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ONTARIO FEED-IN-TARIFF PROGRAMS Adonis Yatchew 1 and Andy Baziliauskas 2

ONTARIO FEED-IN-TARIFF PROGRAMS Adonis Yatchew 1 and Andy Baziliauskas 2. Fourth Asian Energy Conference: “ Electricity Sector & Renewable Energy cum Hong Kong Energy Policy ”, December 3, 2010. 1 Economics Department, University of Toronto. Editor-in-Chief, The Energy Journal.

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ONTARIO FEED-IN-TARIFF PROGRAMS Adonis Yatchew 1 and Andy Baziliauskas 2

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  1. ONTARIO FEED-IN-TARIFF PROGRAMSAdonis Yatchew1 and Andy Baziliauskas2 Fourth Asian Energy Conference: “Electricity Sector & Renewable Energy cum Hong Kong Energy Policy”, December 3, 2010. 1 Economics Department, University of Toronto. Editor-in-Chief, The Energy Journal. yatchew@chass.utoronto.ca 2 Principal, Charles River Associates International. abaziliauskas@crai.com

  2. Introduction • In October 2009, Ontario implemented an ambitious feed-in-tariff program (FIT). • It has elicited a very strong response – in the first 12 months applications totalled 15,000 MW (equivalent to over 40% of Ontario generating capacity). • This paper outlines this program, examines its origins, compares it to other programs and assesses its efficacy and sustainability.

  3. Background • Ontario, Canada • Population • 13 million people. • Largest urban areas – Toronto (5.5 million); Ottawa (1.1 million). • Most of the population resides in southern Ontario, not far from U.S. border. Toronto has the same latitude as Marseilles in the northern hemisphere and Hobart, Tasmania in the southern hemisphere. • Area – 1.1 million square kilometers (equal to the combined area of France and Germany).

  4. Industry Restructuring • For most of 20th century the Ontario industry centered on Ontario Hydro which owned almost all generation, transmission and rural distribution in Ontario. • Municipal distribution was provided by over 300 utilities of varying sizes.

  5. Industry Restructuring • During the late 1990’s the industry was restructured: • Generation separated from transmission with two major descendent companies: • Ontario Power Generation (OPG) which inherited much of Ontario Hydro generation assets. • Hydro One which inherited transmission and (mostly rural) distribution. • Some rationalization among municipal distributors: • Presently there are approximately 80 distributors.

  6. Key Agencies • Ontario Energy Board (OEB) – main regulatory body. • Independent Electricity System Operator (IESO) – balances supply/demand (established 1998). • Ontario Power Authority (OPA) – responsible for assuring a long-term adequate supply of electricity in Ontario. Its plans require regulatory approval by the OEB (established 2004).

  7. Generation -- Capacity • 37,000 MW • Hydro/Nuclear/Solar/Wind 58% • Coal 17% • Oil/Gas 24% • Most facilities publicly owned. • Largest generating company – Ontario Power Generation.

  8. Generation -- Energy • 150TWh/year • Hydro 26% • Nuclear 55% • Solar/ Wind /Bio 3% • Coal 7% • Oil/Gas 10%

  9. Reasons for Aggressive Renewables and Conservation Policies • Aging nuclear reactors, some of which will be out of service within the next decade. • Desire to eliminate coal generators in order to improve air quality in southern Ontario and to reduce greenhouse gases. • Current government efforts to move towards green energy and to promote green economy jobs.

  10. RESOPRenewable Energy Standard Offer Program • RESOP was launched November 22 2006 and ended on October 1 2009. • Designed to encourage renewable supply connecting to distribution and not exceeding 10 MW. • During this period about 1000 MW of renewable was contracted -- mostly solar (53%) and wind (37%).

  11. RESOPRenewable Energy Standard Offer Program • On-peak incentive 3.5¢ for Bio-energy and Water

  12. RESOP Issues and Challenges • High concentration among developers. • Larger projects broken up into smaller ones to qualify for under 10 MW limit. • Distribution system not designed for this purpose and could not accommodate volume of applications. • Program pricing does not reflect economies of scale.

  13. Green Energy Act 2009 (GEA) • Act extends beyond energy policy • Facilitates renewable supply development: • FIT and microFIT program. • Priority connection for renewables. • Minister may direct OEB to ensure specific renewables are connected. This may require T&D expenditures. • Other areas include Smart Grid, conservation and creation of ‘green’ jobs.

  14. Green Energy Act 2009 (GEA) • The GEA has the potential for fundamentally changing the institutional structure and energy related decision-making. • Previously, the OEB, the prime regulator, operated ostensibly at arms-length from the Provincial Government. • Under the GEA, the Government has much broader scope to directly influence choices. It can require that specific contracts for power be signed and that transmission be reserved for designated purposes.

  15. FIT and microFIT Programs • Feed-in-tariff programs are divided into two streams: • FIT – projects over 10 kW. • microFIT – projects less than 10 kW. • Streamlined and simplified contract execution process.

  16. FIT and microFIT -- Solar Tariffs Prices expressed in Canadian ¢/kWh. Presently $1 CAD ≈ $1 U.S.

  17. FIT and microFIT -- Wind and Hydro Tariffs Prices expressed in Canadian ¢/kWh. Presently $1 CAD ≈ $1 U.S. Waterpower prices adjusted for on/off peak at 135%/90% of FIT Price.

  18. FIT and microFIT -- Bioenergy TariffsPrices expressed in Canadian ¢/kWh. Presently $1 CAD ≈ $1 U.S. Prices adjusted for on/off peak at 135%/90% of FIT Price.

  19. Other Key Features • Standardized rules and contracts. • Long term fixed price (20 years for most renewables; 40 years for hydro). • Prices cover development costs. • Prices target a rate of return of 11%. • Equity opportunities for Aboriginal and Community projects. • Domestic content requirements for wind and solar PV projects.

  20. FIT and microFIT Supply

  21. FIT and microFIT Supply • Very strong response to program. Applications total about 15,500 MW (over 40% of current system capacity). • Dominated by: • Wind -- 69% of applications. • Solar – 28% of applications.

  22. The Process • microFIT and ‘capacity allocation exempt’ facilities ‘fast-tracked’. • Otherwise, must pass transmission availability test and/or distribution availability test. • Economic Connection Test. This process is used to drive upcoming transmission expansion depending on locations and requirements of applicants.

  23. Economic Connection Test • Assesses cost of connection, giving preference to renewable generation. • OPA must also consider ratepayer impacts. • In system planning, OPA follows three steps: • Determines requirements of FIT applications. • Designs transmission expansion to accommodate FIT projects while maintaining low system congestion. • Applies economic connection test to identified FIT projects.

  24. Economic Connection Test • OPA proposes to use $500/kW as transmission cost benchmark. • Generally consistent with other jurisdictions. • Similar to previous transmission costs in Ontario.

  25. Transmission and FIT Projects • Major transmission upgrades and expansions ($2.3 billion over the next three years) will be required if many of the applications are to be accommodated. • Transmission constraints may limit approval of contracts in certain regions. Source: http://fit.powerauthority.on.ca/Storage/101/11002_FITMap06.swf

  26. Why Such a Strong Response to FIT/microFIT? • GEA assures preferred access. • Prices substantially higher for solar and wind than under RESOP. Also more price categories. • Pricing based upon studies performed in early 2009. Since that time, favourable changes in costs of certain renewable technologies.

  27. Why Such a Strong Response to FIT/microFIT? • Under RESOP, projects were required to connect to distribution system at a maximum voltage of 50 kV. FIT projects can connect to distribution or transmission. • RESOP projects limited initially to 10 MW. • Simplified/streamlined procedures, especially for small projects.

  28. Comparison of RESOP and FIT/microFIT Uptake • Note these data are for executed contracts only. FIT applications exceed 15,000 MW.

  29. Economics of Solar PV • Several photovoltaic technologies on the market. Market dominated by modules using crystalline silicon (89% of market share in 2007). • Ontario PV installations sensitive to several factors: • Exchange rates – 50%-75% of installed system costs depend on components denominated in U.S. /other currencies. Thus a 20% change in exchange rate can change costs by 10%-15%. • Module prices – there is an expectation that these will decline. • Cost of capital – initially following the financial crisis of 2008, debt financing became more expensive and required higher equity financing. • Insolation – for Ontario annual output is expected to be 1,100 kWh/kW.

  30. Economics of Solar PV – Exchange Rates • Solar PV prices set based on January 2009 study. At that time Canadian dollar was weak relative to the U.S. dollar $1 CAD = $.80 US. Since then the CAD has appreciated to approximate parity with the USD.

  31. Economics of Solar PV – Module Prices • Module prices have dropped dramatically since the beginning of 2009. • Source Solarbuzz LLC http://www.solarbuzz.com/ModulePrices.htm

  32. Favourable Economics for Solar PV in Ontario • Since the time solar prices were set in early 2009, • Canadian dollar has appreciated by 25%. • Module prices have declined by 25%. • Therefore, on balance, installed costs may have declined by 25% or more as a result of changes in these two factors.

  33. Domestic Content Requirements • The FIT and microFIT programs impose ‘domestic content’ requirements.

  34. Domestic Content Requirements • Japan has launched a dispute at the World Trade Organization arguing that the domestic content requirements under the FIT program violate international trade laws.

  35. Comparisons With Europe • Ontario internal rate of return (IRR) used to set prices higher than in other jurisdictions: • Ontario – 11% • France – 8% • Germany – 5%-7% • Spain – 5%-10% Source : “Paying for Renewable Energy”, DB Climate Change Advisors, December 2009

  36. Comparisons With Europe • How to adjust prices over time: • Germany builds in degression. • Netherlands and Spain – prices can be adjusted through periodic review. • Ontario – periodic review. Source : “Paying for Renewable Energy”, DB Climate Change Advisors, December 2009

  37. Comparisons With Europe • Ontario prices for wind and solar compared to those in Spain and Germany: Exchange rate as of November 11, 2010 1 Euro = 1.371 CAD

  38. Political Sustainability • Gasoline prices vary widely, yet governments do little to mitigate consumer impacts (e.g., gasoline taxes are rarely reduced). Source: http://www.ontariogasprices.com/retail_price_chart.aspx

  39. Political Sustainability • Smaller variations in electricity prices can result in fundamental policy shifts: • In 2002, Ontario launched its electricity market with price pass-through to end-users. Hot summer and outages led to rising prices. Provincial Government decided to cap prices to consumers and effectively shifted the model away from a competitive electricity market to a hybrid market where much of the power supply is secured under long-term contract.

  40. Political Sustainability • In 2010, electricity prices are projected to increase by approximately 15% (see graph). On November 18, 2010 the Provincial Government announced a 10% benefit to help consumers manage rising electricity prices for the coming five-year period. • Unclear how this policy will be implemented to ensure that price signals are not distorted further.

  41. Political Sustainability Ontario Electricity Prices Source: http://www.oeb.gov.on.ca/OEB/Consumers/Electricity/Electricity+Prices#prices

  42. Political Sustainability • Electricity prices are expected to increase by 45% over the coming renewables. • As share of renewables grow in the generation mix, this will only serve to put further upward pressure on prices, potentially undermining the long-term political sustainability of the program.

  43. Carbon Reduction • At present prices, solar technology represents an expensive approach for carbon reduction. Source: “Sustainable Pricing for Sustainable Electricity”, Presentation to the Ontario Network of Sustainable Energy Policy Workshop, Donald N. Dewees, Department of Economics, University of Toronto, April 27, 2010.

  44. Concluding Comments • Ontario has embarked on an ambitious feed-in-tariff program. The response has been very strong. • Tariffs designed to attract rapid response. • Changes in costs have favoured suppliers. • Preferred access to transmission and distribution.

  45. Concluding Comments • FIT has been more effective than its predecessor the Renewable Energy Standard Offer Program (RESOP) in securing supply. • Too early to say whether it will be effective in achieving other objectives, such as development of a domestic green industry and job creation.

  46. Concluding Comments • Recent strengthening of the Canadian dollar and decline in solar module prices has improved the economics of solar technology. • Future tariffs could be reduced while still maintaining an attractive rate of return.

  47. Concluding Comments • The Green Energy Act has wide ramifications for energy-related decision making in the Province. • The OEB is subject not only to government policy but specific directives on implementation. • Risks that political exigencies will lead to suboptimal outcomes. • It would be preferable to return to the model where the regulator has greater autonomy.

  48. Concluding Comments • Unless renewables costs (especially solar) drop dramatically, the program may not be politically sustainable. • Already, the Provincial Government is promising a 10% electricity benefit to offset rapidly rising prices. • Solar technology represents a costly approach to carbon reduction.

  49. Concluding Comments • Important challenges include: • Developing adequate and cost-effective T&D. • Effective integration of solar and wind power into dispatch, particularly as their shares grow.

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