The Cost of Subsidizing Green Energy Contracts: OSPE Analyzes the FAO’s New Report

On March 18, the Financial Accountability Office of Ontario (FAO) released a report highlighting The Cost of Subsidizing Green Energy Contracts for Industrial and Large Commercial Ratepayers

In the 2020 Ontario Budget, the Province announced a plan to reduce electricity costs for industrial and large commercial ratepayers by subsidizing the cost of “green energy contracts”. The Government announced that:

  • The renewable generation subsidy program will shift approximately 85 per cent of the cost of electricity generated under the green energy contracts from ratepayers to the Province, until the last contract expires around 2040.
  • The renewable generation subsidy will reduce the price of electricity for all ratepayers in Ontario. However, the Province will offset the benefit provided to residential, farm and small business ratepayers by lowering the discount provided through the Ontario Electricity Rebate (OER). As such, only large commercial and industrial ratepayers that are not eligible for the OER will receive a net reduction in their electricity costs.

Ontario has over 33,000 green energy contracts with wind, solar and bioenergy generators, which secure approximately 12 per cent of Ontario’s electricity supply. Most of the green energy contracts have 20-year terms and were entered into between the introduction of the Green Energy Act, 2009 in 2009 and its repeal in 2019. The prices paid to generators under the green energy contracts are significantly higher than the average price of electricity in Ontario.

Cost of Subsidizing Green Energy Contracts to the Province

  • The FAO estimates that the renewable generation subsidy program will cost the Province a net $2.8 billion over the first three years of the program, from 2020-21 to 2022-23.
  • The FAO’s three-year cost estimate is significantly higher than the Province’s cost estimate of $1.3 billion reported in the 2020 Ontario Budget. The Ministry of Energy, Northern Development and Mines confirmed to the FAO that the government’s estimate included additional cost forecast changes for the OER that were unrelated to the renewable generation subsidy program.
  • Over the life of the program, from 2020-21 to 2039-40, the FAO estimates that the renewable generation subsidy program will cost the Province a net total of $15.2 billion.
    • The annual net cost of the program will decline over time due to a combination of the expiry of green energy contracts, largely beginning in 2028, and projected increases in the market price of electricity.

Impact on Industrial and Large Commercial Ratepayers

  • In total, the FAO estimates that industrial and large commercial ratepayers will receive a $16.1 billion reduction in the cost of electricity from 2020-21 to 2039-40. Approximately 1,400 industrial ratepayers (such as auto parts manufacturers and pulp and paper mills) will receive a $6.3 billion subsidy through 2039-40, while large commercial ratepayers (such as hotels and office buildings) will receive a $9.8 billion subsidy.
    • In 2021-22, industrial ratepayers will receive a $0.5 billion subsidy, which represents an average 17 per cent reduction in the price of electricity and a 14 per cent reduction in a typical industrial ratepayer’s electricity bill.
    • Large commercial ratepayers will receive a $0.8 billion subsidy in 2021-22, which represents an average 19 per cent reduction in the price of electricity and a 16 per cent reduction in a typical large commercial ratepayer’s electricity bill.
    • After accounting for the renewable generation subsidy in 2021-22, the FAO estimates that electricity prices for large commercial ratepayers will remain among the highest in Canada but will fall below the US average. For industrial ratepayers, the discount in 2021-22 will drop prices below the Canadian average and below prices in most competing US jurisdictions.
  • The annual subsidy provided to industrial and large commercial ratepayers will decline over time as the green energy contracts expire. The decline will be gradual from 2021-22 to 2029-30, with the annual subsidy decreasing by 14 per cent over that time. The decline will become more rapid starting in 2030-31 as large numbers of the subsidized green energy contracts begin to expire.

Starting January 1, 2021, the renewable generation subsidy program shifted approximately 85 per cent of the cost of electricity generated under the green energy contracts from ratepayers to the Province. This is equal to the proportion of the contract prices recovered through the global adjustment charge. The renewable generation subsidy will continue for the life of the green energy contracts, until the last contract expires around 2040.

The renewable generation subsidy will reduce the price of electricity for all ratepayers in Ontario. However, the Province will offset the benefit provided to residential, farm and small business ratepayers by lowering the discount provided through the Ontario Electricity Rebate (OER). As such, only large commercial and industrial ratepayers that are not eligible for the OER will receive a net reduction in their electricity costs.

OSPE’s Position

OSPE supports the environmental objective of reduced greenhouse gas (GHG) emissions. OSPE believes that reduced green house gases-producing electricity generation is an overall environmental objective that will improve the health and environment for all Ontarians, not just electricity rate payers. Thus, the incremental cost of the clean electricity should be paid for by the tax base as opposed to the rate base.

By shifting the incremental costs of early generation renewables from the rate payer to the taxpayer, the Ontario government is merely more closely aligning Ontario’s support with how the renewable industry is supported/incentivized in the United StatesOSPE fully agrees with this approach noting there are considerable public benefits to clean energy, especially to a publicly funded health care system. 

In a similar manner, OSPE believes that energy efficiency incentives are best provided via tax incentives rather than being added to the rate base. The decision to reallocate these incentive costs from the ratepayer to the taxpayer is something that should have happened in the first instance and OSPE is glad to see that this is finally done.

Therefore, OSPE supports the Ontario government’s new policy to subsidize the higher cost of clean electricity sources as long as other jurisdictions that compete for consumer goods and services in Ontario use higher emission energy sources and/or subsidize clean energy sources using various production tax credits or other subsidy programs.

Ontario has aggressively lowered greenhouse gas emissions from 2005. Ontario was the first major industrial jurisdiction to achieve a 90% reduction in GHG emissions in its electricity sector from 2005 to 2017, well before international targets. Ontario achieved this by phasing out coal generation and by entering into contracts for higher cost energy sources, such as nuclear and renewables (wind, solar, biofuels and hydroelectric) that produce zero GHG emissions. 

Unfortunately, the prior clean energy policy required the additional cost of clean energy to be included in the cost of electricity. Other jurisdictions such as the United States, our largest trading competitor, chose to use tax credits and other subsidies that did not affect the cost of electricity for either their businesses or residential consumers. The result was that Ontario businesses were forced to pay higher electricity prices that increased the cost of their goods and services faster than their competitors in the United States. This placed Ontario businesses at a disadvantage when selling its products both domestically and in foreign markets.

To fully understand the impact on electricity prices of adding clean energy sources we will use the example of wind and solar generation. These two renewable sources have three characteristics that make them particularly expensive for the ultimate consumer who must also pay for the electricity system integration costs to incorporate those sources.  The three characteristics are:

  • Intermittency – energy production is determined by nature which is not aligned with consumer demand. This has cost implications on required backup generation capacity, electrical storage requirements, transmission line capacity requirements and curtailment losses during overproduction.
  • Low power density – wind and solar energy production is dilute so most renewable sources are located within the electrical distribution system rather than the transmission system. This has cost implications for the electrical protection system and bus/feeder/transformer upgrades in the distribution system.
  • Suppression of wholesale market prices – during periods of over-production wholesale market prices are suppressed. Most domestic consumers do not enjoy the benefits of these low prices due to global adjustment charges applied to retail rates. However, foreign buyers do enjoy these lower prices because they do not pay the global adjustment charge on spot market export sales.

Therefore, to understand the additional electricity system integrated costs of renewable generation we need to include 4 factors:

  • The contractual price difference between renewable energy and other traditional energy sources
  • The additional electricity system integration costs to offset the intermittency of renewable energy sources
  • The additional distribution system integration costs needed to accommodate renewable energy sources
  • Reduced export revenue due to low wholesale electricity prices during over-production by renewable energy sources

This is not a static policy file. Ontario is investing in refurbished nuclear plants, at a capital investment rate of about $3/W, to keep GHG emission low.  The United States and Germany are phasing out nuclear plants and installing subsidized renewables backed up by natural gas plants at a capital investment rate of about $1.5/W. 

At some point, Ontario may have to revisit electricity rates to determine if American energy policies that encourage low cost but high GHG emitting natural gas generation are creating an unfair advantage relative to Ontario’s use of higher cost but lower GHG emitting nuclear generation.

Finally, an unintended consequence of this policy could be reduced energy efficiency by industrial and commercial electricity users which would likely reduce productivity and increase electricity waste. The province’s Process and Systems Upgrade (PSU) energy efficiency program was ended on December 31, 2020, and there is no planned equivalent replacement until sometime in 2022. 

OSPE urges the government to quickly implement an industrial energy efficiency program to replace the PSU program (none of the new programs adequately address this requirement) rather than wait until sometime in 2022. 

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