Green economics was on full display this week when the Ontario provincial government decided to cancel contracts for additional electrical power from renewables, such as those previously offered in March 2016.
Definition of Rent-Seeking, noun (economics):
the act or process of using one’s assets and resources to increase one’s share of existing wealth without creating new wealth.
(specifically) the act or process of exploiting the political process or manipulating the economic environment to increase one’s revenue or profits.
Definition of Ratepayer:
a person who pays a regular charge for the use of a public utility, as gas or electricity, usually based on the quantity consumed.
Feed-in tariffs for 20-year renewable power contracts have the ratepayers outraged, as voiced by the opposition (CBC):
“This government has plowed ahead for years signing contracts for energy we simply do not need,” said Opposition Leader Patrick Brown. “The premier has become the best minister of economic development that Pennsylvania and New York has ever seen.”
The Tories used virtually all their time in question period talking about individuals and business owners struggling with soaring electricity rates, and claimed Thibeault’s cancellation announcement was an admission by the Liberals that their green energy policies were misguided.
“It’s bad policy,” said Brown. “I just wish at this point, now that they’ve acknowledged that they’ve made a mistake, that they would apologize. They made a huge mistake on the energy file and everyone in Ontario is paying for it.”
Mr. Thibeault said contracts signed in an earlier green-energy procurement will be honoured. In March, the province reached 16 deals with 11 firms to build wind, solar and hydroelectric projects for a total of 455 megawatts of new capacity. The negotiated prices were much lower than earlier fixed-price contracts for renewables because of the competitive bidding.
Ontario already has more than 4,000 MW of wind capacity and 2,000 of solar power.
The Liberal government has been under pressure from the opposition and rural residents who oppose wind farms to scale back its renewable plans and to find a way to trim increases in electricity prices.
Rent-Seekers Push Back
Renewables lobbyists are defending their interests (Globe and Mail):
But the cancellation was a shock to the renewable-energy industry, which was counting on the new program, which would have awarded contracts for about 1,000 MW of projects in 2018.
John Gorman, president of the Canadian Solar Industries Association, said the decision could hurt manufacturers and installers of solar product in the province just as they are becoming significant global competitors.
Robert Hornung, president of the Canadian Wind Energy Association, said the wind industry is “shocked and extremely disappointed.”
Lobby group Environmental Defence called the cancellation “short-sighted” and said this is “exactly the wrong time to put the brakes on renewable energy.”
Etc., Etc.
Summary
Several rent-seekers as well as the Energy Minister said renewable prices were coming down, but didn’t say they are still several multiples of the $23/MWh Ontario wholesale price. Nor did anyone point out the cancellation is only avoiding a future rate increase, not bringing rates down. The politics have forced the administration into promising an 8% cut in consumer electricity rates, and it can only come from reducing the subsidies. Hence the howling.
Don Quixote ( “don key-ho-tee” ) in Cervantes’ famous novel charged at some windmills claiming they were enemies, and is celebrated in the English language by two idioms:
Tilting at Windmills–meaning attacking imaginary enemies, and
Quixotic (“quick-sottic”)–meaning striving for visionary ideals.
It is clear that climateers are similary engaged in some kind of heroic quest, like modern-day Don Quixotes. The only differences: They imagine a trace gas in the air is the enemy, and that windmills are our saviors.
A previous post (at the end) addresses the unreality of the campaign to abandon fossil fuels in the face of the world’s demand for that energy. Now we have a startling assessment of the imaginary benefits of using windmills to power electrical grids. This conclusion comes from Gail Tverberg, a seasoned analyst of economic effects from resource limits, especially energy. Her blog is called Our Finite World, indicating her viewpoint. So her dismissal of wind power is a serious indictment. A synopsis follows. (Title is link to article)
In fact, I have come to the rather astounding conclusion that even if wind turbines and solar PV could be built at zero cost, it would not make sense to continue to add them to the electric grid in the absence of very much better and cheaper electricity storage than we have today. There are too many costs outside building the devices themselves. It is these secondary costs that are problematic. Also, the presence of intermittent electricity disrupts competitive prices, leading to electricity prices that are far too low for other electricity providers, including those providing electricity using nuclear or natural gas. The tiny contribution of wind and solar to grid electricity cannot make up for the loss of more traditional electricity sources due to low prices.
Let’s look at some of the issues that we are encountering, as we attempt to add intermittent renewable energy to the electric grid.
Issue 1. Grid issues become a problem at low levels of intermittent electricity penetration.
Hawaii consists of a chain of islands, so it cannot import electricity from elsewhere. This is what I mean by “Generation = Consumption.” There is, of course, some transmission line loss with all electrical generation, so generation and consumption are, in fact, slightly different.
The situation is not too different in California. The main difference is that California can import non-intermittent (also called “dispatchable”) electricity from elsewhere. It is really the ratio of intermittent electricity to total electricity that is important, when it comes to balancing. California is running into grid issues at a similar level of intermittent electricity penetration (wind + solar PV) as Hawaii–about 12.3% of electricity consumed in 2015, compared to 12.2% for Hawaii.
Issue 2. The apparent “lid” on intermittent electricity at 10% to 15% of total electricity consumption is caused by limits on operating reserves.
In theory, changes can be made to the system to allow the system to be more flexible. One such change is adding more long distance transmission, so that the variable electricity can be distributed over a wider area. This way the 10% to 15% operational reserve “cap” applies more broadly. Another approach is adding energy storage, so that excess electricity can be stored until needed later. A third approach is using a “smart grid” to make changes, such as turning off all air conditioners and hot water heaters when electricity supply is inadequate. All of these changes tend to be slow to implement and high in cost, relative to the amount of intermittent electricity that can be added because of their implementation.
Issue 3. When there is no other workaround for excess intermittent electricity, it must be curtailed–that is, dumped rather than added to the grid.
Based on the modeling of the company that oversees the California electric grid, electricity curtailment in California is expected to be significant by 2024, if the 40% California Renewable Portfolio Standard (RPS) is followed, and changes are not made to fix the problem.
Issue 4. When all costs are included, including grid costs and indirect costs, such as the need for additional storage, the cost of intermittent renewables tends to be very high.
In Europe, there is at least a reasonable attempt to charge electricity costs back to consumers. In the United States, renewable energy costs are mostly hidden, rather than charged back to consumers. This is easy to do, because their usage is still low.
Euan Mearns finds that in Europe, the greater the proportion of wind and solar electricity included in total generation, the higher electricity prices are for consumers.
Issue 5. The amount that electrical utilities are willing to pay for intermittent electricity is very low.
To sum up, when intermittent electricity is added to the electric grid, the primary savings are fuel savings. At the same time, significant costs of many different types are added, acting to offset these savings. In fact, it is not even clear that when a comparison is made, the benefits of adding intermittent electricity are greater than the costs involved.
Issue 6. When intermittent electricity is sold in competitive electricity markets (as it is in California, Texas, and Europe), it frequently leads to negative wholesale electricity prices. It also shaves the peaks off high prices at times of high demand.
When solar energy is included in the mix of intermittent fuels, it also tends to reduce peak afternoon prices. Of course, these minute-by-minute prices don’t really flow back to the ultimate consumers, so it doesn’t affect their demand. Instead, these low prices simply lead to lower funds available to other electricity producers, most of whom cannot quickly modify electricity generation.
A price of $36 per MWh is way down at the bottom of the chart, between 0 and 50. Pretty much no energy source can be profitable at such a level. Too much investment is required, relative to the amount of energy produced. We reach a situation where nearly every kind of electricity provider needs subsidies. If they cannot receive subsidies, many of them will close, leaving the market with only a small amount of unreliable intermittent electricity, and little back-up capability.
This same problem with falling wholesale prices, and a need for subsidies for other energy producers, has been noted in California and Texas. The Wall Street Journal ran an article earlier this week about low electricity prices in Texas, without realizing that this was a problem caused by wind energy, not a desirable result!
Issue 7. Other parts of the world are also having problems with intermittent electricity.
Needless to say, such high intermittent electricity generation leads to frequent spikes in generation. Germany chose to solve this problem by dumping its excess electricity supply on the European Union electric grid. Poland, Czech Republic, and Netherlands complained to the European Union. As a result, the European Union mandated that from 2017 onward, all European Union countries (not just Germany) can no longer use feed-in tariffs. Doing so provides too much of an advantage to intermittent electricity providers. Instead, EU members must use market-responsive auctioning, known as “feed-in premiums.” Germany legislated changes that went even beyond the minimum changes required by the European Union. Dörte Fouquet, Director of the European Renewable Energy Federation, says that the German adjustments will “decimate the industry.”
Issue 8. The amount of subsidies provided to intermittent electricity is very high.
The US Energy Information Administration prepared an estimate of certain types of subsidies (those provided by the federal government and targeted particularly at energy) for the year 2013. These amounted to a total of $11.3 billion for wind and solar combined. About 183.3 terawatts of wind and solar energy was sold during 2013, at a wholesale price of about 2.8 cents per kWh, leading to a total selling price of $5.1 billion dollars. If we add the wholesale price of $5.1 billion to the subsidy of $11.3 billion, we get a total of $16.4 billion paid to developers or used in special grid expansion programs. This subsidy amounts to 69% of the estimated total cost. Any subsidy from states, or from other government programs, would be in addition to the amount from this calculation.
In a sense, these calculations do not show the full amount of subsidy. If renewables are to replace fossil fuels, they must pay taxes to governments, just as fossil fuel providers do now. Energy providers are supposed to provide “net energy” to the system. The way that they share this net energy with governments is by paying taxes of various kinds–income taxes, property taxes, and special taxes associated with extraction. If intermittent renewables are to replace fossil fuels, they need to provide tax revenue as well. Current subsidy calculations don’t consider the high taxes paid by fossil fuel providers, and the need to replace these taxes, if governments are to have adequate revenue.
Also, the amount and percentage of required subsidy for intermittent renewables can be expected to rise over time, as more areas exceed the limits of their operating reserves, and need to build long distance transmission to spread intermittent electricity over a larger area. This seems to be happening in Europe now.
There is also the problem of the low profit levels for all of the other electricity providers, when intermittent renewables are allowed to sell their electricity whenever it becomes available. One potential solution is huge subsidies for other providers. Another is buying a lot of energy storage, so that energy from peaks can be saved and used when supply is low. A third solution is requiring that renewable energy providers curtail their production when it is not needed. Any of these solutions is likely to require subsidies.
Conclusion
Few people have stopped to realize that intermittent electricity isn’t worth very much. It may even have negative value, when the cost of all of the adjustments needed to make it useful are considered.
Energy products are very different in “quality.” Intermittent electricity is of exceptionally low quality. The costs that intermittent electricity impose on the system need to be paid by someone else. This is a huge problem, especially as penetration levels start exceeding the 10% to 15% level that can be handled by operating reserves, and much more costly adjustments must be made to accommodate this energy. Even if wind turbines and solar panels could be produced for $0, it seems likely that the costs of working around the problems caused by intermittent electricity would be greater than the compensation that can be obtained to fix those problems.
The economy does not perform well when the cost of energy products is very high. The situation with new electricity generation is similar. We need electricity products to be well-behaved (not act like drunk drivers) and low in cost, if they are to be successful in growing the economy. If we continue to add large amounts of intermittent electricity to the electric grid without paying attention to these problems, we run the risk of bringing the whole system down.
Why the Quest to Reduce Fossil Fuel Emissions is Quixotic
Roger Andrews at Energy Matters puts into context the whole mission to reduce carbon emissions. You only have to look at the G20 countries, who have 64% of the global population and use 80% of the world’s energy. The introduction to his essay, Electricity and energy in the G20:
While governments fixate on cutting emissions from the electricity sector, the larger problem of cutting emissions from the non-electricity sector is generally ignored. In this post I present data from the G20 countries, which between them consume 80% of the world’s energy, summarizing the present situation. The results show that the G20 countries obtain only 41.5% of their total energy from electricity and the remaining 58.5% dominantly from oil, coal and gas consumed in the non-electric sector (transportation, industrial processes, heating etc). So even if they eventually succeed in obtaining all their electricity from low-carbon sources they would still be getting more than half their energy from high-carbon sources if no progress is made in decarbonizing their non-electric sectors.
The whole article is enlightening, and shows how much our civilization depends on fossil fuels, even when other sources are employed. The final graph is powerful (thermal refers to burning of fossil fuels):
Figure 12: Figure 9 with Y-scale expanded to 100% and thermal generation included, illustrating the magnitude of the problem the G20 countries still face in decarbonizing their energy sectors.
The requirement is ultimately to replace the red-shaded bars with shades of dark blue, light blue or green – presumably dominantly light blue because nuclear is presently the only practicable solution.
Summary
There is another way. Adaptation means accepting the time-honored wisdom that weather and climates change in ways beyond our control. The future will have periods both cooler and warmer than the present and we must prepare for both contingencies. Colder conditions are the greater threat to human health and prosperity. The key priorities are robust infrastructures and reliable, affordable energy.
Footnote:
This video shows Don Quixote might have more success against modern windmills.
Don Quixote ( “don key-ho-tee” ) in Cervantes’ famous novel charged at some windmills claiming they were enemies, and is celebrated in the English language by two idioms:
Tilting at Windmills–meaning attacking imaginary enemies, and
Quixotic (“quick-sottic”)–meaning striving for visionary ideals.
It is clear that climateers are similary engaged in some kind of heroic quest, like modern-day Don Quixotes. The only differences: They imagine a trace gas in the air is the enemy, and that windmills are our saviours.
Why the Quest to Mitigate Global Warming is Quixotic
Roger Andrews at Energy Matters puts into context the whole mission to reduce carbon emissions. You only have to look at the G20 countries, who have 64% of the global population and use 80% of the world’s energy. The introduction to his essay, Electricity and energy in the G20:
While governments fixate on cutting emissions from the electricity sector, the larger problem of cutting emissions from the non-electricity sector is generally ignored. In this post I present data from the G20 countries, which between them consume 80% of the world’s energy, summarizing the present situation. The results show that the G20 countries obtain only 41.5% of their total energy from electricity and the remaining 58.5% dominantly from oil, coal and gas consumed in the non-electric sector (transportation, industrial processes, heating etc). So even if they eventually succeed in obtaining all their electricity from low-carbon sources they would still be getting more than half their energy from high-carbon sources if no progress is made in decarbonizing their non-electric sectors.
The whole article is enlightening, and shows how much our civilization depends on fossil fuels, even when other sources are employed. The final graph is powerful (thermal refers to burning of fossil fuels):
Figure 12: Figure 9 with Y-scale expanded to 100% and thermal generation included, illustrating the magnitude of the problem the G20 countries still face in decarbonizing their energy sectors.
The requirement is ultimately to replace the red-shaded bars with shades of dark blue, light blue or green – presumably dominantly light blue because nuclear is presently the only practicable solution.
Summary
There is another way. Adaptation means accepting the time-honored wisdom that weather and climates change in ways beyond our control. The future will have periods both cooler and warmer than the present and we must prepare for both contingencies. Colder conditions are the greater threat to human health and prosperity. The key priorities are robust infrastructures and reliable, affordable energy.
Footnote:
This video shows Don Quixote might have more success against modern windmills.
Consumer Price Index: Ontario Electricity compared to all items, from 2004. Chart: Bank of Montreal.
Rising electricity rates in Ontario are hitting residents and businesses hard. They have gone “out of control” as the Liberal provincial government followed through on eliminating coal-fired power stations.
Brian Hill at Global News provides the back story, a frightening and cautionary tale of “fighting climate change” by pricing away your affordable power grid.
The energy mix in Ontario’s electrical sector is dominated by hydro and nuclear, so getting off coal seemed doable. But in the provincial government’s drive to reduce CO2 emissions and join the California Emissions Trading Scheme, they have hardwired costly energy contracts that Ontarians will pay for through their noses for decades. Meet the Global Adjustment Fee (covering a multitude of sins and mismanagement).
A product of Ontario’s 2009 Green Energy Act, the Global Adjustment fee is a charge billed to all hydro customers in the province.
For major manufacturers and large businesses, the fee appears separately on electricity bills. But for residential customers and small businesses, the fee is hidden – appearing on your electricity bill as a part of the per kilowatt hour charge.
According to data obtained by Global News from the Independent Electricity System Operator (IESO), the organization responsible for managing Ontario’s energy system, residential customers and small businesses in Ontario paid an average of 7.9 cents per kilowatt hour in Global Adjustment fees last year.
So for every $100 in usage that appears on your electricity bill, $77 of that is the Global Adjustment fee. Meaning the cost of electricity use is only $23.
What exactly is included in the Global Adjustment fee?
First, there’s the difference between what the IESO pays energy producers for the electricity they produce, known as the contracted rate, and the actual fair market value of this electricity, known as the Hourly Ontario Energy Price, or HOEP.
In 2015, the average HOEP was 2.36 cents per kilowatt hour, while the IESO paid wind producers as much as 13 cents per kilowatt hour. The remaining 11-cent difference was then passed on to the consumer in the form of the Global Adjustment fee.
Solar producers, many of which signed contracts with the government for as long as 20 or 30 years, were paid as much as 80 cents per kilowatt hour for the energy they produced, despite the fact that fair market value for this energy was the same 2.36 cents per kilowatt hour. Here, too, the 78-cent difference was passed on to consumers.
And while the argument can be made that the Global Adjustment fee simply reflects the true cost of producing reliable, green electricity in the province, this ignores the fact that, in 2015 alone, Ontario sold more than 22.6 billion kilowatt hours of electricity – enough to power 2.5 million homes – to places like New York and Michigan at the fair market price of 2.3 cents per kilowatt hour – generating a loss of more than $1.7 billion for Ontario hydro customers.
So while Ontario customers are required to pay for producing green electricity, utility providers in the United States are able to access this same energy source for a fraction of the cost.
In other words, Ontarians pay the Global Adjustment fee, delivery fees, administration fees and HST, while American utility providers pay for the electricity alone.
The Global Adjustment fee also includes what’s known as “curtailing,” when the IESO pays energy producers not to produce electricity out of fear too much production could cause stress on the system and result in a blackout.
But when asked not to generate power, electricity producers must still be paid because the Government of Ontario initially agreed to purchase everything the energy producer’s facilities were capable of putting out.
The Global Adjustment fee also includes certain government conservation programs.
For example, when you receive a tax credit for purchasing new high-efficiency appliances or LED light-bulbs, that’s included within the Global Adjustment fee. When a delivery man takes away an old refrigerator for free, or when they recycle your old computer parts, the cost of these services are all part of the Global Adjustment fee.
Why conservation won’t make a difference
Over the past seven years, Ontario has signed numerous agreements with energy producers guaranteeing minimum levels of revenue regardless of how much energy they produce.
TransCanada, set to open their Napanee Generating Station later this year, signed an agreement with the Ontario Power Authority in 2012 that guaranteed the company would receive a minimum of $13.7 million per month once the plant comes online – even if they produce zero electricity.
“Essentially… TransCanada is being paid nearly $165 million a year to leave their power generating station running on idle,” said Parker Gallant, former vice president of TD Bank and an outspoken critic of the province’s green energy strategy.
With agreements similar to this in place across the province, Gallant thinks it’s no wonder hydro rates in Ontario continue to rise.
The easiest way to explain it, said Gallant, is that when energy consumption drops due to conservation, the Global Adjustment fee must be increased to make up the difference. So the less power Ontarians use, the higher their electricity costs must be in order to cover the minimum revenues energy producers are guaranteed.
What Cost to Reduce CO2
“When it comes to fighting climate change, Ontario has already been at war with the provincial economy, devastating consumers and undermining growth. In a burst of regulatory overkill, the province ordered a shutdown of its coal plants and orchestrated a massive overhaul of the provincial electricity market, at massive cost to consumers. When the plant shutdowns began around 2009, Ontario industry and individual consumers used 139 TWh (trillions of watt hours) of electricity. In 2014, the province used the same amount of electricity coal free, but the total cost has increased from $8.6 billion in 2009 to $12.7 billion in 2014, a jump of $4 billion.”
“That’s expensive carbon reduction. Much of the increased spending comes from Ontario’s feed-in-tariff and other subsidies to allow the installation of wind and solar power and construction of new gas-powered plants. According to government figures, closing the Ontario coal plants reduced annual carbon emissions by maybe 10-million tonnes between 2009 and 2014. Let’s see, back of the envelope, $4 billion divided by 10-million tonnes of carbon, works out to about $400 per tonne of carbon per year. ” http://business.financialpost.com/fp-comment/terence-corcoran-manufacturing-carbon-hobgoblins
Summary
it really is quite remarkable. Ontario is not trying to do something crazy like South Australia, chasing the dream of 100% renewable energy. No, Ontario energy is cheap, coming from installed nuclear and hydro plants, along with stations fired by gas, quite cheap these days. They only wanted to swap out the sliver of coal electricity for more renewables. And look at the mess they created in pursuing that very limited green energy objective.
No wonder the new UK administration is reconsidering their 30-year price agreement for Hinkley Point electricity. Going ahead means following Ontario and others down the rabbit hole into Not-So-Wonderland.
In a recent followup article Global News reports on the increasingly unpaid Ontario electricity bills.
The OEB data shows Hydro One’s total amount of ‘write offs’ for eligible low income customer accounts jumped from $327,230 in 2013 to $1,798,531 in 2015, a 450 per cent increase in the utility’s write off totals in those two years. . . The total amount owing for Hydro One customers behind on their energy bills rose from nearly $54 million in 2013 to $105.5 million in 2015, according to the OEB. The average amount owing for people in arrears was $292 in 2013 and $467 in 2015, representing a 60 per cent increase.
Science Matters 