September 11, 2018

HERE’S WHY RENEWABLE ENERGY PROJECTS ARE SLOWING DOWN IN ONTARIO, AND WHY GOOD ASSET MANAGEMENT SHOULDN’T

by Etienne Lecompte

For anyone with a stake in renewable energy over the past few years, it’s been hard to miss Ontario’s slowdown. What was once the only market behind California in solar is now lagging far behind.

As far as wind and solar go, we’ve been pretty used to an industry made attractive by government enthusiasm and sponsorship. Now—for the time being, anyway—it’s looking like we’re on our own. That should mean something to you asset managers and developers out there, especially as you try to make economic sense of net metering in a northern climate.

To get a better sense of where we are today, let’s look back on Ontario’s renewable energy industry in the past five years or so. Back in 2012, the sheer scale of renewables in Ontario was impressive: from massive turbine production facilities to solar fields spanning hundreds of acres, it really did feel like Ontario was driving Canada’s efforts towards ditching fossil fuels. Not only was the province on-board with subverting our dependence on coal, but investors and developers from different continents were pouring in to capitalize on a booming market—especially as Europe was reaching its saturation point.

What is a FIT program?

So what was the Ontario government doing, exactly, and why aren’t they doing it any more? Well, look back a bit further to the housing market bubble’s burst in 2008. Trickle-down effects impacted Ontario’s automotive sector—an industry long critical to the province’s industrial leadership—and in-part motivated bills like 2009’s Green Energy Act. The Act was aimed at distancing Ontario from coal and stimulating economic activity by way of aFeed-in Tariff (FIT) program.

For the uninitiated, feed-in tariffs are the economic policy of choice when it comes to promoting investment in renewable energy. They offer long-term contracts at guaranteed rates for electricity produced by renewable fuels. It sounds like a pretty sweet deal, and it was. Combine an easy approval process with increasingly affordable modules and components, and it was little wonder why investment shot through the roof.

What happened to Ontario’s FIT program?

It turns out, however, that markets tend to react poorly when you arbitrarily set conract prices upwards of 40 times the going energy rates…and herein lies the “why” behind the state of today’s industry. With analysts suggesting the Act could eventually produce some of the highest electricity bills in all of North America, there was little choice but to take a bit of the sweetness out of the pot for investors. By a bit, I mean about 70 per cent, which is how much the government had slashed earnings per kilowatt-hour by 2017.

And it doesn’t end there—beyond an emphasis on renewables, FIT was also designed to assist in kickstarting the economy by limiting resources necessary for project development to those found in Ontario. So, while some 31,000 jobs accompanied all that new, clean energy, the World Trade Organization didn’t sympathize and in 2012 struck down these buy-local provisions.

The FIT program’s struggle has been reflected in other large government initiatives, too; the result has been a steady downturn in new development. Back in September 2016, Ontario’s Minister of Energy announced the suspension of the Large Renewable Procurement (LRP) process for competitively selecting developers in large-scale renewable energy projects. Most recently, this past July, it was announced that nearly 760 renewable energy contracts—both FIT and LRP—would be wound down prior to NTP. Aside from tightening up returns the government is prepared to offer investors and operators, these moves reveal an increasing prioritization of the interests of ratepayers—not developers. And there looks to be a political element accompanying that orientation: with green energy caught up in the debate over responsibilities toward conservation and climate change, Ontario—and North America—will struggle to find leadership in its renewable energy sectors.

What does that mean for you?

It’s not all about dollars and cents when it comes to renewables businesses, and for you asset managers out there, it’s time to start paying close attention. Anyone with some skin in the development game can attest to the importance of stakeholder engagement—especially when it comes to renewables. It seems that despite the obvious benefits that come along with clean energy, there’s ongoing resistance to the intrusive qualities of turbines and solar panels. It’s a “not in my backyard” issue: we all want to reduce our collective carbon footprint…we just don’t want to get our feet too wet. To that end, siting issues have long plagued the success of and positive sentiments towards renewable energy projects in Ontario and beyond.

In 2018, as an asset manager with holdings in Ontario, the last decade has left you with fewer returns and resources than you’ve likely been used to—all the more reason to seek out tools to help your portfolio remain profitable and productive. Development of new projects has slowed down, making it even more important to take care of your existing and operating assets. Asset management platforms like PowerHub are working to deliver that value. In an era when government authorities aren’t taking an active role in managing your stakeholders, the value of accounting for a range of interests can’t be understated. The value of having a robust asset register, keeping control of your leases, documenting your warranties, and knowing your contracts is even more important. And if you’re doing all of this on Excel, you might find yourself in a nightmare down the road—especially should the government decide to toss an audit your way.

In a market where generation rates are at their most competitive since the inception of the FIT program, measures taken to strengthen your bottom line are increasingly valuable to the sustainability of your portfolio.

So, what’s the lesson? I think it’s that looking back is a great way to see further forward, and as a result, to make use of your best resources. What are you doing to maximize the returns of your FIT 1 projects?

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