Ontario’s Green Energy Act: Ill Wind All Around

The Fraser Institute recently published a study examining the impacts of green energy policies inOntario,Canada. The summary of the study, which was written by Fraser Institute Senior Fellow Ross McKitrick, is below.

———————

The Ontario Green Energy and Green Economy Act (herein the GEA) was passed in May 2009 with the purpose of addressing environmental concerns and promoting economic growth inOntario. Its centerpiece is a schedule of subsidized electricity purchase contracts called Feed-in-Tariffs (FITs) that pro­vide long-term guarantees of above-market rates for power generated by wind turbine farms, solar panel installations, bio-energy plants and small hydroelec­tric generators. Development of these power sources was motivated in part by a stated goal of closing the Lambton and Nanticoke coal-fired power plants.

This report investigates the effect of the GEA on economic competi­tiveness in Ontario. It focuses on three questions:

(1) Will the GEA mater­ially improve environmental quality inOntario?

(2) Is it a cost-effective plan for accomplishing its goals?

(3) Are the economic effects on households and leading economic sectors likely to be positive? The answer to each question is unambiguously negative. The specific findings of the report are as follows.

It is unlikely the Green Energy Act will yield any environmental improve­ments other than those that would have happened anyway under policy and technology trends established since the 1970s. Indeed, it is plausible that adding more wind power to the grid will end up increasing overall air emissions from the power generation sector.

As of 2009, air quality in Ontario had improved considerably compared to the 1960s, and showed no tendency to be getting worse. A confidential 2005 cost-benefit analysis for the provincial government, often cited by the Province as a defense of the GEA, in fact predicted that the closure of the coal-fired power plants would yield such tiny effects on air quality as to be unnotice­able in most places.

Because of the fluctuating nature of wind and solar power, adding renew­able capacity to the grid requires additional backup power from natural gas plants. Because Ontario currently has a surplus of base-load generating capacity, further additions to base-load in the form of wind or solar power may require removing a nuclear plant from operation and replacing it with a combination of renewable and gas-fired generation, yielding a net increase in air emissions.

The plan implemented under the Green Energy Act is not cost effective. It is currently 10 times more costly than an alternative outlined in a con­fidential report to the government in 2005 that would have achieved the same environmental goals as closing the coal-fired power plants.

The province’s continued reliance on the confidential 2005 “DSS” analysis in defense of the GEA is misleading since that report did not consider or rec­ommend use of wind or solar energy as a replacement for coal. The analysis by DSS Management Consultants actually shows that a relatively low-cost retrofit option for the coal plants was available that would have yielded envi­ronmental improvements (including reductions in greenhouse gases) effec­tively equivalent to those of closing the plants, at about one tenth the current cost of the GEA, and one seventieth what it will cost if the Province follows its stated plans to completion.

The focus on wind generation is especially inefficient because pro­duction peaks when it is least needed and falls off when it is most needed. Surplus power is regularly exported at a considerable financial loss. On average, due to daily and seasonal wind patterns in Ontario, a 1% increase in wind power production coincides with a 1% reduction in consumer power demand. Eighty percent of Ontario’s generation of electricity from wind power occurs at times and seasons so far out of phase with demand that the entire output is surplus and is exported at a substantial loss. The Auditor-General of Ontario estimates that the province has already lost close to $2 billion on such exports.

Data from the Independent Electricity System Operator shows Ontario now loses, on average, $24,000 per operating hour on such sales, totaling $200 million annually. The loss rate will continue to grow with every new wind turbine installation because the mismatch between the timing of wind-powered generation and Ontario electricity demand is structural.

The wind-power grid is also inherently inefficient due to the fluc­tuating nature of the power source. Output of Ontario’s wind turbines is below one fifth of rated generating capacity about half the time, and below one third of the rated capacity about two thirds of the time. Because of the unreliability of output, 7 MW of rated wind energy are needed to provide a year-round replacement of 1 MW of conventional power generating cap­acity. Consequently, the cost of achieving the provincial targets for renewable energy in the coming years will be much higher than currently acknowledged.

The Green Energy Act will not create jobs or improve economic growth in Ontario. Its overall effect will be to increase unit production costs, dimin­ish competitiveness, cut the rate of return to capital in key sectors, reduce employment, and make households worse off.

The claim by the government of Ontario that 50,000 jobs will be created by the GEA was a guess without any basis in formal analysis, and the Province has since admitted both that the vast majority of any GEA-related jobs will be temporary and that the figure of 50,000 does not account for offsetting perma­nent job losses caused by increases in the price of electricity under the GEA.

Electricity costs for large users in Ontario were moderate compared to surrounding jurisdictions as recently as 2008, but have since risen almost to the highest level in our comparison group. Further price increases of 40% to 50% are forecast, in large part to pay for costs incurred under the GEA. These will result in Ontario being at or near the top end of North American electricity costs over the next few years. Such price increases, were they to occur, would strongly affect the unit cost of production in mining and manu­facturing and, to a smaller extent, forestry. I estimate they will drive down the rate of return to capital in manufacturing in Ontario by 29%, in mining by about 13%, and in forestry by about 0.3%, leading to a net loss of investment and employment in the province.

Provincial efforts to shield these industries through energy subsidy pro­grams only transfer the costs onto households, who are already dealing with increases in the price of residential electricity because of GEA-related initia­tives. There would also be uncertainty as to whether the Province will remain committed to such subsidy measures in the face of its ongoing budget deficit. There are additional costs to households in regions afflicted with new wind turbine installations arising from lost property values, degradation of the rural environment, and increased health and stress problems. Were these to be taken into account, the overall cost burden of the GEA would be even higher.