Solar Feed-in Tariffs: A Cautionary Tale From Canada

Toronto Canada

Many solar energy advocates are enamored with the concept of a feed-in tariff for the U.S. market, but increasingly, the idea just doesn’t seem a good fit. The latest evidence of that comes from the Canadian province of Ontario, which launched a lucrative feed-in tariff (FIT) program a year ago and has discovered the wisdom of the adage, “Be careful what you wish for.”

“One of the main lessons we’ve learned is that any feed-in tariff needs a clearly defined target,” said Patricia Lightburn, an analyst with the Ontario Power Authority (OPA) in a discussion of the program during a solar conference in Las Vegas this week. “Because it was a new initiative, there was no target or projection of where the market was going. It makes it difficult to give market signals but also be fair to ratepayers and give them a proper valuation of how much this program is going to cost.”

Ontario passed a legislation that created the FIT program in 2009 to boost the province’s renewable electricity generation, including solar, wind, bioenergy and hydropower. FIT are electricity rates that utilities have to pay to buy renewable electricity in long-term contracts, and they are higher than what utilities would pay for power from conventional sources such as coal and natural gas. The purpose is to create a market for these otherwise more expensive but greener sources of electricity.

Have you seen the tariffs for solar in Ontario? They range from 44.3 Canadian cents per kilowatt-hour for ground-mounted solar systems of more than 10-kilowatt in size to 80.2 cents per kilowatt-hour for rooftop systems of 10-kilowatts and under. The Canadian dollar currently trades near 1:1 for the U.S. dollar. Meanwhile, the average wholesale electricity prices in the province since January this year are near 4 cents per kilowatt-hour, according to the province’s grid operator.

So it’s not so surprising that the FIT program has attracted a lot of interest from solar project developers and equipment manufacturers around the world. As of Oct. 12, of this year, the OPA received 4,263 megawatts in applications and approved 732 megawatts of contracts for solar (using solar panels), Lightburn said. Solar only accounted for 27 percent of the total applications in terms of megawatts, by the way; wind accounted for 69 percent. The OPA set the tariffs in order to provide 11 percent of return on investments, regardless of the size and sources of the renewable electricity, she said.

Here comes lesson No. 2: What about the grid? The OPA has capped the size of each solar project at 10 megawatts, but there’s no cap for how much generation, in total, the province might want over time. The tremendous number of applications has prompted worries about the capacity of the transmission and distribution systems to handle the influx of renewable electricity, Lightburn said. “Grid interconnection is the No. 1 challenge we face, “Lightburn said. At some point, “OPA won’t be able to offer additional contracts until transmission and distribution systems are upgraded.”

Lesson No. 3: setting the appropriate rates. The OPA devised the tariffs before it became apparent the recession would cause a 50-percent fall in solar panel wholesale prices during 2009. “We published the prices, and the next thing you know, all of our project assumptions weren’t reflective of current market conditions,” Lightburn said. Setting appropriate prices is a tough challenge. The solar market, mainly because it’s so young and small, can fluctuate widely depending on government policies and the state of economy.

The OPA modeled the FIT program after that of Germany and Spain — maybe more Spain than Germany. Spain experienced a huge boom, followed by a big crash because its program had no mechanisms to temper any rush to install solar in a short period of time. Spain’s tariffs were so lucrative that its ratepayers began to protest about electricity rate hikes (utilities pass on some of the costs to ratepayers). Germany’s tariffs, on the other hand, are set to fall whenever new installations exceed certain limits.

The OPA already reduced the tariff for ground-mounted PV this summer, and more rate reductions could take place next year. It also published a long-term energy plan last week that kickstarted the process to define the province’s energy generation goals: a move that also would help it modify the FIT program over time.

Ontario’s program requires made-in-Ontario equipment for a portion of each project. This “domestic content” mandate has been controversial, and it recently ticked off the Japanese government, which filed a protest with the World Trade Organization a few months ago. The program requires 40-50 percent of a project to have domestic content if it’s installed in 2009-2010. The percentage goes up to 60 percent in 2011 and beyond.

The “domestic content” requirement has prompted more manufacturers to set up factories in Ontario, and green jobs are popping up, Lightburn said, but it also has caused some difficulties in raising project financing. OPA gives the approval of the equipment only after the project is built, though it can issue a preliminary approval based on the equipment plans submitted by the developers. Some investors worry that they would put money into projects that won’t get the final nod.

It remains too early to see if the FIT program is working; the metrics will depend on how many of the proposed projects actually get built, how many of the promised green jobs materialize and how high the rate hikes Ontario residents will have to bear will be. The OPA plans to do a program review next year.

FIT programs in Germany and other European countries have made it possible for the solar market to grow. They, too, also have served up some good lessons for what not to do. Given the political climate in the U.S., any proposals that would mandate electricity pricing and lead to a hike in electric bills aren’t likely to gain strong support.

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Photo courtesy of Juan_M.

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