This article is an excerpt from Government Procurement, which is available for purchase.
In its 2011 annual report the Ontario Auditor General found that the provincial government’s decision to phase out competitive bidding in favour of uncompetitive subsidized programs led to considerable increases in renewable energy costs. As the report noted, while Ontario’s renewable energy program had initially utilized competitive RFP processes to procure hydro, wind, solar and bioenergy power, the province decided to phase out competition in order to subsidize local job creation and the promotion of a made-in Ontario “green industry.” The Auditor General recommended that the province revisit its renewable energy sourcing strategy with a view to balancing sustainability with reliable supply and value-for-money.
As the report noted, prior to implementing its highly subsidized “Feed-in-Tariff” (“FIT”) program, the government had directed the Ontario Power Authority (“OPA”) to phase out the competitive RFP approach in favour of a somewhat costlier Renewable Energy Standard Offer Program (“RESOP”) that sourced supply from small scale operations at pre-set prices:
[T]he complexity and cost of developing competitive RFPs was seen as favouring larger projects at the expense of smaller ones. To remove these barriers to small projects, the Minister issued a direction in 2006 to the OPA to develop a Renewable Energy Standard Offer Program (RESOP) that would offer smaller renewable energy projects a standard pricing regime while providing for simplified regulations, including eligibility and contracting. Prices under RESOP were about 16% to 40% higher than the competitive prices under the RFPs, as illustrated in Figure 8. The OPA indicated that RESOP would not be successful if the standard prices were not set high enough to attract investment in renewable energy projects. On the other hand, the OPA did acknowledge that the standard-offer process might have had some unintended consequences arising from an absence of the competitive tension that encourages innovative solutions, and it did ultimately result in high prices and oversubscription.While the RESOP standard offer program was already resulting in higher prices when compared to the prices won through larger competitive RFPs, the government decided to accelerate and expand its renewable energy subsidy policy with the launch of its above-noted FIT program. As the Auditor General observed, the government decided to replace both its competitive RFP process and its standard offer RESOP program in favour of the costlier FIT program which was both heavily subsidized and required made-in-Ontario components. This added $4.4 billion in renewable energy costs over a twenty year period:
Earlier procurement programs for renewable energy included competitive bidding and the Renewable Energy Standard Offer Program (RESOP), which were both very successful and achieved renewable generation targets in record time. In particular, RESOP received overwhelming responses. It was expected to develop 1,000 MW over 10 years, but it exceeded this target in a little more than one year. Although continuing the successful RESOP initiative was one option, the Minister directed the OPA to replace RESOP with a new Feed-in Tariff (FIT) program that was wider in scope, required made-in-Ontario components, and provided renewable energy generators with significantly more attractive contract prices than RESOP. These higher prices added about $4.4 billion in costs over the 20-year contract terms as compared to what would have been incurred had RESOP prices for wind and solar power been maintained. The Ministry indicated that replacing RESOP with FIT successfully expedited its renewable energy program and promoted Ontario’s domestic industry.
As the Auditor General noted, the government justified its more expensive energy sourcing strategy as an attempt to “create jobs and protect the environment.” However, the report noted that the FIT program guaranteed renewable energy developers an 11 percent after-tax return on investment and found that no independent price-control protocols were established to measure the reasonableness of those energy costs. In fact, the Auditor General found that the Ontario Energy Board’s traditional role of reviewing and approving energy prices was not extended to provide oversight over the FIT program. Instead, the Auditor General noted that the Ontario Power Authority would be conducting its own “in-house” review that would be “supported by consultants as needed” and that the government had “not decided whether to involve an independent third party in the review.”
In conclusion the Auditor General found that the entire renewable energy program, and in particular the FIT subsidy program, significantly increased the cost of energy when compared to more traditional energy sources and that those higher energy costs had been locked in for periods of between twenty and forty years. Moving forward the Auditor General recommended that the government “conduct adequate analyses of the various renewable energy implementation alternatives so that decision-makers are able to give due consideration to cost, reliability, and sustainability.” As this case study indicates, replacing competitive bidding with government-controlled subsidy programs can prove to be a costly policy decision with long term consequences to the taxpayer.
