The Ontario Auditor-General’s annual report contained three chapters on Ontario’s electricity sector. Here are the key observations from the report:
- Ontario is on track to shut down its more than 7,500 megawatts (MW)—the capacity as of 2003—of coal-fired generation by the end of 2014. Coal-generated power is being replaced by nuclear power from refurbished plants and by an increase of about 5,000 MW of gas-fired generation, with the remainder resulting largely from bringing more renewable energy online. More significantly, actions taken by the OPA and the Ministry to implement the Minister’s Directives are projected to increase renewable energy, mainly wind and solar power, to 10,700 MW by 2018.
- Because the ministerial directions were quite specific about what was to be done, both the Ministry and the OPA directed their energies to implementing the Minister’s requested actions as quickly as possible. As a result, no comprehensive business-case evaluation was done to objectively evaluate the impacts of the billion-dollar commitment. Such an evaluation would typically include assessing the prospective economic and environmental effects of such a massive investment in renewable energy on future electricity prices, direct and indirect job creation or losses, greenhouse gas emissions, and other variables.
- In May 2009, when the Green Energy and Green Economy Act (Act) was passed, the Ministry said the Act would lead to modest incremental increases in electricity bills of about 1% annually—the result of adding 1,500 MW of renewable energy under a renewable procurement program called the Feed-in Tariff program and implementing conservation initiatives. In November 2010, the Ministry forecast that a typical residential electricity bill would rise about 7.9% annually over the next five years, with 56% of the increase due to investments in renewable energy that would increase the supply to 10,700 MW by 2018, as well as the associated capital investments to connect all the renewable power sources to the electricity transmission grid.
- Earlier procurement programs for renewable energy included competitive bidding and the Renewable Energy Standard Offer Program (RESOP), which were both very successful and achieved renewable generation targets in record time. In particular, RESOP received overwhelming responses. It was expected to develop 1,000 MW over 10 years, but it exceeded this target in a little more than one year. Although continuing the successful RESOP initiative was one option, the Minister directed the OPA to replace RESOP with a new Feed-in Tariff (FIT) program that was wider in scope, required made-in-Ontario components, and provided renewable energy generators with significantly more attractive contract prices than RESOP. These higher prices added about $4.4 billion in costs over the 20-year contract terms as compared to what would have been incurred had RESOP prices for wind and solar power been maintained. The Ministry indicated that replacing RESOP with FIT successfully expedited its renewable energy program and promoted Ontario’s domestic industry.
- Many other jurisdictions set lower FIT prices than Ontario and have mechanisms to limit the total costs arising from FIT programs. The OPA made a number of recommendations to lower Ontario’s pricing structure. We were advised that the government opted for price stability to maintain the investor confidence required to attract capital investment to Ontario until the planned two-year review of the FIT program could be undertaken. Examples of proposed changes included the following:
In March 2009, before the passage of the Green Energy and Green Economy Act, the OPA proposed a reduction of 9% to FIT prices for electricity generated from ground-mounted solar projects, in line with similar practices in some other jurisdictions. This could have reduced the cost of the program by about $2.6 billion over the 20-year contract terms. The government did not apply this reduction. The Ministry informed us that such a predetermined price reduction ran counter to the government’s goals of maintaining policy and price stability for the initial two-year period.
- In February 2010, the OPA recommended cutting the FIT price paid for power from microFIT ground-mounted solar projects after the unexpected popularity of these projects at the price of 80.2¢ per kilowatt hour (kWh), the same price as was being paid for rooftop solar projects, became apparent. This price would provide these ground-mounted solar project developers with a 23% to 24% after-tax return on equity instead of the 11% intended by the OPA. The recommended price cut was not implemented until August 2010. In the five months from the time the OPA recommended the price cut in February 2010 to the actual announcement in July 2010, the OPA received more than 11,000 applications from developers. Because the government decided to grandfather the price in order to maintain investor confidence, all of these applications, if approved, would qualify for the higher price rather than the reduced one. We estimated that, had the revised price been implemented when first recommended by the OPA, the cost of the program could have been reduced by about $950 million over the 20-year contract terms.
- The Ministry negotiated a contract with a consortium of Korean companies to build renewable energy projects. The consortium will receive two additional incentives over the life of the contract if it meets its job-creation targets: a payment of $437 million (reduced to $110 million, as announced by the Ministry in July 2011 after the completion of our audit fieldwork) in addition to the already attractive FIT prices; and priority access to Ontario’s electricity transmission system, whose capacity to connect renewable energy projects is already limited. However, no economic analysis or business case was done to determine whether the agreement with the consortium was economically prudent and cost-effective, and neither the OEB nor the OPA was consulted about the agreement. On September 29, 2009, the ongoing negotiations with the consortium were publicly announced, and Cabinet was briefed on the details of the negotiations and the prospective agreement in October 2009. The formal agreement was signed in January 2010.
- Surplus generating capacity is necessary to meet periods of peak demand, which, in Ontario, occur in the summer. Therefore, to ensure system reliability, all jurisdictions will have surplus power from time to time. Ontario deals with surplus-power situations mainly by exporting electricity to other jurisdictions at a price that is lower than the cost of generating that power. Given that demand growth for electricity is expected to remain modest at the same time as more renewable energy is being added to the system, electricity ratepayers may have to pay renewable energy generators under the FIT program between $150 million and $225 million a year not to generate electricity.
- Recent public announcements stated that the Green Energy and Green Economy Act, 2009 was expected to support over 50,000 jobs, about 40,000 of which would be related to renewable energy. However, about 30,000, or 75%, of these jobs were expected to be construction jobs lasting only from one to three years. We also noted that studies in other jurisdictions have shown that for each job created through renewable energy programs, about two to four jobs are often lost in other sectors of the economy because of higher electricity prices.
- Renewable energy sources such as wind and solar provide intermittent energy and require backup power from coal- or gas-fired generators to maintain a steady, reliable output. According to the study used by the Ministry and the OPA, 10,000 MW of electricity from wind would require an additional 47% of non-wind power, typically produced by natural-gas-fired generation plants, to ensure continuous supply.
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