By Edgardo Sepulveda
September 10, 2024
Executive Summary
In 2018, the newly elected Ontario government passed one of its first pieces of legislation – to repeal the Green Energy Act (GEA).
Modelled on German legislation to promote wind and solar generation, the 2009 GEA initiated the largest use of guaranteed above-market price long-term contracts (FITs) in North America.
What caused Ontario Premier Doug Ford to pull the plug?
The GEA proved to be incredibly contentious locally and province-wide: it gave government the power to override local opposition to the installation of wind turbines and contributed to an unprecedented increase in electricity prices. Hoping to jump-start wind generation, Premier Dalton McGuinty’s government established high wind prices, fixed for 20 years, which averaged $151/MWh over the 2020–23 period.
As the sector grew, so did the fiscal liability of those contracts. Multi-billion-dollar government subsidies started in 2017 and will total $7.3 billion for the current fiscal year (Ontario 2024a), equivalent to 0.65 percent of provincial GDP (Ontario 2024b). No other government in Canada has subsidized its electricity sector by this much for so long. Unsurprisingly, the very German government that first introduced FITs is likewise under fiscal pressure due to ballooning subsidies (Sorge 2024).
This paper tells the economic story of wind generation in Ontario in several parts. First, we provide an overview of wind generation’s impact on electricity costs, prices and subsidies: to keep prices low, Ontario subsidizes 70 percent of the cost of wind. Second, based on regression and cost-benefit analysis, we show that the costs of wind far exceed its societal and climate benefits for the 2020–23 period, with average net cost of -$124/ MWh, due to financial (high prices) and structural factors. Due to its nuclear and hydrodominant generation and elimination of coal, Ontario is one of the lowest-emission large grids in the world. The climate benefit from any new zero-emission generation will be limited to the extent it can displace gas generation. Relative to other areas, Ontario’s wind capacity factors are modest and out of sync with gas generation, all resulting in a relatively low wind emissions offset (0.227 tCO2/MWh). Third, we calculate a cost-benefit “break-even” wind price of $46/MWh for the 2027–2030 period.
There are financial and structural challenges to aligning the public costs and benefits of wind generation in Ontario. Given the political defeat of the GEA, the province should have strong incentive not to “overpay” for wind within Ontario’s single-buyer system.
For legacy wind projects whose contracts will expire, we explore the benefits of the province implementing a wind re-contracting standard offer of $46/MWh for a maximum ten-year contract. Some wind operations would shut down, while others would recontract on those terms.
Among a broader set of options for new wind projects, one would be to continue with the private wind IPP contracts approach, but for the Independent Electricity System Operator (IESO) to design a competitive auction process with a maximum reserve price of $46/MWh. Another possibility would be to discard the contractual approach in favour of financing and compensating wind projects based on cost-of-service economic regulation. A third option would be to leverage the larger economies of scale and lower cost of public financing and have new wind projects publicly owned and operated, as is the case for about half the wind capacity in PEI and the thrust of the new strategy in Quebec.
Read the full paper here:
