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Working Paper: Understanding the Economic Impact of Renewable Energy Initiatives: Assessing Ontario’s Experience in a Comparative Context

The key conclusions from this new working paper from SEI are as follows. The full paper is available at Comments welcome until August 30, 2013 to marksw at

Proponents of renewable energy initiatives like the Ontario FIT program argue that they offer the potential to both deliver more environmentally sustainable, cost-effective and secure energy supplies, while fostering the development of domestic renewable energy technology manufacturing and services sectors. Critics of such initiatives argue that they increase energy costs unnecessarily, and that they will result in the loss of more jobs than they create.
This paper examines the available empirical evidence regarding the economic development impacts Ontario GEGEA FIT program. The paper also analysed Ontario’s debates around the FIT program as both a sustainable energy and economic development strategy in the context the debates over renewable energy initiatives in other jurisdictions comparable to Ontario, including Germany, the United Kingdom, Spain and Denmark.
The study finds that the publicly available empirical evidence regarding the employment impacts of the FIT program in Ontario is extremely limited. The situation in Ontario is in stark contrast to that in the other jurisdictions reviewed where very detailed information on the structure, types of activities and levels of employment in the renewable energy sector is available. In the absence of reliable and comprehensive information about the development of the renewable energy industry in Ontario the debates over the economic impacts of the GEGEA have been grounded in the results of modelling exercises rather than empirical data. This observation applies with respect to both the anticipated expansion of employment in the renewable energy sector and the impacts of the GEGEA on the wider economy. Understanding the assumptions embedded within the models used to examine the impacts of the legislation is therefore central to understanding the different conclusions reached by participants in the debate over its effects.
In this context, a number of important conclusions can be derived from the comparative exploration of the debates surrounding the economic development impact of Ontario’s GEGEA. In Ontario and the other jurisdictions reviewed, arguments about the negative impacts of renewable energy initiatives on the economy as a whole are largely premised on assumptions that renewable energy development will cost more than the available conventional, non-renewable alternatives. Renewable energy technologies are seen as inherently more expensive than the available alternatives, in part due to their intermittent nature. In addition, it is argued that renewable energy initiatives, such as FITs and RPS result in higher prices and energy costs to consumers than competitive processes for acquiring new energy supplies. These higher energy costs feedback into the wider economy, reducing economic growth and overall employment, typically in a manner that overwhelms the employment gains flowing from the development of a renewable energy sector.
These arguments turn, in large part, on the approaches used to model the integration of renewable resources into energy systems and markets and the assumptions made about the economic costs of different conventional and renewable technologies and their relative roles in energy systems. The treatment of the environmental and social externalities and technological, fuel cost and security and catastrophic accident risks related to conventional technologies relative to those related to renewable energy alternatives are also central issues in the debate. In particular, proponents of renewable energy initiatives argue that FITs and similar programs are a way of dealing with subsidies and externalities associated with non-renewable energy sources that are typically overlooked by their critics and in the design of electricity markets. When these factors are taken into consideration, the additional costs of renewable energy initiatives, relative to conventional technologies and approaches to acquiring new energy supplies, are significantly reduced if not eliminated.
At the same time, these technical arguments are embedded in wider debates about the appropriate role of government in economic development. Some “market fundamentalists” who have been prominent critics of renewable energy initiatives tend to object to any effort at industrial strategy beyond the provision of fundamental infrastructure. On the other hand, those in the “progressive political economy” tradition and “ecological modernists” see a rationale for renewable energy initiatives in the context of the need for a more active role of the state in general economic strategy, and in moving the economy and society in the direction of sustainability. This is especially true in Canada’s case, where it is argued there is a strong pull away from innovation and valued added economic activities and towards resource commodity export dependency.
Even those who accept the need for more active economic strategies, and who argue that at the time of the GEGEA’s formulation there was the potential for the development of a renewable energy technology and services industry in Ontario, find it hard to argue that there were not serious flaws in the design and execution of the province’s FIT initiative as an energy and industrial development strategy. The rates incorporated into the original FIT program were excessive, particularly for wind and solar, leaving the program vulnerable to criticism of its economic costs. Important features of the European FIT programs, such as linking rates to the avoided environmental costs of conventional technologies or the pace of renewable energy deployment, and incorporating degression rates into FIT programs, designed to control costs and manage the pace of development were overlooked in the Ontario program.
The Ontario program structure eliminated the opportunities for annual adjustments in rates and targets, as applications were made and contracts granted at the front end of the program up to near the total targets for renewable energy contained in the LTEP, Instead, the structure created a “gold rush” response from potential developers seeking FIT contracts. That in turn led to the creation of overcapacity in manufacturing and services in some sectors, like solar PV, which would have to be reduced in the “bust” following the build-out of the initial round of contracts. A more phased roll-out of the program might have also reduced delays in contract processing and in obtaining grid connections for project developers in the long term.

More broadly, from an economic development perspective, movement on the establishment of a comprehensive strategy for the development of a renewable technology manufacturing and services sector in Ontario occurred far too late. Such a strategy only began to emerge in the aftermath of the 2011-12 FIT review. A strategy should have been initiated in tandem with the introduction of the GEGEA in 2009, if not earlier. As a result, the province may have missed crucial windows in the domestic and international renewable energy technology and services markets. The ad hoc measures that were taken in relation to the development of the sector were open to political (e.g. the Samsung Agreement) or trade (e.g. local content requirements) challenge.
The most serious challenge now facing the sector is the high level of uncertainty about the provincial government’s long-term commitment to renewable energy development. As of the summer of 2013, there continued to be no certainty about the existence of a significant domestic market for these technologies beyond 2018, either under a FIT or competitive bidding structure. The build-out of the supply contracted but not yet installed through the FIT program over the next few years still offers some potential for industrial development. However, it will be difficult to justify significant investments in manufacturing capacity without some prospect of the continuation of a meaningful domestic market.
Looking Forward

The provincial government made a series of announcements regarding renewable energy in May and June 2013. Requirements for local government participation in new projects were introduced, and the FIT program was terminated for anything other than small projects. Reductions in the government’s commitments under the Samsung agreement were also implemented. These steps may respond to local objections to wind projects and concerns over economic costs. Unfortunately, they may also signal the end of the possibility of the substantial development of a renewable energy industry in Ontario.
If such an outcome is to be avoided, the province needs to clarify its commitment to renewable energy development beyond the 2018 target contained in the 2010 Long-Term Energy Plan. Steps need to be taken to account for externalities, risks, liabilities and potential contributions to sustainability of all technologies on a full life-cycle, level playing field basis in future efforts at system planning.
At the same time, if it intends to continue to pursue the development of the renewable energy sector, the province needs to advance its clean energy economic development strategy to take advantage of the 2013-2018 build out of existing contracts. Among other things this will require:
• the development of a comprehensive, empirically-based profile of the renewable energy technology and services sector in Ontario, similar to those which exist in other jurisdictions pursuing the development of their renewable energy sectors;
• the identification of areas of potential comparative advantage in renewable energy technology and services for Ontario;
• the assessment of potential external markets for the Ontario industry in Canada, the United States and overseas, including close monitoring of policy and program commitments and supply chains in these markets;
• the assessment of education and skills development requirements within the sector and the development of appropriate mechanisms to ensure that these needs are addressed through Ontario’s post-secondary institutions; and
• market development and research and development support as outlined in the Deputy Minister’s 2012 FIT review report.
If these steps are not taken, the province runs considerable risk that, from an economic development perspective, the GEGEA exercise will amount to an expensive but temporary countercyclical intervention as opposed to an investment in development of an industrial sector with potential to make significant long term contributions to the Ontario economy.