Economic model underlying green energy not sustainable, says Guelph economist

(June 9, 2011) GUELPH – An economist at the University of Guelph says if Ontario’s experiment with green energy is similar to what’s happened in the European Union (EU), the province can look forward to higher taxes, a net loss of jobs, and little difference in terms of green house gas emissions. Glenn Fox is a director of Energy Probe.

Speaking at the Canadian Association of Farm Advisors’ annual conference on June 2, Dr. Glenn Fox said the economic model for Ontario’s Green Energy Act is not sustainable and has many implications for rural Ontario.

Fox, who is chair of the Agricultural and Rural Policy Research Program at the University of Guelph, said since most of the infrastructure for Ontario’s green energy plan is being constructed in rural Ontario, it has become one of the most controversial and divisive issues to emerge that he’s seen in his career.

“Who has not driven through rural Ontario and not seen an expression of protest about solar or wind farm development?” Fox asked.

He noted that as chair of a rural policy research program he’s used to dealing with controversial issues, but this is the largest issue to emerge in rural Ontario, and Fox suggests that the economic and political pressures surrounding it will eventually lead to a change in policy.

Fox said the Ontario Green Energy and Economy Act was actually proposed by an organization known as the Ontario Green Energy Alliance, which is a coalition of environmental groups, trade associations, equipment manufacturers and developers.

He said that at a conference he attended where a member of the Green Energy Alliance was keynote speaker, it was claimed that the Alliance had written the legislation.

“This was a startling claim in a political system like Canada’s,” Fox said, adding that it is not unusual in the U.S. for an external organization to draft legislation and have it sponsored by someone in Congress. But this is unusual in a Canadian context.”

Nevertheless, Fox said Alliance obviously played a critical role in influencing the legislation’s development its attending regulations.

Fox said the main element of Ontario’s green energy policy is its Feed-In-Tariff, more commonly referred to as FIT.

“This was basically the catalyst for the establishment of various categories of alternative energy sources,” Fox said, adding that wholesale electricity rates for the various categories were established depending on the size, type and location of the facility.

“Each one gets a formula price, which ranges from 103 cents per kilowatt for landfill gas, to 80.2 cents for small-scale, rooftop solar installations, with wind-generated power at 13.5 cents per kilowatt.”

Fox noted that the organization called Wind Concerns Ontario has done some work on establishing what the average producer price is for conventional sources of electricity and determined that in 2009 the average producer price was 3.32 cents per kilowatt.

“That’s the electricity that costs you about 6.5 cents per kilowatt, so that will give you some idea of the markup,” Fox said.

“It’s important to keep that price in mind, because they are retail and FIT prices are wholesale.”

Fox said a major problem with the FIT program is that with each category being paid its own price there is no competition among the various forms of alternative energy. Consequently, there are no incentives to increase efficiency.

“If you have a high-cost source, you get a high price; if you have a low-cost source, you get a lower price,” Fox said.

“There is no incentive to innovate, no incentive to try something new because you’ve got a guaranteed price.”

Fox noted that three countries within the EU served as templates for Ontario’s green energy initiative: Denmark, Germany and Spain.

While the green energy programs of these countries are often held up by advocates as success stories, Fox said research suggests that’s not true.

He noted that a Danish research institute recently did research on the history of wind energy in that country and found that Denmark had the highest electricity prices in the EU, while at the same time the industry was subsidized by 900 million euros.

Fox said the study did, however, conclude that between 2001 and 2008 wind energy did help reduce green house gas emissions, but at a cost of $124 per metric tonne.

“Carbon credits in most of the industrialized world can be purchased for about $25 per tonne,” said Fox.

“That’s a relatively high cost for the reduction of green house gas emissions.”

Fox said the Danish experience also indicated that the useful life expectancy of wind turbines is 10 or 15 years at the most.

“We have been told in Ontario that their life expectancy is between 25 and 30 years,” he said, adding that to use 15 or even 20 years to amortize the capital costs of a wind turbine would call into to question the economic feasibility of most wind projects in Ontario.

“Tracking the history of wind turbines in Denmark, it was concluded that at the end of 10 years you’ve got a major re-investment in terms of maintaining that infrastructure.

He added that the research indicated that the Danish wind turbine manufacturing industry does have a strong global position but it is one that is highly contingent on government subsidies and they would not be able to compete otherwise.

“It was further concluded that green energy jobs in Denmark actually cost between $90,000 and $140,000 per job to create,” he said.

Contrary to what’s heard on this side of the Atlantic, Denmark for the most part stopped building wind turbines in 2003, he said.

Fox said similar studies were conducted in Germany and Spain, where it was found that while there were new jobs created in the green energy sector, the indirect consequences of higher taxes and higher energy costs actually resulted in a net loss of jobs due to business closures and business migration.

Fox said Spain had embarked on a similar track to Ontario’s when it developed its green energy strategy in 1997.

“Likewise, their rationale was to create green energy jobs and reduce greenhouse gas emissions with a goal of producing 20% of its electricity from renewable sources,” said Fox.

“However, the study revealed that for every megawatt installed, 5.28 net jobs were lost on average.”

Fox said many researchers at the university level are having second thoughts about the proposed phase-out of coal plants in Ontario, not simply on cost but because they are also beginning to question the initial environmental arguments put forth to justify their closure.

“It’s difficult to find much hard evidence of environmental health effects from the coal plants that we already have,” he said.

Fox said a recent study done by a colleague of his in the law faculty at the University of Toronto also concluded that Ontario’s green energy policy had evolved by emulating the European experience.

The study stated that Ontario’s failure to articulate the real costs in the trade-offs involved in the transition to a green economy, coupled with untested assumptions and short-term political calculations, may have a “deleterious” or destructive impact on the environment as well as environmental policy in the long term.

“That’s lawyer-speak for they don’t think it’s a good idea,” said Fox.

“I think if it’s not too late already, it’s time to rethink the decommissioning of coal plants.”

Fox noted that there is a lot of controversy surrounding the health impact that wind generators have on humans, but says that is not his area of expertise.

“Consequently, I don’t have the capacity to judge, but from what I have read there are questions that need to be answered.”

Fox said as an economist he prefers to focus on the economic implications of the Green Energy Act, which he adds have not received enough attention.

“The problem is basically that both wind and solar are costly, and the job creation rationale is what economists call the “infant industry” argument.

“The theory is that if new industries that are not competitive are subsidized they will eventually mature and be able to function on their own,” he said.

“The problem with that theory is that kids never grow up and leave home.”

John Phair, June 9, 2011

Glenn Fox is a director of Energy Probe.

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One Response to Economic model underlying green energy not sustainable, says Guelph economist

  1. You’ve got great insights about green house energy, keep up the good work!

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