FOR A LOW CARBON ECONOMY

Ontario’s Feed-in Tariff for Renewable Energy: Lessons from Europe

Key messagesThe extensive European experience with feed-in tariffs (FiTs) for renewable energy provides •a useful set of lessons for Ontario’s FiT program.

The rationale for a feed-in tariff is not limited to the reduction of GHG emissions, for which •a FiT is in fact an expensive instrument. There are important objectives related to reduction of technological costs and overall innovation that are also served by a well-designed policy.

The long-term cost of the FiT program needs to be controlled through a commitment to a tariff •“degression” policy (such as that in place in Germany), through which the tariff on new contracts is reduced to account for the reduction in renewable technology development and deployment costs over time.

As Ontario considers other instruments related to its climate change objectives, particularly •a carbon pricing policy, great attention will have to be given to the interaction between the FiT and carbon pricing. The policy experience in Europe in this regard should be studied carefully to ensure maximum effectiveness and to avoid perverse impacts.

Policy Brief September 2010

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Introduction1

In 2009 Ontario’s Green Energy and Green Economy Act2 (GEGEA) enabled the development

of a feed-in tariff (FiT) program to promote the generation of electricity from renewable

sources in the province. Ontario’s FiT is the first program at such a large scale in any North

American jurisdiction.

In contrast, FiT programs have been implemented in European countries for over 20

years. These programs have evolved continuously in key design features and policy

elements since their first development, and it is likely that the Ontario program will be

similar in this regard.

In particular, it is important to understand how the FiT policy should evolve over

time to address two key issues: first, how the level of the tariff itself needs to be

informed by the experience curve in determining the price of a particular renewable

energy technology, and second, how planned climate change policies are likely to interact

with renewable energy policies like the FiT, and lead to changes in their design.

The aim of this Policy Brief is to summarize the evolution of FiT policies in Europe,

with a view to informing policy development in Ontario. In addition, the brief highlights

recent research on how renewable energy policies are likely to interact with the new market-

based climate change policies that are being planned in Ontario, and in other jurisdictions.

This brief should not be seen as an exhaustive assessment of policies to support or promote

renewable energy. Rather, it is meant to provide context and some basis of consideration

for how Ontario’s FiT policy might evolve over time.

1 This policy brief is based on background analysis carried out for Sustainable Prosperity by Nic Rivers. Helpful insight was provided by Lois Corbett.

2 http://www.ontla.on.ca/web/bills/bills_detail.do?locale=en&BillID=2145.

The aim of this report is to summarize

the evolution of FiT policies in Europe, with

a view to informing policy development

in Ontario.

2 introductionPolicy Brief – September 2010

Why promote renewable electricity?

Although the cost of generating electricity from renewable sources has fallen significantly in

recent decades, in most situations renewable electricity is still not competitive with electricity

generated from conventional sources.3 If adoption on a significant scale is desired, government

policies aimed at promoting renewable energy are therefore required. And while such policies

are likely to impose costs on the economy,4 there are at least two strong arguments for why

governments might choose to put in place a feed-in tariff policy.5 Both those arguments are

present in the case of Ontario:

To address environmental and health externalities associated with 1. conventional electricity generation.

The main advantage of renewable electricity generation is that it does not produce any

significant greenhouse gas emissions or local air pollutants. These emissions impose a host of

costs (e.g. environmental, health, etc.) on society that are not reflected in the market price

for electricity.

In the case of Ontario, research carried out by the Ontario Medical Association establishing

the public health costs of coal-generated electricity production led to the decision to phase

out the province’s coal-fired generation assets. This analysis raised in a very tangible way

the costs to Ontario of continuing to rely on its coal-fired generating assets, and help set

the stage for the Green Energy and Green Economy Act.

3 Large hydro is generally considered a conventional electricity technology, although it is a renewable form of electricity. Many studies document the evolution in costs of emerging renewable energy technologies. See for example Junginger, M., Faaij, A., and Turkenburg, W.C., 2005, “Global experience curves for wind farms”, Energy Policy, 33, p.133-150. This study estimates that each doubling of worldwide wind energy capacity is associated with a 15-23% reduction in cost.

4 A recent meta-analysis suggests that renewable support policies in Europe have reduced GDP by between 0.02 to 0.2 percent: Dannenberg, A., Mennel, T., and Moslener, U., 2008, “What does Europe pay for clean energy? A review of macroeconomic simulation studies”, Energy Policy, 36, p.1318-1330.

5 Menanteau, P., Finon, D., and Lamy, M.L., 2003, “Prices versus quantities: choosing policies for promoting the development of renewable energy”, Energy Policy, 31, p.799-812.

This analysis raised in a very tangible way

the costs to Ontario of continuing to rely

on its coal-fired generating assets, and

help set the stage for the Green Energy

and Green Economy Act.

3why promote renewable electricity? Policy Brief – September 2010

Table 1 shows how the health (and to a lesser degree environmental) costs of coal end up making

it more expensive than wind, once those costs are factored in.

Table 1: Full costs of electricity production from wind and coal

The optimal policy to efficiently reduce such emissions, and their environmental and health

costs, would be a tax or cap and trade system that captured the full cost of emissions

proportional to their environmental and health damage.6 If such a policy is not possible in

the short-term, policies to directly promote renewable electricity generation and the economic

benefits that accrue from it are an alternative (although less directly efficient) way to achieve

the goal of reducing emissions.

At the same time, it should be acknowledged that public policy in this area will seldom seek

the fulfillment of just one objective. With respect to renewable energy policy, economic

and technology development objectives also weigh heavily, which leads us to the second

argument for a feed-in tariff.

To stimulate technological advances and cost reductions in renewable 2. energy generation.

It is typical for most technologies that their costs fall as experience is gained in their production

and use, and as production expands to take advantage of possible scale economies.7 This can

6 Fischer, C. and Newell, R., 2008, “Environmental and technology policies for climate mitigation”, Journal of Environmental Economics and Management, 55, p.142-162.

7 Arrow, K., 1962, “The economic implications of learning by doing”, Review of Economic Studies, 29, p.155-173.

WindCoal

Cost of electricity generation by type

20

15

10

5

0

Health costs

Environmental costs

Financial costs

Type of electricity generation

¢ /

kWh

CoAl1 Wind

Financial Costs 3.7 9.62

Environmental Costs 1.4 03

Health Costs 11.3 04

Total Costs in ¢ / kWh 16.4 9.6

1 DSS Management Consultants et al. for the Ontario Ministry of Energy. (2005). Cost Benefit Analysis: Replacing Ontario’s Coal-Fired Electricity Generation. <http://www.mei.gov.on.ca/en/pdf/electricity/Cost%20Benefit%20Analysis%20DSS%20Report%20-%20Executive%20Summary.pdf> [accessed May 31, 2010].2 Ontario Ministry of Agriculture, Food, and Rural Affairs. (2003). Electricity Generation Using Small Wind Turbines at Your Home or Farm. <http://www.omafra.gov.on.ca/english/engineer/facts/03-047.htm#cost> [accessed June 21, 2010)].3 Ibid.4 Chief Medical Officer of Health (Ontario). (2010). The Potential Health Impact of Wind Turbines. <http://www.health.gov.on.ca/en/public/publications/ministry_reports/wind_turbine/wind_turbine.pdf> [accessed June 9, 2010].

4 why promote renewable electricity?Policy Brief – September 2010

make it difficult for immature technologies to compete, as they have not gained advantages

from accumulated experience, even though such technologies might be more competitive if

they had the same degree of embodied learning as conventional technologies. In a way, then, a

FiT acts to accelerate the development of renewable technology above and beyond the normal

experience curve dynamic. That experience curve – and the idea that the cost of the technology,

its implementation, and the electricity it generates decreases over time – is directly relevant to the

consideration of how the FiT should evolve over time, which is discussed later in this brief.

The acceleration of that technological development is justified if society judges that there are

strategic economic and environmental advantages to be gained. In the case of Ontario, a very

deliberate ambition of the GEGEA is the creation of renewable energy technology and manufacturing

capacity to create long-term economic and environmental benefits for the province.

Even if environmental externalities are corrected for, then, there may be an additional

rationale for “strategic deployment” of renewable energy technologies.8

Alternative policies for the promotion of renewable electricity generation

Policies designed to promote renewable electricity generation can be classified into

three broad categories:

Subsidies for renewable electricity.1.

Governments have used a variety of subsidies to promote renewable electricity generation. For example,

in the US, a Production Tax Credit (PTC) provides eligible renewable electricity generators with a

2.1 ¢/ kWh subsidy for 10 years following project commissioning, so that generators receive this price

on top of the wholesale electricity price. Because the subsidy has periodically elapsed, it is possible to

infer that it has been fairly effective in promoting generation from renewables9 based on how the policy

has tracked with investments in renewable energy projects. When investors foresee the policy lapsing,

investment dries up. Canada, through its ecoEnergy program, has used a similar subsidy mechanism

for renewable electricity, providing 1 ¢ / kWh for the first 10 years of project operation.10 This

program is set to expire in March 2011.

The most common policy for renewable electricity, however, is the feed-in tariff, applied

throughout Europe. A FiT involves two components: (a) an obligation on the part of electric

utilities to purchase electricity from qualifying renewable electricity generation facilities, and 8 Neuhoff, K., 2004, “Large scale deployment of renewables for electricity generation”, Cambridge Working Papers in Economics CWPE 0460.

9 Wiser, R., Bollinger, M., and Barbose, G., 2007, “Using the federal production tax credit to build a durable market for wind power in the United States”, Energy Policy, 20, p.77-88.

10 http://www.ecoaction.gc.ca/ECOENERGY-ECOENERGIE/power-electricite/index-eng.cfm.

Even if environmental externalities

are corrected for, then, there may be

a rationale for “strategic deployment”

of renewable energy technologies.

5alternative policies for the promotion of renewable electricity generation Policy Brief – September 2010

(b) a tariff determined by the regulator that determines the rate at which generators

are paid for this electricity.

A key feature of the FiT is that it reduces the risks faced by generators. In particular,

by guaranteeing generators a fixed tariff for energy supplied to the market, the FiT

eliminates hedging costs for small generators, which can be substantial. Moreover,

by eliminating price risk, the FiT can allow generators to borrow at a lower rate,

which can reduce overall project costs.11

Quotas for renewable electricity.2.

Most American states and some Canadian provinces have used quota-based, rather than

price-based, systems for promoting renewable electricity generation.12 These systems are

usually referred to as renewable portfolio standards (RPS), renewables obligations, or tradeable

green certificate systems. In such a system, the regulator sets a minimum quantity of renewable

electricity to be purchased by the electric utility (usually as a share of total electricity sales).

Utilities then solicit bids for this quantity of generation from third-party generators, and

choose the cheapest bids that meet given criteria. If there is more than one utility in a regulated

region, utilities are often allowed to trade renewable power certificates with one another to

minimize costs of achieving the obligation.

Market-based instruments3.

In addition to these policies, broader market-based environmental policies, like emission taxes

and cap and trade systems, can implicitly promote renewable electricity by making electricity

generation from fossil fuels more expensive. Such policies, because they are broader and so

offer more flexibility in reducing emissions, are generally considered more efficient policies if

the goal is to reduce emissions.13 If the goal is to more rapidly promote renewable electricity,

a targeted renewable policy is optimal.

The potential for interaction between a FiT and other market-based emission policies is

discussed later in this document.

11 Mitchell, C., Bauknecht, D., and Connor, P.M., 2006, “Effectiveness through risk reduction: a comparison of the renewable obligation in England and Wales and the feed-in tariff in Germany”, Energy Policy, 34, p.297-305.

12 A list of US states with renewable portfolio standards is available at: http://apps1.eere.energy.gov/states/maps/renewable_portfolio_states.cfm. For Canada, examples are Quebec and British Columbia.

13 Fischer, C. and Newell, R., 2008, “Environmental and technology policies for climate mitigation”, Journal of Environmental Economics and Management, 55, p.142-162.

Such policies, because they are broader

and so offer more flexibility in reducing

emissions, are generally considered more

efficient policies if the goal is to reduce

emissions. If the goal is to more rapidly

promote renewable electricity, a targeted

renewable policy is optimal.

6 alternative policies for the promotion of renewable electricity generationPolicy Brief – September 2010

Design of a feed-in tariff

Several important design elements are associated with a feed-in tariff. These can help to

dictate its effectiveness, efficiency, and public acceptability. Some of the most important

design characteristics are described here.

Tariff structure.1.

The price offered for renewable-generated electricity by the relevant authority is important,

since it dictates the equilibrium supply of electricity from renewables, as well as overall cost

of the policy. In practice, most FiT policies offer differentiated rates for different types of

renewable generation, aimed at reflecting the differences in costs for different technologies

(e.g., solar photovoltaic generation is more expensive than wind). Differentiated rates

increase the short-term cost of the policy, but may help achieve desired reductions in cost

in currently expensive technologies over the long term. Research on this question, for

example, has found that FiT policies tend to favour higher cost renewable technologies

(typically solar) over the lower cost (and typically more mature) technology. The higher

price offered through a differentiated tariff structure promotes innovation in that higher

cost/higher tariff technology, and so drives down its overall cost quicker.14

Premium or fixed rate.2.

A FiT can be implemented as a premium above the wholesale price of electricity (as in Denmark) or

a fixed tariff that is invariant with respect to the wholesale price (as in Germany). The former exposes

renewable electricity generators to fluctuations in wholesale prices, while the latter insulates the

generator (but leaves the total amount of subsidy paid subject to greater fluctuations).

Funding source.3.

The cost of providing the subsidy for renewables is borne either by ratepayers

(e.g., Germany) or by taxpayers (e.g., Denmark). In the former case, the cost of the

subsidy will be reflected in increases in the retail price of electricity. In the latter

case, the cost of the subsidy will be reflected in higher tax rates, increased

borrowing, or reduced program spending (if the subsidy is fiscally neutral).

Time-differentiated pricing.4.

Wholesale electricity prices vary widely, both throughout the day and throughout the year, as a

result of the interplay between the supply and demand of electricity. When prices are high, the

value of additional generation is likewise high, and vice versa. It is possible to design a FiT

structure that reflects the price of wholesale electricity either in a fixed rate system or a premium

system. This type of system should promote efficiency, but increase price risk to generators.

14 Johnstone, N., Hascic, I., and Popp, D., Renewable Energy Policies and Technological Innovation: Evidence Based on Patent Counts. Environmental and Resource Economics (2010) 45: 133-155.

The higher price offered through

a differentiated tariff structure promotes

innovation in that higher cost/higher tariff

technology, and so drives down its overall

cost quicker.

7design of a feed-in tariff Policy Brief – September 2010

Rate updating.5.

Costs of most renewable electricity generation technologies have fallen over time, as experience

is gained with their manufacture, installation, and operation. A FiT that maintains a constant

rate over time will essentially be providing a growing real subsidy to generators. Regulators in

some countries (e.g., Germany) have implemented a tariff structure that decreases over time, to

reflect anticipated cost reductions in renewable electricity technologies.

Policy review.6.

Changes in electricity markets, changes in generation technologies, and experience with policy

implementation can make it desirable for regulators to review and update the FiT policy at

regular intervals. This has been done in most existing FiT policies in Europe. Conversely, regular

changes to the policy can increase difficulty in planning investments for investors.

length of tariff applicability.7.

A FiT applies for a given window of time following commissioning of the renewable generation

facility. This period is designed to make the investment attractive to investors, but not to result

in excess profits. Typically, FiT policies are applicable for between 10 and 20 years.

Support mechanisms for local manufacturing capacity.8.

A stated goal of many of the jurisdictions that adopt a FiT is to increase employment and manufacturing

capacity in renewable energy. To do so, they link the FiT to support mechanisms to promote domestic

manufacturing of renewable energy infrastructure, like local content requirements or tax incentives.

Policymakers in Ontario, Spain, Denmark, and Germany (these European countries are

chosen since they are generally seen to have the most successful FiT programs) have all

implemented policies aimed at directly supporting a local renewable energy

manufacturing industry. In Ontario, the FiT is contingent on a minimum domestic

content of 25 percent for wind turbines (increasing to 50 percent after 2012) and 50

percent for solar panels (increasing to 60 percent in 2011). Spain has used domestic

content requirements to foster the development of a local manufacturing industry for

wind turbines. In some regions of Spain, development concessions for wind turbines are

contingent on local assembly and manufacture of turbines and components. In addition,

Spain’s production tax credit for wind-powered electricity is withheld from turbines that

do not meet local content requirements. In Denmark and Germany, “soft” (below market rate)

loans were provided by government to support projects with significant local content, and customs

duties were implemented that favoured the import of components over fully assembled turbines

(to support a local assembly industry). In both of these countries (especially Denmark, which has

seen little growth in onshore domestic installations this decade), government has focused on

developing an export market as well by providing export credit assistance and development aid

loans to less developed countries that are purchasing wind technology.

One key difference between the Ontario

and German FiT is that the German FiT

includes a ’degression’, whereby FiT rates

on new contracts are adjusted downwards

each year by a pre-set amount to reflect

on-going improvements in technology.

8 design of a feed-in tariffPolicy Brief – September 2010

Table 2: Key features of existing feed-in tariffs for wind power15

onTARio GeRMAny denMARk SPAin

Feed-in tariffa

• Wind onshore 13.5g 12.7b 8.0c 10.4d

• Wind offshore 19.0g 17.9b –c 20.8d

Tariff type Fixed rate Fixed rate Premium Fixed rate or premiumf

Funding source Ratepayerse Ratepayers Taxpayers Ratepayers

Time-differentiated No No Yes (spot price plus premium) No

Automatic rate updating – -1-2%/yr onshore-5%/yr offshore

– Indexed to consumer price index

Policy review Scheduled review every 2 years

Scheduled review every 2 years

– Scheduled review every 4 years

Tariff period 20 years 20 years 22,000 full-load hours (~10 years) 20 years

Manufacturing support Domestic content requirements

Soft loans; subsidies; favourable customs duties; export credit assistance

Soft loans; favourable customs duties; export credit assistance

Domestic content requirements; subsidy

Rates are current as of 2010, and are expressed in Canadian cents per kWh by converting Euros to dollars at a market exchange rate of 1.38 EUR/CAD.a.

The rate is reduced by 1% per year for onshore wind and by 5% per year (after 2015) for offshore wind.b.

Denmark’s FiT consists of a premium added to the wholesale price of electricity of 4.64 ¢/ kWh. The value reported here is the wholesale electricity price c. plus the premium. Denmark has used a tendering process for offshore development in recent years.

Onshore wind in Spain is supported by either a premium above the wholesale price of electricity or by a fixed rate tariff (the latter is shown here). Offshore d. wind is supported only by a premium above the market electricity price of 12.2 ¢/ kWh.

The Ontario FiT is funded by the Ontario Power Authority; OPA revenues are derived mostly from fees levied on ratepayers.e.

For onshore turbines, project proponents choose between a fixed rate and a premium. For offshore turbines, just a premium exists.f.

Ontario’s FiT provides up to an additional 1.5 ¢/ kWh and 1.0 ¢/ kWh for projects with significant aboriginal and community participation, respectively.g.

Overall, Ontario’s FiT is very comparable to those in Spain and Germany, although there

exist some small differences. For onshore wind, Ontario’s rate is somewhat higher than in

Spain or Germany. The relative generosity of the program, however, is impossible to assess

without corresponding comparison of the wind resource and transmission capacity in each

jurisdiction, which is beyond the scope of this report. Other provisions in the Ontario

program mimic the German and Spanish programs very closely.

One key difference between the Ontario and German FiT is that the German FiT includes a

“degression”, whereby FiT rates on new contracts are adjusted downwards each year by a pre-set

amount to reflect on-going improvements in technology. New renewable energy projects that

are commissioned in a given year receive the applicable tariff for the 20-year duration of the FiT

contract; however, each year the applicable tariff is reduced by a pre-set amount.16 The rate of

degression is reviewed periodically, and is adjusted to reflect anticipated changes in technology

costs. This captures the point made earlier in this brief about the importance of understanding

how the “experience curve” on a technology interacts with the tariff being offered.

15 Recent prices for European feed-in tariff programs are reported in Fouqet, D., “Prices for renewable energies in Europe”, European Renewable Energies Federation, http://eref-europe.org/dls/pdf/2009/09erefreportfinal.pdf.

16 Held, A., Ragwitz, M., Huber, C., Resch, G., Faber, T., and Vertin, K., 2007, “Feed-in systems in Germany, Spain, and Slovenia: a comparison”, Fraunhofer Institute Working Paper.

9design of a feed-in tariff Policy Brief – September 2010

The degression policy was introduced in the major review of the FiT in 2000, and was based

on Germany’s decade-long experience administering a FiT. By adjusting tariffs downwards,

German regulators are attempting to strike a balance between the effectiveness of the program

and the costs to ratepayers. A similar degression mechanism is used in France.

The current Danish FiT stands out as different from the rest (it took on its current form

after amendments to FiT legislation in 1998). Rates are lower overall, the FiT is structured

as a premium on the market price of electricity, which exposes renewable energy investors

to volatility in the electricity market, and the program is funded by taxpayers rather than

ratepayers. In addition, the Danish FiT is likely to be phased out in coming years in favour

of a quota-based RPS with tradeable green certificates. This is seen as more compatible

with the on-going liberalization of Denmark’s electricity market.17 Few new contracts have

been signed under the Danish FiT since about 2000.

Interaction of feed-in tariffs with market-based carbon policies

Ontario is considering the role of market-based instruments (specifically a cap-and-trade

system) as part of its overall approach to climate change and energy, and so it is important

to look at how such policies interact with feed-in tariffs. As market-based carbon policies

like carbon taxes and cap and trade systems become more prominent, both in practice and

in policy discussions, scholars have attempted to understand how such systems might

interact with targeted renewable electricity policies like the FiT or the RPS. Because of

relatively limited experience with overlapping renewable policies and market-based carbon

policies, much of the analysis has been theoretical in nature.

The key finding of the “interaction” literature is that if a FiT program is implemented in

conjunction with a cap and trade system, the FiT will not result in additional emission

reductions.18 This is because the cap and trade system sets a binding cap on the total amount

of emissions in the economy, which remains constant no matter what other policies are put

in place. Rather than affecting the total amount of emissions, the FiT instead changes the

distribution of emissions (provided it is also binding). For example, if the cap and trade

system is targeted at the electricity sector as a whole, the introduction of a FiT has the

perverse effect of increasing the amount of electricity generated from the dirtiest sources.19

This result occurs because the introduction of the FiT causes a reduction in the market

17 Munksgaard, J. and Morthorst, P.E., 2008, “Wind power in the Danish liberalized power market – policy measures, price impact, and investor incentives” Energy Policy, 36.

18 Fischer, C. and Preonas, L., 2010, “Combining policies for renewable energy: Is the whole less than the sum of the parts?” Resources for the Future Discussion Paper, RFF DP 10-19, March 2010.

19 Bohringer, C. and Rosendahl, K.E., 2010. “Green Promotes the Dirtiest: On the Interaction between Black and Green Quotas in Energy Markets.” Journal of Regulatory Economics, forthcoming.

10 interaction of feed-in tariffs with market-based carbon policiesPolicy Brief – September 2010

value of tradeable permits in the cap and trade system, which indirectly benefits the most

emission-intensive generation sources.

It is important to note that this conclusion is based on an assumption that the cap is not

adjusted to account for the FiT policy. This is clearly an assumption that Ontario will have to

carefully consider.

In contrast, if a FiT is implemented in conjunction with an emission tax, such as

British Columbia’s carbon tax for example, it will result in additional emission

reductions. In this case, the emission tax penalizes fossil fuel electricity generation

relative to renewable electricity generation, and the FiT does likewise, such that the

two policies build on one another. Again, however, the cost of achieving a given level

of emission reductions will tend to be higher when the two instruments are used

together as compared to when an emission tax is used alone.

In either case, if the key policy goal is limited to reducing emissions, studies emphasize that

market-based emission policies like a cap and trade system or an emission tax will be more

economically efficient compared to targeted technology policies like a FiT. Of course, policy

makers often have multiple overlapping goals, and must consider the public acceptability of

different types of instruments, and in this case, a FiT can emerge as a good compromise.

However, care should be taken when implementing policies aimed at reducing emissions as

well as targeted policies like a FiT in conjunction, since doing so can potentially increase costs

without increasing effectiveness.

Implications for policy-makersControl overall long-term program costs.1.

As the FiT in Ontario matures, renewable electricity will make up a larger share of overall

generation. As a result, the overall cost burden of the program is likely to increase, leading to

increases in the retail price of electricity. Such increases can be politically costly, harmful to

particular consumer groups, and impose an economic cost. It is therefore important to design the

program to achieve its goals with the lowest possible increase in costs. Ontario’s regular review of

the FiT program is a good step in this direction. However, a discretionary review leaves the

outcome of the FiT level subject to a negotiation involving a variety of stakeholders that might find

it difficult to reduce FiT rates.20 As such, it may be additionally useful to consider a fixed ‘degression’

as is implemented in the German policy, whereby rates in the FiT are adjusted downwards every year

in new contracts to reflect on-going improvements in renewable technologies.

20 The FiT imposes ’concentrated benefits’ (on renewable electricity investors) and ’diffuse costs’ (on electricity consumers). In such a situation, pressure from those experiencing concentrated benefits is likely to be greater.

Ontario is considering the role of market-

based instruments (specifically a cap-and-

trade system) as part of its overall approach

to climate change and energy, and so it is

important to look at how such policies

interact with feed-in tariffs.

11implications for policy-makers Policy Brief – September 2010

Assess interaction of FiT policy with broader emission control policy.2.

Combining a FiT with a broad market-based emission control policy can lead to undesirable

results if improperly designed. In particular, if a FiT is implemented in conjunction with a cap and

trade system, it may not result in additional emission reductions compared to a cap and trade

system in isolation, and may increase costs. Before implementing this type of emission control

policy, the FiT should be re-evaluated to determine if it is still necessary and how it will interact

with the other policy. In general, policy makers need to consider their policy objectives clearly in

choosing a policy or combination of policies; the FiT is an effective tool for rapidly promoting

renewable energy, but is likely a less efficient tool for reducing emissions than a broader market-

based emission pricing policy, and can lead to unintuitive effects when combined with such an

emission pricing policy. Ontario should take these general findings into account when examining the

potential specific interactions of its FiT policy with the broader carbon pricing policy it develops.

Consider time-differentiation of tariff.3.

The Ontario FiT, like most other such policies, does not offer different prices for electricity

generated at different times of the day, on different days of the week, or in different seasons.

However, electricity generated at one different time can have significantly different value than

the same quantity of electricity generated at a different time. Since Ontario faces a potentially

large “supply gap” between now and 2020, changes to the FiT that promote renewable electricity

generated when it is most valuable should be considered. This would allow renewable energy to

help to make a more significant contribution to Ontario’s electricity capacity.

Address links between electricity price increases and feed-in tariff policy4.

Quite aside from the lessons European experience on feed-in tariffs can provide, there is a growing

“Made in Ontario” challenge that policy makers will need to address in the short term. That challenge

is the growing conflation in the public mind between increasing electricity prices and the feed-in

tariff program (and other GEGEA measures). Electricity prices are going up in Ontario. The causes

of this increase are multiple and complex; and include factors such as the legacy costs of nuclear

energy and the need to re-invest in the provincial grid after a long period of little to no investment.

The cost of renewable energy, particularly going forward, will be a factor as well. But it is not at all

clear that renewable energy support is responsible for all – or even most – of the price increases that

Ontario consumers face. More work needs to go into de-mystifying the true drivers of electricity

price increases in Ontario, so that the public has a clear understanding of why they are paying more

for a more reliable, greener, and healthier electricity system and what role renewable energy

policies play. An important consideration in that analysis is emerging evidence from Germany

that large-scale penetration of renewable energy can in fact serve to moderate electricity price

volatility, and so reduce average electricity prices over time.21

21 Rathman, M. Do Support Policies for the RES-E reduce EU-ETS Driven Electricity Prices? Energy Policy, vol. 35, Issue 1 January 2007.; Senssfuss, F., Ragwitz, M., and Genoese, M., The Merit-Order Effect: A Detailed Analysis of the Price Effect of Renewable Electricity Generation on Spot Market Prices in Gemany. Energy Policy, Volume 36, Issue 8, August 2008.; and Poyry Consultants for European Wind Energy Association (EWEA), Wind Energy and Electricity Prices: Exploring the ‘Merit Order Effect’. April 2010.

12 Policy Brief – September 2010 implications for policy-makers