TO THE POINT—EVES’ GREEN P.R. IS NICE, BUT DOOMED

by ERIC REGULY
Writer, The Globe And Mail
Commentator, Canadian Business
Thursday, November 14, 2002

The Ernie Eves electricity PR machine continues to roll forward, deftly avoiding the barriers to common sense and clear thinking. On day one, we learned that retail prices are to be fixed at an artificially low level, yet somehow new energy suppliers are still supposed to swarm into the Ontario market and make fat profits.

On day two, we were presented with a basket of incentives to create clean, politically correct green energy. Yesterday we were told that, just to be safe, we should all conserve energy.

The absurdity of lowering prices while expecting customers to consume less is beyond argument. What it will take to encourage green energy is the more interesting debate.

The Eves government introduced a laundry list of green incentives. Among them: A 100-per-cent tax write off against the cost of acquiring alternative energy units, such as wind-power systems, and tax credits for the cost of residential solar panels. The fledgling alternative energy industry cheered and, on cue, the team behind Windshare pounced on the moment to promote its campaign to build a 25-storey wind turbine on the Toronto waterfront. Surely, huge wind farms wouldn’t be far behind, and Ontario, like Denmark would disprove the conventional wisdom that alternative energy would never be more than a feel-good, niche source of electricity.

Forget it. Alternative energy is doomed to make little progress in Ontario and the government is the main reason why. Alternative energy, especially wind power, is highly ex pensive and unless the customer Is forced to subsidize it by paying extremely high prices, it will never be more than an insignificant source of power.

Here’s how the alternative energy game is played in Britain. By law, electricity retailers have to ensure that 3 per cent of a customer’s energy needs come from renewable re sources, such as wind, solar, small hydro turbines on rivers and biomass (burning mulched wood to create steam). The green level is to rise to 5 per cent by 2005, and climb from there over time. For the green 3 per cent, customers pay about 6 cents a kilowatt, or slightly more than twice the going rate for electricity produced from the traditional plants. The British government’s bet is that alternative energy, propelled by subsidies, will enter the main stream. As it does, and as technology costs fall, the unit production costs will decline significantly.

Now let’s return to green wannabe Ontario. While the government offsets some of the costs of alternative energy with tax goodies, there is no special elevated price for green electricity. It appears that the juice produced by wind companies, like all other producers, will be sold to retailers at the bargain 43-cent-a-kilowatt rate set by the Eves government this week The cost of producing wind power is 7-8 cents a kilowatt.

Companies that finance alternative energy, including Toronto’s Corpfinance International, say the tax incentives may help on the green front, but they will only go so far. What the financiers want to see is a long-term. inflation-adjusted energy purchase contract that will allow them to earn a decent return on their loans. If they don’t get that, they’d be willing to lend less (or none at all), which means the alternative energy investors would have to pump more equity into the project When that happens, their return on equity falls, possibly to the point that the deal makes no financial sense. No one is going to finance green energy just be cause it’s green. A single wind machine costs as much as $2-million.

So far, we have seen no evidence that the Eves government is prepared to make an exception to its low-prices-for- everyone policy and adopt a British-style alternative energy scheme. The government, in other words, wants green electricity but doesn’t want to create a mechanism to pay for it.

For Ontario, alternative energy is not the practical answer, although it’s a nice idea. But Mr. Eves and his Energy Minister, John Baird, keep soldiering on. Yesterday, Mr. Baird arrived in Oakville, Ontario, to deliver his conservation message in a car powered by animal fat and recycled cooking grease. Save that bacon fat, folks; it might be a future tax deduction.