Ontario Feed In Tariff - Opportunity for some, brick wall for others!

January 2010

There has been a great deal of press coverage about Ontario's Feed-In-Tariff program recently.

I must admit I view it all in with a great deal of skepticism. The announcements are all very rosy, speaking of 50,000 new jobs and billions of dollars of investment in the renewable industry in Ontario. Similar programs in Germany and other countries are held up as shining examples of what can be done. There are many fundamental differences between the situations in the country of Germany, and the province of Ontario.

Some of the biggest differences are: 1) Germany has more than a 20 year head-start and has worked hard to create a strong international market for it's alternative energy products. 2) Germany has a domestic market almost eight times larger than Ontario's. 3) The cost of electricity in Germany is more than twice that of Ontario's. 4) Supplies of conventional fuels - oil & natural gas come from other countries (some would argue this is also true in Ontario:). 5) The German's have more than four times the installed capacity of conventional electric power than Ontario.

1) A 20 year head start is a huge advantage if you are developing an industry to compete in a global market. Yes we can learn some things from their experience - basically whatever they are willing to sell us (for use in our own market). It won't make us competitive with them on the world stage. We can't effectively compete with them, or the many others, until we develop our own products & processes - which bring us to point 2.

2) Germany has a domestic market for its products that is almost eight times larger than Ontario's - that means eight times the opportunity (at least) to develop and refine an industry. They did this will billions in government support, plus an industrial policy that was supportive of the industry - we don't have either in Ontario. Without a domestic market, companies are trying to develop products in a vacuum & it can't be done successfully. In Ontario our energy costs are too low to make most alternative energy products cost effective so we have virtually no natural PV or wind market - which brings us to point 3.

3) The average cost of a Kilowatt hour of electricity in Germany is more that twice that of ours in Ontario. This instantly makes alternative energy more than twice as cost effective there, than here. This dramatically improves the potential to sell alternative energy systems to their domestic market, while providing an opportunity for higher profits for the industry - which allows them to be stronger and grow faster.

4) Germany's own oil and natural gas reserves are expected to be exhausted within the next 10 years. The bulk of these fuels are already imported (over 80%).This give the German public and government a great deal of  motivation to support the development of an alternative energy industry. In Ontario we are rather complacent due to the fact we have a resource based industry (not manufacturing) and other provinces to provide us cheap oil and gas. We also haven't experienced the extortion (and shortages) caused by fuel suppliers the way the German's have the past two Winters.

5) Last but not least, the Germans have a electrical grid capacity that is more than four times larger than Ontario's. Also, they are linked to several other country's electrical grids - so they can export any surplus of electrical generation with relative ease. Ontario (currently) has a peak electrical capacity of about 27 Gigawatts. Within 60 days of announcing the FIT program, applications for the program, totaling 8 Gigawatts, were received. It is impossible for a utility such as Ontario Hydro to function reliably if more than 20% of its electrical generation capacity comes from intermittent and unpredictable sources such as wind and solar electric systems. In other words within 2 months of being announced, the FIT program was more than 30% oversubscribed!!

I think that what we will see in Ontario is a few companies setting up branch operations to fabricate alternative energy hardware for the domestic market created by the FIT program. They will do this using the significant support of both Federal and Provincial governments (with capital grants probably on the order of 75%). When the domestic market has been saturated and/or the FIT program is cancelled, they will pack up and leave. The costs of producing alterantive energy equipment in Ontario cannot compete with equipment fabricated in China and other cheap-labour countries. Cheap labour and lax regulations in  other countries, make products produced in Ontario uncompetitive world-wide.

I would suggest that the FIT program is a great opportunity for those who can purchase and install an FIT qualified system within the next 18 months. It's a disaster waiting to happen for the Ontario solar industry.

For individuals and companies that have cash on hand (not borrowed) the FIT program represents a great opportunity right now. The rates paid for the electricity bought back by the OPA are the highest in the world. They can provide a rate of return between 8% and 10% (some shysters claim higher returns) and it's guaranteed by the OPA for 20 years!! Given that right now  interest rates paid for cash deposits are at an all time low, FIT ROI sounds very attractive. Mind you, you are purchasing equipment which has no known resale value and interest rates are bound to go up - so the spread on the interest rates is going to shrink. Long term maintenance costs are also not well known.

For the domestic solar industry the FIT program is going to be a short term blast. Unfortunately it has no staying power. Without the FIT subsidies, the costs of a solar PV system currently provide about a 70 year simple payback. Allowing for cost reductions in equipment, improved installation techniques and a slight increase in the cost of electricity, a post-FIT solar PV system might have a payback as low as 50 years. These paybacks are completely un-sellable. As a result the market for these systems will disappear, and the companies that started up to take advantage of the FIT program will all go bankrupt.

This is not the first time this has happened to the Canadian solar industry. Back in 1985 Canada had a vibrant, growing, state of the art solar thermal industry - on a par with the rest of the world, including Germany. Then oil prices dropped, and Mulroney got elected in Canada and Regan got elected in the US. These buddies stopped all of the programs that supported the North American solar industry and it died. (Germany kept supporting theirs). Subsequent federal Conservative governments have shown equal scorn for alternative energy and conservation programs in Canada. Any program that is a political construct, is subject to the whims and vagarities of political favour. With its huge budget deficit, politicians in Ontario are going to be actively seeking programs and expenses to cut. A program such as FIT, that is too rich and is oversubscribed, has no chance of surviving. There is also going to be a provincial election October 2011. If elected - and some maintain this is certain - the provincial Conservatives will likely stay true to their federal brethren (Mulroney, Clark & Harper) and radically cut back or terminate all alternative energy programs or their budgets.

The result will be a brick-wall-stop for the majority of the Ontario solar industry. I'm not looking forward to that happening - again.