Solar Energy–Higher Electricity Rates–Economic Suicide

   Do not think about, write about or deal with  human behavior without determining the effects of incentives.

   Yesterday, in Toronto, a cube van fire on one of Toronto’s busiest multi-lane highways turned into a 3 hour traffic standstill. First they ran hoses across two highways. Then, the resultant ice had to be cleared. The show was nice, but the results bad. It’s good we have experts protecting us, else how could we get along without them?

   Today, we see the results of more mismanagement based on fad, hysteria and, my favorite, consensus. The world was warming due to mankind and we were running out of fossil fuels. The sky was falling and the Chicken Littles turned to Green Energy. The jobs, the technology. Government policy would, as usual, lead us to the New Nirvana. The result, as usual, high costs, little production. Economic distortion. No Global Warming and extremely high new reserves of fossil fuel. Wrong again, but hysterical still. 

    When will people recognize that it’s not that governments have the Wrong Policies, but that governments have Policies, that does the damage?


Blame solar for sky-high Ontario power bills

Bruce Sharp, Special to Financial Post | October 29, 2013 5:00 PM ET
Solar energy – one of the key pillars of the Green Energy and Economy Act (GEEA) – is casting a dark cloud over Ontario electricity bills and is a big factor in recent and future bill increases.

On October 17, the Ontario Energy Board announced an increase in the Regulated Price Plan rates that apply to most residential and many small business consumers. The 0.5 cent/kWh rate increase will cost a typical Ontario homeowner an extra $57 per year.

If they’re wondering what’s driving this, they should look up into the sky or at their neighbour’s roof.

Solar energy – one of the key pillars of the Green Energy and Economy Act (GEEA) – is casting a dark cloud over Ontario electricity bills and is a big factor in recent and future bill increases. In 2013, solar projects caused electricity bills to be about $550-million higher than they would otherwise have been. For a typical homeowner, this works out to $47 per year. Ontario will have an estimated 1,100 MW of solar installed by year-end and roughly 900 MW will be added in 2014. This addition will cause 2014 electricity bills to increase by another $435-million – equal to a typical homeowner increase of $37 per year. By the end of 2014, solar will be costing Ontarians $1.25-billion per year – while generating a paltry 2% of Ontario’s total electricity requirement.

How did Ontario get here?

Under the previous Renewable Energy Standard Offer Program (RESOP), Ontario contracted for 475 MW of solar capacity, to be paid $0.42/kWh for 20 years. Then in 2009, the GEEA was introduced with great fanfare, with the cornerstone feature being a Feed-In Tariff (FIT) program for renewable energy. The Act was a creation of the Green Energy Act Alliance, a group comprised of some well-meaning but also self-interested organizations bent on driving their green agenda. At the time, then Energy Minister George Smitherman claimed the GEEA would increase consumers’ electricity bills by no more than 1% per year. Sadly, this is far from reality.

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   One percent. Fond memory. They get all the benefits of the sexual act. I get the shaft.

A massive, long-term portion of the solar cost to be borne by Ontario electricity ratepayers could have been avoided had the Ontario Power Authority (OPA) held the line on one key aspect of the draft FIT solar pricing. The original price proposed in April 2009 for large, ground-mount projects was $0.443/kWh, with a planned price “degression” or decrease of 9% for each 100 MW of solar ground-mount capacity added. The idea behind the degression was to simultaneously anticipate and force reductions in the installed cost of solar generation. Solar advocates immediately protested the planned price degression and the OPA quietly dropped it. This was akin to a parent giving in to a child’s demand to be served cookies and ice cream at every meal.

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   If one looks at these government documents they look impressive with their language and their mathematics. It’s all based on nonsense, of course, so the result is nonsense.

The move will cause great harm to ratepayers. Assuming this decrease would have occurred on a non-compounded basis, by the time 400 MW of ground-mount solar was under contract , the associated price would have been 32.3 cents/kWh . This price is close to where it stands today and is likely uneconomic. So, had price degression for ground-mount FIT solar been maintained, its development would have effectively ground to a halt at no more than 400 MW.

    A 10 MW solar project could be flipped for a windfall profit of $21-million

Arguably, price degression should also have been enacted for all rooftop solar and so its development would also have effectively ground to a halt at 400 MW of installed capacity.

In its 2011 annual report section focusing on renewable energy initiatives, Ontario’s Auditor General pegged the 20-year cost of the lost degression clause at $2.6-billion. This figure significantly understated the lost savings, by 68% to 73%. For ground-mount solar alone, degression would have saved ratepayers $8.2-billion over the 20-year life of solar contracts. If degression had also been extended to rooftop solar, it would have yielded savings of $1.6-billion. Total savings would then have been $9.8-billion or $840 per Ontario household.

Ontario’s FIT program has many other warts but one other price-related fault is worth mentioning. Original FIT rates for all generation types assumed ownership entities would be standalone. This affected wind and solar in particular and so assumed the entities would not make use of attractive capital cost allowances (CCA) as they were generated but instead only as the entity had income against which to use the generated CCA. This increased the FIT rate required to make projects owned by these entities economic.

Large entities then entered the picture, developing projects themselves or purchasing projects from the original developers. These large entities had “other income” that allowed them to use the attractive CCA much earlier. The result was an equity-return bonanza for large developing entities – increasing their equity returns by 10% or more. Standalone entities that sold projects to large entities received a windfall premium of 20% to 45%, depending on the acquiring party’s equity return target and debt leveraging. A 10 MW solar project with an original cost of $46-million could then be flipped for a windfall profit of $9-million to $21-million. Note that by 2016 – including Samsung’s solar projects – Ontario might have up to 1,800 MW (RESOP, FIT and Samsung) of ground-mount solar installed. This is the equivalent of 180 projects at 10 MW each.

Of course, much of this could have been avoided, had the Ontario government chosen to follow the OPA’s professional planners’ recommended gradual approach to adding solar to the generating mix and if competitive procurement had been used. On June 12, current Energy Minister Bob Chiarelli issued a directive, requiring all future FIT projects over 500 kW (0.5 MW) to be procured competitively. The effect of this – if any – will be minimal. Too little, too late, too bad.

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   Having competitive bids for nonsensical projects just makes nonsense more efficient. The results are still economically pointless. I’m looking forward to posting photos of abandoned solar and wind “farms” as the subsidies run out and government loses the “will to pretend.”

   To order my novel, “Days of Songs and Mirrors: A Jacobite in the ‘45”, click here.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson
Cui Bono–Cherchez les Contingencies

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