Moving target

In October, Ontario’s Green Energy and Green Economy Act dodged a bullet.

The opposition Conservative party claimed that the Feed-In Tariff (FIT) program, the Act’s most visible component, was sending electricity bills sky-high. On the face of it, the idea makes sense. Since the Ontario FIT rate for small-scale rooftop solar is 80.2 cents per kilowatt-hour, and the peak retail rate is 10.8 cents, doesn’t that mean our bills will be, like, nearly eight times what they are now?

Not even close. The Ontario Long-Term Energy Plan has targeted a measly 1.5% of all power in the province to be supplied by solar photovoltaic (PV) by 2030. If that goal were reached entirely at the 80.2 cent small-scale rooftop PV rate (not, say, large-scale ground mount, which commands half that), it would mean the FIT program would cause prices to rise by less than 10% over the entire 20-year life of the program. That equates to an annual increase of less than half a percentage point, or about 50 cents a month for the average Ontario household. In fact, the increase will be much less, as small-scale rooftop PV makes up only a small portion of the generation capacity currently in the program pipeline.

PV won’t make a noticeable impact on hydro bills. The reason is not that PV is cheap – it isn’t, at least not yet. It’s because the province has set a target for PV that is so low it’s laughable. Seriously, if all the PV industry can expect to accomplish is to reach 1.5% of total generation capacity over a twenty-year period, what’s the point?

1.5% is way, way too low.

Let’s look at some statistics on PV. According to the International Energy Agency, the global authority on energy matters, we can expect to see a reduction of 18% in total installed cost for PV systems each year. At that rate, PV will reach parity with today’s off-peak retail price of 6.2¢/kWh in 2022 – just a little over ten years. Retail rates, of course, will continue to rise rather than remaining constant, so retail grid parity will actually come sooner than that.

At this week’s Solar Canada 2011 conference presented by the Canadian Solar Industries Association (CanSIA), Skypower CEO Kerry Adler opined that 1GW of new contracts per year would be necessary to maintain a sustainable solar PV industry in Ontario. The LTEP target is less than 5GW of total installed capacity by 2030, or less than 250MW installed per year – not even a quarter of Mr. Adler’s projection. Although other industry commentators differed with Mr. Adler, it is clear that industry capacity is far larger than is required to deliver the LTEP goal. Either the industry has to rationalize, or the LTEP goal has to be revised upward.

Another discrepancy will have to be addressed. The response to the FIT program has been much greater than anticipated. However, the program did not include any mechanism to control the volume of applications, and the unexpectedly large number is putting the program under serious budgetary pressure. The OPA is now considering a cap on the number of megawatts-worth of PV contracts that are signed.

Such a measure would be extremely damaging to the nascent PV industry. Business thrives on predictability, on regular production volumes, and on a consistent rate of growth. If the industry is permitted to produce up to an arbitrary cap and no more, what is to be done? Are staff to be laid off, supplier contracts to be suspended, and production lines shut down until the next equally arbitrary reopening of the contracting window? That is no way to run a railroad.

There is another mechanism, a much more natural one than placing a ceiling on installed capacity. It is price.

It is a basic assumption in FIT programs that rates will be reduced rates over time – price digression, as it is called. In some countries, this price reduction is automatic. Hence, nobody that has followed FIT programs at all should be surprised that the Ontario FIT rates will be reduced. However, there are serious flaws in the way that the Ontario Power Authority has conducted the review.

The OPA has telegraphed that the rates will drop, but they have not indicated by how much. That much is not a problem. However, when the OPA announced the review, they also mandated that all applications received thereafter – and, worse, any that were in-process but had not yet reached the contract stage – will be subject to the new, unknown pricing. This means that businesses that negotiated deals and submitted applications assuming a certain price now have no idea if they will lose their shirts on those deals.

The OPA’s approach is understandable. If they’d left the door open, and allowed applications to continue under the old pricing, they would have had a stampede on their hands – everyone would have been falling all over one another to get their applications in under the old, higher rates. Instead of taking the hit themselves, the OPA let the industry take the hit instead. And the industry is hurting.

An automatic digression schedule would have avoided this conundrum. In the future, the OPA should specify a recognized industry metric to use as the basis for price digression. It should publish this metric on a regular basis. And, it should reduce FIT rates according to that metric on as regular and frequent a schedule as is practical. This will ensure that the industry remains competitive, and that FIT rate reductions don’t send it into a tailspin every couple of years. It will also avoid the need for the OPA to set an arbitrary cap on installed capacity.

However, this scenario will result in an organic pattern of growth that will not respect the target in the LTEP.

The Plan was based on what was thought possible at the time it was written. It already appears that the target for PV is too timid. The goals for other renewables may prove likewise. It is important that the Ontario Ministry of Energy not shackle itself to the targets contained in the LTEP. It must retain the flexibility to revise the figures for renewable energy upward if the industry demonstrates that it is capable. It must find ways to buy time, to postpone the huge, irreversible, and open-ended commitment of taxpayer cash required to refurbish Ontario’s aging nuclear plants.

Nobody knows just what renewable energy can do. As the picture becomes clearer, the Ministry must do everything it can to keep its options open.

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