Lessons from Ontario's green energy shift
Ontario's transition off coal-power was combined with an experiment in privatizing electricity generation and 'crowding-in' private investment.
In order to understand the thinking of policy makers, it’s sometimes useful to understand what lessons they’ve taken from their past experiences. Many McGuinty-era Liberals work in and around the current federal government, and lots of current environmental lobbyists would have been shaped by their experiences with Ontario’s Green Energy Act under McGuinty. Ontario’s shift off of coal power is a huge environmental success story, but it also set the government up to be blamed for rising electricity costs, which contributed to their electoral defeat in 2018.
I have no idea what political or policy lessons the people involved might have taken from that experience, but given the twin focus on less carbon-intensive electricity and industrial policy from the federal budget, I though it might be useful to review this recent history.
The Gas Plant Scandal
I moved to Ontario in 2012, just after the provincial election where the proposed construction of two natural gas power plants near Toronto were the centre of pretty heated controversy. To be honest, I didn’t fully understand the nature of the “gas plant scandal”, I just knew that people were MAD. Like, incoherently mad.
Six years after the plants were cancelled, in 2018, people were STILL mad. High electricity costs and a criminal prosecution over McGuinty’s staffers’ attempted cover-up of the true cost of the cancellations kept it front of mind for voters. The Ontario Liberals were reduced to 7 seats in 2018, and only won 8 seats in 2022. The gas plant scandal and high electricity prices weren’t the only reason, but it was a factor.
Industrial policy kneecapped by trade policy
The green energy act used high and guaranteed feed-in-tariff rates to expand the supply of renewable electricity in Ontario, originally with a “Buy Ontario” component that was supposed to foster a renewable manufacturing industry in Ontario.
Unfortunately the local purchasing requirement was shut down by the World Trade Organization (WTO) in 2012 (Canada lost its appeal in 2013). My opinion is that the provincial government could have found a way around the WTO rules by focusing on public options1, but it would have been very challenging.
The subsidies and higher rates (especially for wind and solar) really only made sense in the context of supporting local manufacturing. In fact, the whole program was designed around that goal. The provincial government wasn’t as concerned with planning the ideal regional mix of renewable projects (especially solar and wind) so that we could reach the overall scale of renewables that they wanted. Instead, they prioritized ramping up wind and solar projects as quickly as possible, however it made sense for private actors. This is the very definition of ‘crowding in private investment’ that the federal Liberal government has been talking about since it was first elected.
As a result of this strategy, a common complaint that I heard about the Green Energy Act was that it incentivized renewable energy generation in the ‘wrong’ places. More accurately, not where an intelligent designer with an overall understanding of current generation and transmission capacity and future need would have placed them. Instead, we got more electricity than we could use in some places (but we still paid for capacity, not actual generation, because we had committed to that in the contract), and some small (less than 10kW) projects were approved without confirming that there was capacity to connect them into the local transmission system. So they had to be moved and bundled into larger projects, but still guaranteed the higher MicroFIT rate for small projects.
This wasn’t the end of the world, but it contributed to a general sense that the shift to renewables was both expensive and wasteful. Tables like the one below don’t help either. It shows that the average cost of solar electricity supplied to Ontario’s transmission grid is more than 3 times the cost of wind, 5 times the cost of nuclear, and 8 times the cost of hydro.
Privatization as a factor in cost increases and/or public anger
The coal phase-out & renewable push was used by the Ontario Liberal government as a way to expand private ownership in the energy sector. Private companies got most of the contracts for new gas plants, which is why the contracts were so expensive to cancel. Left critics of the plan had pointed out that privatization of electricity generation could increase costs in a way that would undermine public support for the much-needed reduction in carbon emissions.
The Wynne government doubled down on privatization, selling off a majority stake in Hydro One (the utility responsible for electricity transmission and distribution for most of Ontario). Public opinion polls showed that most Ontarians believed that the sale of Hydro One would increase the cost of electricity for them.
Integrating the political vision with technical planning
A 2015 Ontario Auditor General report found that co-ordination failures between the provincial government, Ontario Energy Board (OEB), Ontario Power Authority (OPA) and the Independent Electricity System Operator (IESO) had resulted in higher electricity costs. The AG report found that “over the last decade, [Ontario’s] power system planning process has essentially broken down.” (pg. 213). The report argued that instead of amending the existing legislated technical planning process to incorporate their vision, the Ministry of Energy went around it, and as a result made decisions that increased the cost of electricity to consumers. Costs may have increased anyway, but now the Ministry gets to wear all of the blame.
Even if the roll-out of private renewable energy expansion had been perfectly planned from a technical and cost-effectiveness angle, there are valid questions about how it should have been paid for. Small private actors (homeowners, small business, farmers) who could afford to pay to install solar panels were guaranteed a return. Their return on that (socially desirable) investment was paid for by rate-payers. This naturally set up resentment among lower income households with rising electricity bills who felt they were paying for the virtue signalling of their wealthier neighbours. This is one reason why economic ‘nudges’ are generally regressive, whether they are constructed as tax incentives or subsidised rates. Policies that are designed to use public money to ‘crowd-in’ private capital generally leave out those of us who don’t have any capital to engage.
A more progressive and effective strategy would have been to integrate technical and political planning, with a focus on public-led investment, rather than chasing private dollars. Public investment can and should be designed to foster private sector economic activity. Government as a large, reliable, initial customer in new markets can help get private sector suppliers up and running and provide opportunities to train workers in a new industry. This kind of “jump-start” strategy would have allowed for rapid adoption of renewables across Ontario, and could have probably kept the “Buy Ontario” component, fostering local manufacturing and installation capacity, AND minimized the resentment about wealthier private actors benefiting disproportionately. This is the lesson that I would have liked Liberal policy-makers to have learned.
Parallels to Federal Green Infrastructure Policy
The Ontario green electricity shift was all about crowding-in private capital by providing guaranteed above-market rates for long term contracts. This sounds a whole lot like the “contracts for difference” (CfD) financing tool that Budget 2023 referenced for the new (and largely undefined) Canada Growth Fund. I know people are going to say the way the prices are established in CfD is more competitive, etc., but excuse me if I need to see some more details before buying into yet another ‘innovative’ market mechanism that sounds a whole lot like a profit subsidy scheme.
The new federal clean energy tax incentives are also a ‘nudge’ type, crowding-in private investment policy. Tax-based incentives tend to benefit those with enough capital to make up-front investments in the first place. This sets up a situation where jurisdictions are simply chasing after existing investment dollars, rather than creating the conditions to foster new players and investments in an industry. Instead of crowding-in additional private investment, it is more like playing ‘Hungry, hungry hippo” against the US and EU to capture a share of existing investment for our domestic market.
In an attempt to make them more progressive, the new tax incentives are higher for projects that meet prevailing wage and apprenticeship requirements for a portion of the project workforce. The prevailing wage is complicated and only applies to manual labour, excluding female dominated office jobs. It’s a mystery why they didn’t just mandate that compensation be set through a collective bargaining process for all workers associated with a project.
The 2023 Federal Budget does say that the clean electricity tax credit will be available to public entities and projects owned by Indigenous communities as well as to private sector actors. So the tax credit should result in cheaper and cleaner electricity without preferencing privatization.
The lesson?
It feels like the lesson learned was that we need less public planning, not better integrated planning, and that government interventions should balance profit subsidies alongside strategies that make electricity cheaper for ratepayers. (To be fair, the federal government doesn’t have the ability to shift costs to ratepayers). They’ve doubled down on the idea that there’s a whole bunch of private capital out there waiting to be invested in socially desirable goals, and all the public sector needs to do is put some money on the table and point in the right direction.
This assumes that a) the private sector knows best about how to accomplish those socially desirable goals, and b) the primary barrier for the private sector in meeting those goals is money, and not regulatory systems that allow more profit-making from less socially desirable behaviour, weak connections between market players, the existence of vibrant public sector research environments that are straight-forward to collaborate with, a thoughtful intellectual property regime, or the lack of a fully-formed market.
Cost may be one factor, and tax incentives may have their place, but if we aren’t thoughtful about what all the other barriers are, and how governments can work with industry to ameliorate them, the tax incentives are going to be less effective than they could have been. In the worst case-scenario, like the carbon capture, use, and storage tax credits, we end up subsidizing more of the carbon-intensive economic activity that we said we wanted to shift away from.
While this budget made some efforts to limit that kind of worst-case scenario, the next conservative government can easily make alterations. Which leads us to another lesson - make investments that are difficult for the next administration to reverse. The tax credits introduced in this budget are set to apply for the next ten years - no one thinks the Trudeau government has another ten years left. A conservative government probably won’t remove them, but they could make them more like fossil-fuel subsidies than clean energy ones with a few technical changes.
For some reading/listening about what green industrial policy could be, try:
Budget 2023 Reaction: Green Industrial Policy with Brendan Haley, Broadbent Institute
Bet Big: A citizen’s guide to green industrial policy in Canada, Canadian Centre for Policy Alternatives (CCPA)
Spending what it takes: Transformational climate investments for long-term prosperity in Canada, CCPA and CanRAC
P.S. Why are Ontario’s electricity costs increasing?
The cost of electricity has gone up substantially in Ontario, from about $6/kWh in 2008 to $13/kWh in 2020 (not adjusted for inflation). The smaller dark blue bars in the graph below show the average cost of purchasing a kWh through Ontario’s electricity markets. The lighter blue line, on the right hand side, shows the average adjustment added to electricity bills to cover the cost of building, maintaining, and refurbishing infrastructure. This is because most electricity generators have guaranteed prices established in contracts with IESO that include these medium-to-long term overhead costs.
The total average price went down by about $3/kWh in 2021 largely because the cost of non-hydro renewable contracts was shifted to general revenue. But that doesn't mean savings for most residential and small business consumers, because the Ford government offset this benefit by decreasing the amount of the Ontario Energy Rebate (OER) by the same amount. Instead this shift provides a subsidy to industrial and large commercial rate-payers who had not been eligible for the OER2.
The amount rebated for wind and solar contracts is about 30% of the total global adjustment cost, which works out to about 20% of the total kWh price, give or take.
It varies because the global adjustment is a top-up from the market price to the guaranteed contract price, so if the market price is lower, the global adjustment is higher, and vice versa. (Why do we have a market that generates prices below actual cost of delivery, and still we guarantee a higher fixed price? I have no idea, but it might work to incentivize the most cost effective supply mix in the moment?)
The IESO puts out data on the Global Adjustment costs by source, which is still pretty high level. The monthly data is kind of noisy, so I did a 12 month rolling average. It’s clear that the majority is going to natural gas, hydro, and nuclear generators (the OPG line has both hydro and nuclear). This is consistent with the narrative that higher prices are mostly the result of costs associated with building and refurbishing core infrastructure.
From the WTO Ruling, under Summary of Key Findings, emphasis mine: “The Panel found that Canada had not established it was entitled to rely upon Article III:8(a) of the GATT 1994 because the Government of Ontario's procurement of electricity under the FIT Programme was undertaken “with a view to commercial resale”.”
The FAO estimates that the green electricity rebate will cost the province $2.8B over the first 3 years, and $15.2B over the lifetime of the program, which runs until 2039 when the final renewable contracts expire.