Sand in the Vaseline: Part III

This is the third installment of a series looking at the Ontario MicroFIT program. Part I looked at the Ontario Power Authority and the shortcomings of its online application system. Part II looked at the way each Local Distribution Company (LDC – your local electricity utility) handles MicroFIT applications, and suggested how it could all work much more smoothly. This post will zoom up to cruising altitude and look at the FIT rate itself, and how it makes the MicroFIT program what it is: less than what it could be.

Policies flow from objectives, and objectives flow from some overarching goal. According to the OPA website, “The primary goal of the Green Energy Act is to further enable and promote energy conservation and renewable energy development.” The site also states four expected benefits, which you could also view as objectives – more renewable energy, more conservation, more jobs, and less climate change. The Feed-In Tariff program speaks to items one, three, and four.

In fact, you can sum these up in one simple objective – a healthy and growing renewable energy industry. Such a creature will automatically create jobs, and lots of them. Such a creature will also automatically mitigate climate change, or at least this one province’s contribution to it, since renewable energy more-or-less by definition is energy that does not produce climate-changing greenhouse gases.

In a perfect world, how would you create a thriving renewable energy industry?

There are a number of policy options, but one of the best is the Feed-In Tariff (FIT). This measure offers a premium price for renewable energy, partially in recognition of the massive subsidies – explicit and implicit – that traditional energy sources like coal, oil, nuclear, and natural gas receive. It is also partially in recognition that, in the case of rooftop solar at least, the energy is more valuable; solar provides the most energy exactly when it is most needed, exactly where it is most needed – high noon in summer, when urban air conditioners are cranked, the grid groans under the weight of peak demand, and power may have to be purchased at extortionate rates from neighbouring states and provinces.

But the main reason for the premium is the same reason parents accept the expense of raising children – it is a commitment that won’t last forever. As each unit of renewable energy comes online, the cost of the next unit is slightly lower. Over time, these cost reductions really add up. A good FIT correlates the buy rate for new power contracts with the capital cost to produce that power (since operating costs are close to zero), with a little extra to allow for profit. As the capital cost drops, so can the FIT. Eventually, or so the theory goes, the FIT will reach the prevailing price of electricity from other sources, and can be abandoned altogether.

The primary focus of the program, therefore, should be to monitor the cost of renewable energy installations continuously, and to realign the FIT rate to that cost as frequently as possible. This downward path of the FIT rate is called regression. Ideally, regression would be in realtime – this would provide the least-cost path to bring the price of renewables in line with that of traditional energy sources.

The most critical piece of information for making decisions in any industry is the price. With good price information comes good decision making about matters like when to add production capacity and how much to add. Therefore, another focus of the program should be to make the FIT regression as transparent as possible.

Since the Ontario FIT program began, the highest rate has been for rooftop solar photovoltaic (PV) systems with a nameplate capacity of 10kW or less. When the program launched in May 2009, the rate was 80.2 cents per kilowatt-hour. In October 2011 the OPA froze the program, reopening it after a ridiculously drawn-out review in July 2012 at the rate of 54.9 cents. The adjustments came without warning and, although extensive consultations were held, the process for setting the rates was utterly opaque.

RegressionThe chart at left shows in red what an orderly, linear regression on a biannual schedule could have looked like. The blue line represents what the OPA has actually done. The area above the red line and below the blue is wasted money – cash given away in the form of MicroFIT contracts with parties who would have accepted less. The area below the red line and above the blue is…well, the best name for it is Death Valley. No contracts, no revenues, no profit, no industry.

For 18% of its existence, the MicroFIT program didn’t exist at all.

How could the OPA have done better?

Simple – every time a contract is issued, require the program participant to name the price they paid for their system. This is competitively sensitive information, but it would be simple enough to anonymize it so that nobody can get an unfair edge over rivals. If every MicroFIT contract issued since July 2012 was for the maximum system size of 10kW, this would yield 5,000 data points – more than enough to track trends in system pricing while weeding out any statistical anomalies.

It would be child’s play to take this data and present it for the industry to scrutinize, and set out the rules for how and when the data would drive FIT rate adjustments. This would render the process completely transparent. Everyone would know where the price was headed. There would be no attempts to play the timing game, waiting until the gap between expenditure and expected revenue was the widest – there would be no point.

If a review of the program were required, there is no reason it would necessitate shutting down the program altogether. It’s not like every car had to be taken off the roads for the better part of a year while the Province formulated the law prohibiting use of handheld cellphones while driving. The OPA’s decision to freeze MicroFIT for nine months did immense damage – like breaking a child’s legs while she is just learning to walk. It was no way to meet the objective of a healthy and growing renewable energy industry.

Oh, there are other things that could be done differently to minimize the cost of the program and maximize the speed at which we convert to a post-carbon economy. Eliminate silly rules like the one that prevents a person that owns more than one property from putting up solar panels or a wind turbine on as many of those properties as they wish (with due consideration for the feelings of the neighbours, of course, which municipal zoning rules already handle quite nicely, or should). Allow projects to be built on a property regardless of whether it is owned by a person or a corporation. And most of all, eliminate the 7% feeder rule.

But that’s a topic for another day.


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