Take the high road

Last week I spoke about democracy. This blog is supposed to be about solar energy, not political science, but today I’ll take a stroll down the majority-rule road again. That’s because an issue that is critical to the future of Canada will shortly be decided by less than 14% of its people.

On May 14th of 2009, the government of Ontario passed the Green Energy Act (GEA). The first of its kind in the country, this legislation was intended to boost investment in clean, renewable energy. In just over two years, the act has given birth to an entire industry in the province, and attracted thousands of Ontarians into the business of generating and selling green electricity. Dozens of new companies are now doing manufacturing, installation, maintenance, and financing for projects that produce power from sun, wind, and biomass. Wind turbines and rooftop solar arrays are becoming an increasingly common sight in the province.

So far, the only Canadian jurisdiction that has followed the Ontario lead is Nova Scotia. Next week the province launches the “ComFIT” (Community Feed-In Tariff) program as part of its Renewable Electricity Plan. I’ll talk more about that next week.

My suspicion is that politicians in the other provinces and territories, as well as those at the federal level, are waiting to see what happens in Ontario before they commit to any big, bold initiatives. It is a rare politico that will go out on a limb with a new, unproven policy. On the campaign trail, the candidate that plans to tackle any more than three issues is the candidate that won’t get elected. Unfortunately, green energy is rarely such a front-and-centre topic that it makes the top three list.

So all eyes are on Ontario. If the GEA succeeds, chances are other jurisdictions will give serious consideration to imitating it. But if the GEA fails, it will set the renewable energy clock back a decade.

There are storm clouds on the horizon for the GEA. For one thing, some “Buy Ontario” stipulations of the GEA are under attack. Both Japan and the European Union have launched legal action at the World Trade Organization. They allege that these local procurement provisions violate WTO agreements, and constitute protectionism.

In my opinion, they’re right. In Canada, we’ve always had to contend with the occasional jingoistic American senator that wants to put an end to all this nasty importing of goods from foreign countries. 73% of our exports go to the US, so when “Buy American” fever takes hold, we’re the ones that get the shakes. So we can hardly turn around, get protectionist ourselves, and expect no repercussions.

Ontario didn’t sign the WTO agreements that form the basis of the complaints, but Canada did. That binds Ontario just as surely as if Bob Rae, the premier at the time of the WTO’s birth, had affixed his name to the document. So did Premier McGuinty’s entire policy formulation team miss the fact that his bill would inevitably bring nasty attention in the global trade deal negotiating table? It seems incredible.

Of course they knew. Just like they knew the well-established economic principle that protectionism is self-defeating in the long run – it breeds second-rate businesses that probably couldn’t survive in a truly competitive environment, and costs the consumer a bundle as a result. That’s why all the WTO signatories agreed to work together to keep trade barriers down.

But the GEA authors also knew that in the short run, protectionism can help to create something called a cluster. A cluster is a self-reinforcing network of interrelated enterprises and a rich pool of talent, all located in the same geographic area. Think of Silicon Valley. The cluster develops advanced technologies for the product itself and  for the production process. It also establishes powerful brands, and a workforce with deep skills and experience. For anyone left on the outside of the cluster, these present a formidable barrier to entering the market.

When an industry is in its infancy, and there are no clearly dominant global players, the rules of the protectionism game are different. Some countries recognize the opportunity to cultivate an industry cluster, others don’t. The ones that move first, and set up their incubator and surround it with trade barriers, can set the stage for their industry to be a global player.

It takes a while for other countries to wake up to the fact that a market has been illegally closed to their exports. It takes a while longer for bilateral negotiations to run their course, longer still for an action to be brought at the WTO, and even longer for that action to have a noticeable effect on the trade barrier. By that time, the protectionist hothouse has done its job. If there were any established global industry leaders to begin with, they now have a new competitor in their midst. The countries that failed to see the potential of the emerging industry in the first place will never be more than branch plant territory.

Of course Premier McGuinty’s team knew all this when they created the GEA. Their intent was to make Ontario a global contender in the renewable energy arena. And from what I see, the province is already well on its way, at least on the solar energy front. There are companies like ATS that provide production line machinery for solar panel manufacturers. There are manufacturers like Canadian Solar Inc., which recently (despite what you might think from its name and its $219M market capitalization) set up its very first Canadian manufacturing plant. And there is a myriad of companies installing and maintaining solar arrays.

It’s not clear if the Japanese and European actions will snuff this blossoming industry. They probably won’t. But a much greater threat is looming, and it’s not on another continent; it’s in Queen’s Park, and its name is the Progressive Conservative Party of Ontario.

The PCs have taken a hard line against the GEA. Party leader Tim Hudak has promised to scrap the most important parts of the act if he wins the provincial election next month. Given that the rest of the country is looking to Ontario to decide whether to get into the renewable energy game, and that our proportional representation system means that a party can form a majority with less than 40% of the popular vote, that means that less than 14% of Canada’s population is making a decision that will affect the future of the renewable energy industry nationwide for a decade to come.

Here’s hoping they choose well.

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Best of a bad lot

Democracy is about majority rule. The candidate with the most votes wins the election. A newcomer to the whole idea of democracy – a school child, for example – might infer that the winner is best candidate: the most qualified, the most experienced, the most popular, the most effective, or some or all of the above.

It doesn’t always work out that way.

Oftentimes during election campaigns, you realize that you don’t particularly like any of the candidates. In fact, you actually detest one or two of them. When you head to the polling station, you aren’t actually voting for a particular person. Instead, you’re voting against all of the candidates except one. You’re voting for the least bad alternative.

It’s like that with solar energy.

Don’t get me wrong. Solar energy has many terrific selling points. With minimal capital investment and a rapid installation process, you can start producing power. Solar arrays are completely scalable, and can be sized precisely to the application – from a single panel powering a roadside sign, to a multi-megawatt solar farm covering several hectares.

Solar energy can be generated right where it is used, eliminating the construction cost, maintenance overhead, and losses inherent in long-distance electricity transmission infrastructure. Once installed, photovoltaic systems produce zero emissions. They have no moving parts, and so are extremely reliable and require minimal maintenance. Panel manufacture is energy-intensive, but the panels generate many times more energy than that during their usable life.

All is not sweetness and light, however. The manufacture and end-of-life disposal of solar panels suffer from the same environmental perils as the semiconductor industry. The production process uses toxic metals that must be handled carefully to keep them from leaking into rivers and other water bodies. And like consumer electronics, clapped out solar panels are nasty things if not disposed of properly. Fortunately more and more manufacturers are offering recycling services, and third parties are getting into the act – one man’s trash is another man’s treasure.

Then there’s the cost. At present, solar cannot compete with most other energy sources on an installed cost-per-watt basis. However, this is mainly because most traditional energy sources carry costs that aren’t included in the price. They appear cheap, but the price you pay is only the first installment; there are more costs hidden in the fine print, and they’re brutal. Economists call this an “externality”. More on this below.

So solar is not perfect. But let’s look at the alternatives.

In Ontario, Canada, the three main sources of energy are hydroelectric, nuclear, and thermal. So let’s focus on these three.

At first glance, hydroelectric power is pretty sweet. It’s always been expensive to construct a dam. But once it’s built, the water is free and maintaining the turbines is cheap.  However, the best locations for large-scale hydro projects are already tapped. Further, hydroelectric projects can wreak havoc on river ecosystems, and the flooding when a river becomes a reservoir has displaced entire communities. The cost of managing these social/environmental impacts is rising, and may even kill some projects outright.

Next up is nuclear. It’s reliable, and it doesn’t produce greenhouse gases. But it is incredibly costly. Nuclear plants are the most expensive of all, and the costs don’t end with the construction. Uranium mining is an unpleasant business. Operating the plants always costs more than the builders anticipate. Spent fuel rods remain incredibly dangerous for thousands of years, and that’s a horrible legacy to leave our descendants. Even the low-level waste from refurbishing or decommissioning reactors is a hazard, and a tempting target for terrorists seeking to build a dirty bomb.

Then there’s the risk of accident. Three Mile Island, Chernobyl, and now Fukushima Daiichi all loom large in the mind of the public, and currently China is the only country with plans to build new plants. Germany is getting out of the business entirely. Few private companies are willing to accept the risk associated with nuclear plants, so often state agencies or corporations have to assume the risk instead. That means that when things go wrong, it’s the general public that foots the bill. This is an externality, as mentioned above – the price you pay does not reflect the total cost.

Thermal power plants generate power by burning fuel – usually the non-renewable kind, like coal or natural gas.  Their main attraction is that they are one of the few methods of power generation that can be brought online in a pinch to deal with spikes in demand that happen when, for example, everyone cranks the air conditioning during a heat wave. They cost a fair chunk of change to build, but the fuel is cheap and that means the power is too.

However, the thermal power party may have the biggest hangover of all. Burning fossil fuels produces greenhouse gases, and this leads to global climate change. That is yet another externality. When a hurricane wipes out New Orleans, the companies that run coal-fired generating plants and gas station chains aren’t presented with the bill. Instead, the population at large gets nailed with higher taxes and insurance rates.

So solar’s competitors suffer from many disadvantages. They generally cost a bundle just to get into the game, and the investment earns no return during the long period of construction and startup. That’s a huge financial risk. Nuclear and thermal require fuel, and the price of that fuel varies, which presents another short-term financial risk. Since there’s only a limited amount of fuel in the earth’s crust, the long-term price trend will always be upward; that’s not even a risk, that’s a certainty.

Finally, the power is usually generated a long way from where it is used, so there’s a big infrastructure cost to get the power to market. If you want to compare apples to apples, the sunk cost of high-voltage transmission lines should be included when evaluating competing energy sources.

That’s why developing countries will likely leapfrog us – when they electrify outlying villages, they will likely skip over central power generation completely and jump straight to on-site generation with wind and solar. This is analogous to the way that they have largely skipped landline telecommunications, and jumped right to mobile phones.

Solar does have its downside, make no mistake. But when you make an honest, thorough comparison, it’s the best of a bad lot.