is expected to go, in terms of accepting incremental costs to expedite the addition of renewable capacity.
Here are some of the unresolved questions. Should new renewables be added to the system if they can reasonably be expected to cause existing hydro-electric capacity to sit idle? The answer to this question depends to a large degree on whether the dams would actually have to spill water in order to sit idle. The answer is different for coal-fired power plants, which are usually designed to respond to system needs and are being phased out in any case. The answer would be different again if you pose the questions with respect to idling existing nuclear or gas capacity. However, because of a policy framework that doesn’t provide all the guidance it might, this kind of question is more complicated than it needs to be, and the discussions around it are more likely to be inconclusive in the short run.
How is an electricity distributor expected to determine the appropriate level of investment in reinforcing its system to accommodate renewable generation in each of its planning timeframes? Should a distributor who is close to investing in expansions anyway be expected to go further, and incur higher costs, in order to accommodate a rate of expansion designed to maximize the connection of renewables? Or is it expected to find a moderate compromise that will increase the level of renewables beyond what it would have otherwise been, while keeping rate impacts below a certain threshold? Where would that compromise be, and how would such a threshold be set?
There are no absolute answers to these questions. Policy is needed to help planners, distributors, and transmitters determine how fast, and how expensively, to go with renewables. And a key component of that policy is what kind of analysis is considered necessary to demonstrate acceptability, before proceeding with a rate-based investment.
Whenever public policy pushes a system to make investments that it would not make on its own, complications ensue in the mandates of the implementing agencies. How to judge the real value of an undertaking or to properly assess its costs? While intricate analysis is undoubtedly being applied in these areas, its value depends heavily on the policy context. Two policy variables in particular, effectively qualitative issues, can make these calculations into effective tools of judgment or just so much paper: First, whether there is clarity on the public’s willingness to accept incremental costs to accommodate green energy, and second, whether there is consistency over time on the mandate to install additional green power capacity.
On the first variable, the McGuinty government has been reasonably clear. Based on its Long Term Energy Plan and the public information disseminated about it, the government seems to be saying, at some risk to itself, that it believes the public is ready to accept a moderate premium in price for green power. It seems so confident about this that it has apparently made no attempt to disseminate research on how the added costs will be offset by savings elsewhere over time. That is an act of judgment, even courage, which is what political leaders are sometimes expected to do. Whether the price is right is reasonable territory for debate, but policy ambiguity in this area has not complicated the ability to conduct effective analysis or to host public discussion on acceptable premiums.
However, on the second question, whether there is consistency over time on the degree of commitment to the program, there are two underlying problems. First, and this is largely unavoidable, if there is a change in government, public policy could take a sharp turn. Secondly, it appears that Ontario’s policy on procurement of green power has not been designed to maximize the likelihood of continuity following a change of government. A truly sustainable policy would be crafted such that only the most radical of successor governments would feel compelled to perform major surgery on it. Clearly, the McGuinty government felt that a judgment call was required here: Whether to make significant change today at the risk of being scaled back later, or to make modest change today, to improve the likelihood of continuity. Unfortunately, the polarized nature of partisan politics that currently operates in Ontario probably caused the government’s decision-makers to opt to take bold steps today, in order to present more distinctive alternatives for the voters in the coming election. Negotiating a durable compromise with the other political parties was probably considered so unlikely as to have been not worth trying.
Democratic societies often face questions that are unnecessarily clouded by partisan competition. It is a price that the vast majority of society willingly accepts in return for transparency in government positioning. But it is tested when it complicates the process for analyzing the projected economic impact of alternative policy options. In the end, the analysts will produce their projections to the best of their abilities, and voters will make judgments based on broad impressions and relatively coarse economic projections. And as a result, the regulators and the utilities are left without guidance on the degree of economic analysis that really needs to be applied before a rate-based investment is approved.
Many would argue that a carbon tax or a mandated renewable portfolio standard would get around these problems because they incent and/or oblige infrastructure upgrades to be put in place while allowing most of the existing mechanisms for enforcing cost discipline to operate. But those options have other problems that presumably have kept them out of the running in Ontario.
Only imperfect and partial solutions are available for problems of this nature. The solutions, where they exist, lie to a great extent in the realm of clarified policy. To what extent should regulators assume consumers are willing to go, to increase the proportion of green power on the grid? And to what level of detail should regulators be expected to go in assessing whether an infrastructure proposal is appropriate for rate-basing? The right answers are greater than zero and less than the “nth degree” in both cases. Absolute precision, elusive at the best of times, is not critical, as long as the full cost of alternative options is known with reasonable certainty, and participants keep asking the relevant questions. We will likely be in the right ball park if diligent efforts are made to accommodate new green power while maintaining respect for the core principle of prudency with consumers’ money. The resolution of these challenges may not be not be quick or easy, but the direction is clear. The power sector’s willingness to define prudent and meaningful change in a durable way will be a mark of our collective ability to forge consensus on the way forward for the power system in these challenging times.
- Jake Brooks, editor