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Queen's Park September 2006 Forum on Ontario's Standard Offer ProgramSeptember 27, 2006 By Paul Gipe Disclosure: The views expressed are those of Paul Gipe and are not necessarily those of OSEA or the sponsors. Paul Gipe's presentation can be seen here. The following is a report on a public forum held at "Queen's Park", Ontario shorthand for the provincial legislative assembly building. The by-invitation only forum on the status of Ontario's Standard Offer Program was held September 21, 2006 in the Legislative Assembly building, locally known as Queen's Park. The forum sought a snapshot of the status of similar programs in Europe (after which the Ontario program was patterned), how the Ontario program compares, and what are the next steps for Ontario. Participants in the forum discussed Advanced Renewable Tariffs, commonly known as electricity feed laws. In Ontario, renewable tariffs were mistakenly referred to as Standard Offer Contracts and it is this name that has been applied to the Ontario program. The forum was well attended and included the new parliamentary assistant to the Minister of Energy, Kevin Flynn, MPP-Oakville. The audience was sophisticated and included wind developers, coop members, members of the Ministry of Energy's staff, staff of the Ontario Power Authority, NGOs (Greenpeace, World Wildlife Fund, OSEA, and others), and visitors from British Columbia as well as the state of Michigan. Questions followed each speaker's presentation and the questions asked elicited a productive dialogue on how feed laws work in the respective country and how they may work in Ontario. The forum provided a non-threatening environment for an exchange and this prompted a lively discussion. One overriding message from France, Germany, and Spain is that there must be a strong political commitment for such programs to succeed. The subject of "bonus" payments raised at the forum offered a new mechanism to provide the SOC program with added flexibility without delaying launch of the current program.
ParticipantsThe Forum's participants included representatives from Germany, France, and Spain, as well as the USA.
The Minister of Energy opened the forum with a video-taped address emphasizing the McGuinty government's support for the program, an all important message for everyone in the province's policy apparatus.
Goals of ProgramIt is useful to reiterate the goals of OSEA's proposal for a program providing Standard Offer Contracts as noted in its 2005 report to the Ministry of Energy.
In their 2006 report to the Minister of Energy, the Ontario Power Authority (OPA) and the Ontario Energy Board (OEB) adopted some of OSEA's suggestions, but not all. OPA and OEB reported that their guiding principles in designing the program were that the program should
Elements of Advanced Renewable TariffsPresentations at the forum reviewed the key elements of Advanced Renewable Tariffs (ARTs). Programs must
Most importantly, renewable tariffs must be sufficiently differentiated to deliver the kind of renewable development from the technology desired in the location desired. Further, successful programs have either no cap on the program size (Germany), or the cap is so high (France and Spain) that there is no fear of reaching the cap in the early years of the program. This discourages gaming and hoarding. In countries where Advanced Renewable Tariffs are successful, they are the principle, if not only, policy mechanism (Germany and Spain) used to develop renewable energy. Some countries (France) use both renewable tariffs and Requests for Proposals (RFPs) side by side. However, in France the principal program for meeting French renewable targets is Advanced Renewable Tariffs and RFPs (Call for Tenders) are only used for niche applications, for example France's first large offshore project.
Status of ARTs in GermanyBy the end of 2006 there will be more than 20,000 MW of wind capacity, and more than 2,000 MW of solar photovoltaics (PV) operating in the country. Germany is the world leader in both wind energy and solar PV. Germany introduced a feed law in 1991 and Advanced Renewable Tariffs in 2000 (Renewable Energy Sources Act or EEG). Tariffs were revised in 2004 and will be revised again in 2007 as part of the program's periodic review. Following the election in the fall of 2005, the Christian Democrats and the Social Democrats entered a formal agreement that created a Grand Coalition. This agreement specifically preserved the German renewables program. More on the German program can be seen in Danyel Reiche's presentation. In 2005 renewables provided 10% of Germany's electricity of which two-thirds were added solely due to the German EEG.
Status of ARTs in FranceFrance surpassed 1,000 MW of installed wind capacity in 2006, nearly all of which were installed under the country's system of Advanced Renewable Tariffs launched in 2001. The French National Assembly passed the new POPE law (Loi de Programme fixant les Orientations de la Politique Energétique) in 2005 and new tariffs were implemented in the summer of 2006. The law changed the requirements that wind projects must meet to qualify for renewable tariffs. The new law asked the government to determine whether tariffs were fair or excessive. The government asked the Regie (the French equivalent of the OEB), stakeholders, and ADEME for their comments. The Regie said the tariffs were excessive and industry said they were insufficient. The elected government chose to modify the wind tariff, boost payments for other technologies, and significantly increased tariffs for solar PV. While the new tariffs did not increase the base rate for on shore wind energy in continental France, they doubled the amount of time that wind projects receive the premium payment from five to ten years. This significantly improves the profitability of wind turbines at moderately windy and windy sites. The new tariffs also substantially raised the tariffs for off shore wind turbines to Euro 0.13/kWh ($0.187 CAD/kWh) and also extended the premium period from five to ten years. Tariffs for biogas were more than doubled for plants less than 150 kW. There is also a substantial bonus for biogas produced with on-farm methane. France has a very ambitious target of 12,500 MW of wind energy installed on land by 2010. There are nearly 3,000 MW of wind projects in the queue for installation under the previous French wind tariffs. More on the French program can be seen in Bernard Chabot's presentation.
Status of ARTs in SpainAt the end of 2005 Spain had installed more than 10,000 MW of wind generating capacity, making it second in the world behind Germany. The Spanish program is substantially different from that in Germany, France, and most other countries using feed laws. Spain provides two options for renewable generators: a system of relatively fixed tariffs, and a system coupling the wholesale price with a bonus payment. OSEA has emphasized Spain's relatively fixed tariffs in reporting on the program. In this system, the tariff is determined annually as a percentage of the Average Electricity Tariff. For example, generation from solar PV is paid 575% of the AET of Euro 0.0733/kWh ($0.103 CAD/kWh) in 2005, or Euro 0.421/kWh ($0.606 CAD/kWh). Most commercial wind developers have opted for the system of wholesale price and bonus payment. As a consequence, when the wholesale price increases, tariffs also increase. With the dramatic increase in the price of natural gas on the European continent recently, wholesale electricity prices have spiked, tariffs have risen rapidly as a result, leading to political repercussions. This is a weakness of the Spanish system. For more on the Spanish program, see Hugo Lucas' presentation.
Political DirectivesOne result from the discussions that followed the presentations were comments by representatives of OPA that they were willing to revisit key areas of contention, notably price differentiation, a fundamental requirement of all Advanced Renewable Tariff programs. In certain aspects, OPA's hands were tied by statute (Bill 100) they said. However, if they (OPA) were issued a Ministerial Directive specifying the actions the OPA were to take, they (OPA) would act to fulfill the directive. They made it clear that without a Ministerial Directive they would not act on many of the contentious issues.
Institutional CooperationThere was a clear willingness of the OPA, OSEA, and DSF to work together to launch the program as planned on 1 November. OSEA and DSF reserved the right to continue to persuade OPA to change details of the program before the launch. And the OPA indicated a willingness to change details of the program if directed to do so by a Ministerial Directive.
OPA FlexibilityOPA indicated it would constantly monitor the program and that it was flexible in its implementation of the program. OPA indicated that it was able to change details of the program at any time during the review period if it was necessary to insure the program's success.
Price (Tariff) DeterminationIn Germany, France, and Spain, tariffs are determined by an estimate of the cost of production and an allowance for a reasonable profit. Tariffs are ultimately determined by a political process. Reiche explained that the German government hires consultants to conduct cost studies. In the case of wind energy, it is Deutsche WindGuard. The studies are then presented to stakeholder groups. Ultimately, parliament (the Bundestag) makes a determination and the tariffs are written into revisions of the Renewable Energy Sources Act (EEG). The next revisions are scheduled for 2007. In France, the process is similar. ADEME proposes revisions to the tariffs, as do stakeholders. The elected government seeks guidance from the Regie, then makes its determination. Lucas' presentation noted that Spain follows a process similar to that in France for determining the base tariff and any bonus payments.
Price (Tariff) DifferentiationOne of the key features in all Advanced Renewable Tariff programs is tariff differentiation by technology, project size, application, or resource intensity. This theme was repeated in each presentation. The programs in Germany, France, and Spain differentiate price or tariffs by technology and within each technology tariffs vary by project size or application. For example, solar PV integrated into a building receives one tariff, panels installed on the roof receive another tariff, and those installed on the ground might receive a third tariff. Tariffs are thus used not only to reflect the costs of generation but also to fulfill other objectives. For example, German tariffs are higher for solar panels on the roof than those on the ground to encourage people to put the panels on the roof of their homes and barns rather than taking up valuable ground space in the densely populated country. Likewise, tariffs often vary by project size to reflect expected economies of scale. In France, biogas generation receives a declining tariff as project size increases above 150 kW. Tariffs for wind energy in Germany and France also vary whether the wind turbines are installed on land or off shore. In the case of wind energy, tariffs vary by resource intensity or location in Germany and France. In both countries, the tariffs for wind energy vary by the productivity of the wind turbine. This is a surrogate for wind resource intensity (power density). The objective is twofold: to lessen development pressure on the windiest sites by enabling development in other, less windy, sites; and to provide siting flexibility. Both programs have been successful in spreading or distributing development across the landscape of each country. While development still favors the windiest regions, development is not solely concentrated in the windiest regions. Germany and France each use a different mechanism for determining site productivity. However, both use a trial period after which the productivity and the subsequent tariff are determined. Until mid 2006, both countries used a five-year test period. (France recently extended its trial period from five to ten years.) During this period, all wind turbines are paid the same tariff. After five years, the average productivity is calculated and this value determines the tariff that will be paid during the years remaining under the contract. Thus, the maximum tariff is fixed to provide a targeted profitability at the targeted sites, but the final tariff paid for more productive sites declines on a sliding scale as a function of productivity Because this concept has yet to be used in an Anglophone country, there is no consensus on what to call this feature in English. OSEA has used the term "tiered" tariffs. OSEA argues that tiered tariffs for wind energy are essential to distribute wind development across the province. Tiered tariffs
Tariffs differentiated by site productivity can be a powerful tool to encourage wind development where it is wanted or needed most. For example, generation is needed in the GTA or Golden Horseshoe but the winds are lower than elsewhere. With low productivity, a higher tariff is necessary to develop a profitable project in the GTA than along the windy eastern shores of Lake Huron.
Bonus Payments"Bonus" payments, in the form of a tariff per kilowatt-hour, may provide the Ontario program with some short-term flexibility without the need to revisit the base tariffs for a specific technology. For example, the Ministry of Agriculture remains pessimistic that the current tariffs for biogas are sufficient to drive development of on-farm biogas. As in France, it may be possible in the near term to stimulate on-farm biogas generation by providing "bonus" payments for the environmental benefits of reducing animal wastes (manure). The bonus would apply, as in the French system, for generation produced by on-farm methane, or methane produced by farm wastes. The new French tariffs have doubled the payment for biogas generation from that previously. Further, the new tariffs pay an additional Euro 0.02/kWh ($0.029 CAD/kWh) for generation from on-farm methane. As a consequence, the new French tariffs for on-farm biogas generation are Euro 0.09/kWh (the base tariff) + 0.02/kWh (the methane bonus), or Euro 0.11/kWh ($0.158 CAD/kWh). This is approximately the tariff that the Ministry of Agriculture estimates would be necessary in Ontario. Similarly, the French wanted to stimulate greater solar PV development but they faced a political obstacle to raising the new "base" tariff of Euro 0.30/kWh ($0.43 CAD/kWh) any higher. (This base solar PV tariff is similar to that of the "base" solar PV tariff in Ontario.) The French chose to use a "bonus" payment instead. By including a bonus payment for building integrated solar PV of Euro 0.25/kWh, they were able to raise total tariffs for solar PV to Euro 0.55/kWh ($0.79 CAD/kWh). Thus, the new French tariffs became competitive with those in Germany. Incidentally, the new French tariffs are also comparable to those suggested by OSEA in its original 2005 report. In the Ontario context, should few or no community wind projects move forward under the current tariffs, OPA could make a bonus payment to spur cooperative formation without modifying the base wind tariff of $0.11CAD/kWh. Perhaps a cooperative bonus of $0.01-0.02 CAD/kWh would be sufficient to push more cooperatives or community groups into developing projects. Another possibility is to use "bonus" payments to lure development into areas where the grid needs strengthened or where generation is needed closer to the load, as in downtown Toronto. OPA could offer a "bonus" payment to solar PV in the GTA on the grounds of "emergency rooftop generation incentive" to spur development on rooftops in Toronto's downtown core, where generation is desperately needed. OSEA prefers that ultimately the base tariffs reflect the cost of generation for each desired technology in each location desired. This was the foundation for the rigorous pricing model that OSEA developed with the aid of France's ADEME. However, the use of bonus payments may provide the political flexibility needed to meet the SOC program's goals without revisiting the contentious issue of the base tariffs.
Inflation IndexingOSEA's original economic model assumed 100% indexing for inflation. The final document suggested a 20% inflation adjustment, reflecting the client's wishes. Subsequently, OSEA urged OPA to adopt a value between 60% and 80%. Few at the forum understood the powerful influence inflation has on eroding the profitability of investments in long-lived, capital-intensive technologies such as renewable generation. ADEME's Chabot has consistently emphasized this in his previous presentations in Ontario and he returned to this theme at the forum. Chabot noted that if productivity is determined by the resource, and all other factors remain the same, then profitability is determined by the tariff and the inflation adjustment. To improve profitability, the price can be increased, or the inflation adjustment can be increased, or some combination of the two can be used. In no case can the tariff be lowered and the inflation index lowered at the same time without hurting profitability. To maintain profitability when the tariff is lowered, the inflation index must be increased to compensate. Conversely, if the OPA wanted to boost returns to encourage development while maintaining the base tariff, they could raise the inflation adjustment from the current 20% (inexplicably, solar PV is excluded from the inflation adjustment). Germany and Spain represent two extremes in how they respond to inflation. Germany's EEG does not account for inflation. For wind and solar PV there is an annual degression in the tariff. In Spain, tariffs increase annually 100% with the inflation in electricity prices under the fixed tariff option. This feature is built into the program because renewable tariffs are calculated as a fixed percentage of the "Average Electricity Tariff" determined annually. France includes both an adjustment in the base tariff for inflation, and within a contract, an adjustment of the contracted tariff. Most significantly, tariffs for each technology posted in 2006 increase with inflation. Thus, the biogas tariff of Euro 0.09/kWh increases to Euro 0.0927/kWh in year two if inflation is 3%. For comparison, consider what would happen if OPA, using its discretionary power, adopted a similar policy. The base rate for wind, hydro, and biomass of $0.11 CAD/kWh was announced on March 21, 2006. If a wind project was built in the spring of 2007, or one year after the base tariff was announced, the tariff at the time of connection would become $0.11 CAD/kWh +$0.0033 for a total of $0.1133 CAD/kWh. After 2008, there is a degression in the French wind tariff of 2% annually, but this is on the inflated base tariff. Within a contract for wind energy or solar PV, the French tariff is adjusted annually to 60% of inflation. For biogas, the adjustment within a contract is 70% of inflation. Chabot warned that Ontario's 20% inflation indexing is not sufficient to protect renewable investments from the effects of inflation. In light of this, OPA's decision to eliminate any inflation indexing on solar PV is perplexing. It is as if, rather than removing barriers, OPA chose to penalize investors in solar PV. This was not discussed at the forum.
Program ComplexityReiche emphasized that the current complexity of both the French and German programs were determined after experience was gained with earlier systems, especially that in Denmark and Germany. While it is possible to launch a sophisticated system like that in German and France from the start, it is not necessary to do so. Experience can teach policy planners how to change the system once a program gets underway. Moreover, he emphasized that the problems encountered in the German program should be understood in context. Germany now has almost 20,000 MW of wind turbines and 2,000 MW of solar panels operating in the country. Such problems can be avoided but most importantly they won't appear until well along in the development process. In other words, the problems encountered in Germany today are not problems that Ontario need worry about now.
Renewable Tariffs & Retail RatesIn both Germany & France the tariffs for solar PV are significantly greater than the retail rate for electricity. Both Reiche and Chabot noted that there was no connection between retail rates and the tariffs for renewable energy. This was understood by most in the energy policy community in each country. In both countries, the high tariffs for solar PV have had an insignificant impact on electricity prices. Even in Germany, the entire EEG has had very little impact on electricity rates because the final cost to consumers is largely determined by the large amount of existing generation.
InterconnectionIn France, as in Germany, the wind developer pays for the local
connection to the grid. However, any grid reinforcement is the
responsibility of the grid operator. Ontario's SOC Program Leads North AmericaWhile Ontario's SOC program falls far short of those in Germany, France, and Spain, it leads in North America. No other program to develop renewable energy in North America is as comprehensive as Ontario's SOC program. The Ontario program includes solar, wind, hydro, and biomass. No other program in North America pays as much as Ontario's program (0.11 CAD/kWh and $0.42 CAD/kWh), or for as long (20 years). No other program is open ended, that is, there's no limit on the amount of renewables installed under the program. No other program is intended to provide opportunity to all willing participants, from homeowners to commercial wind developers. While some programs, such as those in California and Washington State, provide a higher initial payment per kWh (a Production-Based Incentive in American jargon), they do so for a limited number of years (5 years in California, 8 years in Washington State). Thus, the average payments over 20 years is substantially less in these programs than that in Ontario, even when accounting for the retail (net-metered) tariff in the California and Washington State programs.
Status of SOC ProgramThe Canadian Solar Industries Association's Rob McMonagle estimates that in Ontario there are 500 kW of PV systems in the pipeline since the province announced its Standard Offer Program March 21. McMonagle notes that the capacity is evenly split between commercial and residential applications and comprises 100-200 systems. The current amount of new capacity booked is twenty times the average installation rate in the province and five times the total Canada-wide installation rate. Since the announcement, there have been about 250 new applications for grid connections, mostly of wind projects. If each application represents 10 MW, the announcement has generated at least an interest in installing the equivalent of 2,500 MW of new renewable capacity in Ontario. There is no indication of how much of this "expression of interest" will actually be built but it is a harbinger that the program could add significant amounts of new capacity to the system.
Initial Program EvaluationOPA has expressed a willingness to modify the program within the two-year review period if growth isn't "robust" enough to meet the program's objectives. Because of the high expectations of the SOC program, the progress of the program should be closely monitored during its initial stages to determine if the program's objectives will likely be met. An ad hoc or select committee should be convened shortly after contracts become available in November. The committee should be composed of representatives from the Ministry of Energy, Ministry of Agriculture, OPA, OEB, and stakeholders (OSEA, CanWEA, and OWA). This committee should be charged with measuring the program's progress and determining if barriers remain that prohibit success of the program.
Measures of SuccessOSEA's 2005 report to the Ministry of Energy suggested monitoring the program at a minimum to determine if "growth in renewable generation is satisfactory to meet the government's targets. Further, the review should determine if development is being overly concentrated in certain areas to the exclusion of others. To gain the benefits of distributed generation, it must in fact be distributed geographically." To gauge the success of the program, there are a number of measures that can be monitored.
Next StepsFollowing the program's launch in November, OSEA sees a need to begin re-evaluating the tariffs for each technology, a need to establish differentiated tariffs within each technology, most notably for wind, and to re-examine the inflation index. Experience elsewhere suggests, for example, adding specific tariffs for offshore wind, and for solar domestic hot water, and solar heating.
ConclusionStandard Offer Contracts or Advanced Renewable Tariffs are no panacea for renewable energy development. As Reiche concluded from his study of European renewable energy policy, successful programs depend on several policies working in harmony. Most importantly, he found, success depended upon political commitment. Without the political commitment, Reiche noted, no program will succeed regardless of how well designed. With that commitment, solutions will be found to the problems that inevitably arise in any program. The use of "bonus" payments, as in France and Spain, could be a short-term fix for weaknesses in the province's current SOC program.
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