A Green Energy Revolution?

Today we turn to the topic of our energy future, using my own province of Ontario as an example of what is being attempted in North America, but too little and too late. As renewable energy proponents in Ontario celebrate a Green Energy and Green Economy Act that introduces European-style feed-in tariffs, and talk of this province being entirely powered by renewable energy, I wanted to inject a dose of reality.

Some 85% of Ontario’s existing generation capacity will reach the end of its design life within 15 years. While demand has fallen since 2007, and supply has increased with the refurbishment of reactors, creating more of a supply cushion, the easing of the situation leads to a false sense of security. The time horizon for replacing conventional generation is such that a supply crunch looms down the line, even though the coming depression will in some ways buy us some time due to demand destruction.

As with other forms of energy supply, demand collapse for electricity sows the seeds of supply collapse due to lack of timely investment in both supply and maintenance of existing infrastructure.

Feed-in tariffs for renewable power were initiated in Europe, at least partly in order to reduce dependence on Russian energy supplies as much as possible. Eastern Europe knows only too well the strings attached with that kind of dependency, and Western Europe will find out in the coming years. Russia will enjoy yanking Europe’s chain, but at least Europe has developed a proportion of its renewable energy potential, which will blunt the effects to some extent. North America was not so foresighted.

A feed-in tariff is a premium price paid for renewable electricity over the long term (typically a 20 year contract) in order to facilitate project financing and stimulate investment. It varies with technology and project size, reflecting the different cost structures of different forms and sizes of generation, in order to provide each with a similar rate of return. It may also vary with resource intensity – paying a higher rate where resource intensity is lower in order to encourage distributed generation and maximise domestic renewable potential.

The approach is to fix a price and allow the market to decide the quantity it is prepared to provide at that price. In addition, much of the cost of connection was covered by the rate base (a system called shallow entry), making investments in renewable power much more attractive. Over the last decade, countries like Germany, Spain, Denmark and the Netherlands have made impressive strides in developing renewable power as a result. They have also built the renewable energy companies that now supply later movers elsewhere.

This is highly counter-intuitive to the comparative advantage mindset which dominates in Northern America, where the cheapest option has been encouraged, no matter what unfortunate long-distance dependencies are created in the process. Until relatively recently renewable generation was contracted for through an RFP process, where a small amount of generation was specified and the lowest bids to provide it accepted. This under-estimated renewable potential, providing a ceiling rather than a floor.

It favoured large projects that could benefit from economies of scale rather than distributed generation. It continued the central station model of generation (large plants at long distances from load) rather than achieving the reduced need for power transmission advantage of embedded generation.

It also favoured only the cheapest technology (big wind) rather than developing a range of options. (Wind has a reasonable EROEI, but it is intermittent and also has a particularly poor match to a load profile that has its peaks on hot, humid and still days in the middle of summer.) Forcing projects to bid in very low meant that many would have been only be marginally viable and were often not built at all.

For something as essential as electricity, this was risky, especially considering that there was also chronic under-investment in the grid infrastructure needed to carry power over long distances. The regions with the most under-developed infrastructure were often the ones with the most renewable energy potential. These were also often distant from load. In addition, the cost of connection fell entirely on the generator, no matter how far downstream the necessary modifications may be or how disproportionate the cost may have been to the size of the project (a system called deep entry). This made many potential projects completely uneconomic.

The successor to the RFP system in Ontario was the Renewable Energy Standard Offer Program (RESOP), which offered one standard price for all generation (11 cents/kWh and 3.5 cents/kWh for non-intermittent power during peak periods) except solar PV (42 cents/kWh). I critiqued the program at TOD:Canada in October 2006; see Standard Offer Contracts – the Future for Renewable Generation?

Once again, the comparative advantage mindset was evident, as only the cheapest renewable generation would be able to compete at a standard price. The program was pitched to homeowners in the full knowledge that, at the rate offered, very small systems would be money losers for their builders. In May 2008, RESOP was suspended, leaving renewable energy companies and potential projects in limbo for 18 months until the launch of the new Feed-In Tariff (FIT) program. All of this was wasting valuable time in which renewable generation might have been developed.

FIT goes much further in the direction of the European legislation it is intended to mimic, but still has many flaws in terms of tariffs, tariff bands, financial assumptions and a broad appreciation of the public interest (properly valuing environmental attributes for instance). There is not enough tariff band differentiation at the smaller end of the scale, and tariffs are often too low for smaller-scale projects to be viable.

Technologies that must create their own renewable fuel, such as anaerobic digestion, have been particularly undervalued considering the benefits they provide in addition to renewable power. The chances of some of the most beneficial technologies being developed under these conditions, in the remaining time before financing becomes impossible, are very low.

There is to be a review in two years, but that review, if it goes ahead at all, will be happening in the middle of a depression. Demand will be depressed, power prices will be very low, private financing will be all but impossible, and it will be politically very difficult to justify special treatment for more expensive power, even though that power will be needed in the long run. In fact, I would be surprised if the contracts now being offered would indeed be honoured for 20 years. Twenty years is an eternity in times of great upheaval, and governments in other jurisdictions have been known to unilaterally rewrite inconvenient contracts in the power sector.

The Ontario grid can only accommodate perhaps 2500MW of renewable generation, which is a small fraction of the projects currently being contemplated by eager proponents. In fact the available capacity has consistently decreased as Hydro One has discovered additional problems with voltage stability on long feeders and reverse flow through some of its transformers.

The Ontario Power Authority expects all the available capacity to be fully subscribed during the first month of the FIT program. Anything coming later would have to wait for additional grid capacity to be developed, and that will not happen in a depression in a province which is already in a financially precarious position before the credit crunch begins to bite here.

There are grand plans for the development of twenty new transmission lines in ten years, which would be ridiculous even in good times, given that it has taken six years for the single Bruce to Milton line just to reach the environmental assessment stage. (And that was under conditions of time pressure, due to a take-or-pay contract with a private company refurbishing a nuclear reactor, for which the government of Ontario will be on the hook for a billion dollars when it fails to build the transmission line in time.)

The distribution investment that would also be necessary hasn’t even been planned yet by the over 80 local distribution companies which would be responsible for it. A vast amount of grid investment would be required for the grid even to be able to continue carrying the power it does now, and ambitious expansion plans are pure pie-in-the-sky.

North America could not have copied European achievements in renewable power entirely, even if it had chosen to invest in a timely fashion. The larger geographic area, lower population density, lower feeder loads and under-developed rural grids would have held back development in any case, but much more could still have been achieved than will now be possible in the very limited time still available. North America will thus be left with a much greater legacy of structural dependency on ageing conventional infrastructure.

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