Ontario's Green Energy Act a Bad Bargain for Ontarians

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Appeared in the Financial Post

In 2009, under the Premiership of Dalton McGuinty, the Ontario legislature passed the Ontario Green Energy Act (GEA), an Act that aimed to increase Ontario’s use of renewable energy such as wind power, solar power, biofuels, and small-scale hydropower. The centerpiece of the Act is a schedule of subsidized electricity purchase contracts – called Feed-in-Tariffs – that provide long-term guarantees of above-market rates for power generated by those renewables.

The GEA may have been well-intended, but a recent analysis published by the Fraser Institute, Environmental and Economic Consequences of Ontario’s Green Energy Act, demonstrates that the GEA has had disastrous impacts on Ontario’s energy rates and is going to seriously threaten economic competitiveness for the manufacturing and mining sectors. What little environmental benefit it is expected to generate could have been had at a fraction of the cost. Further, unless the province changes course, the GEA will saddle Ontarians with needlessly high energy costs for decades to come.

As our study demonstrates, the GEA will soon put the province at or near the top of North American electricity costs, with serious consequences for the province’s economic growth and competitiveness. Already the GEA has caused major price increases for large energy consumers and we’re anticipating additional hikes of 40% to 50% over the next few years. Because of these price hikes, we estimate that the manufacturing and mining sectors will be hard hit, with returns to investment in manufacturing likely to decline by 29% and mining by 13%.

What benefits will Ontario get for enduring high energy prices and reduced economic competitiveness? Precious little. Ontario’s air pollution levels were already well-controlled without the GEA, with concentrations of most primary air pollutants already at levels below government health standards and continuing to decline. In fact, with the perversity that seemingly can only come from heavy-handed and ill-considered government action, the GEA poses a risk of increasing air pollution levels. Wind power requires natural gas as a backup. If the province continues adding wind and gas power at a time when there is a surplus of generating capacity it may render one of Ontario’s baseload nuclear plants superfluous. Taking a nuclear plant offline and replacing it with gas would lead to higher overall emissions.

Ontario’s pursuit of wind-power was particularly ill-considered because provincial demand tends to be out of phase with our wind patterns. In Ontario, 80% of wind-power generation occurs when demand is so low that the entire output is surplus and must be dumped on the export market at a substantial loss. The province’s Auditor General estimates that Ontario has already lost close to $2 billion on surplus wind exports: figures from the electricity grid operator also show the ongoing losses are $200 million annually. The wind grid is also inherently inefficient due to the fluctuating nature of the power source. The report calculates that due to seasonal variability, seven megawatts of wind energy are needed to provide a year-round replacement for one megawatt of conventional power.

What’s particularly distressing is that all of this pain could have easily been avoided. A 2005 report commissioned by the government showed that if the province simply continued with ongoing retrofit projects of its existing energy-generation fleet, all of the claimed benefits of the GEA could have been secured at one-tenth the cost. Sadly, that report was kept confidential and subsequently ignored.

But what about all the green jobs that the Ontario government promised? The government originally promised the GEA would create 50,000 jobs. Alas, those benefits also proved illusory: the government now admits the 50,000 jobs claim was not based on any formal analysis; that most of these green jobs would be temporary, and the estimate didn’t account for the jobs that would be killed by escalating electricity costs under the GEA.

Of course, the provincial government can try to ease the burden on industry through energy subsidy programs but this will only transfer the costs onto Ontario taxpayers who will have insult added to injury: higher energy costs at home and the obligation to offset the pain of high energy rates for favoured industry groups.

The GEA may have been well-intended. But as the saying goes, the road to hell is paved with good intentions. The overall effect of the GEA 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. And all for extremely modest air pollution reductions that could have been achieved at a fraction of the cost.