Just four years ago, Paul Ghezzi bought into Ontario's green-energy dream. But today the founder of the Ontario Solar Income Fund calls the province's much-touted solar strategy "an absolute disaster." His beef is specific-narrow, even-but it joins a widespread chorus of complaint. Ontario's solar revolution has been dogged by controversy, backtracking and confusion among manufacturers, power producers and consumers-not to mention a little entity called the World Trade Organization.
Of course, a politician as experienced as Premier Dalton McGuinty knows that government initiatives can have unintended consequences. But how did a policy that seemed so perfect go awry on so many fronts?
Back in 2003, Ontario had a power problem and McGuinty reckoned he had a powerful solution. Coming to office just months after a dramatic blackout, the incoming Liberals pledged to mothball the province's emission-belching coal power plants, clearing a path for a new era of clean air and clean power.
The new premier quickly learned that reorganizing an electricity system is a tough slog. The Liberals first had to push back the decommissioning of the coal plants, from 2007 to 2010, and then to 2014. Then they realized that expanding Ontario's system of nuclear plants would be a wildly expensive process, and one that might not be done in time for 2014.
All the while, another problem also pressed the government: The province's once-mighty manufacturing base was wilting, shedding tens of thousands of jobs as long-established industries struggled to keep up with offshore competition and shrinking demand.
Environmentalists urged the Liberals to look to the renewable-energy revolution in places like Denmark, Germany and Spain. These countries had discovered that they could solve their power problems as well as create jobs by promoting wind and solar. The key step was to introduce long-term subsidies for renewable energy producers. This would generate a crowd-sourced burst of power as entrepreneurs, farmers and even homeowners got into the energy business.
Inspired, the Liberals in 2006 set preferential rates for green power feeding into Ontario's grid, the first jurisdiction in North America to take such a step. By 2009, Queen's Park had jacked up the subsidies further and added a rider: Green-power developers would be obliged to source much of their materials in Ontario. Et voilà: Manufacturers would create jobs in Ontario, and the province could even become a supplier to other markets. Ontario could be on the cutting edge of the emerging green economy.
In 2007, Ghezzi, a Toronto private wealth manager, decided to establish a private equity fund to develop solar projects on the roofs of "big-box" commercial and industrial buildings. By the time he launched the Ontario Solar Income Fund in September, 2009, Ghezzi claimed to have $100 million in debt and equity financing, as well as a long line of eager property owners ready to put solar panels on their roofs. McGuinty's green energy subsidy-the "feed-in tariff"-promised 10%-to-11% annual returns for investors.
These days, however, Ghezzi is a study in frustration. The cause of the disaster, as he calls it, is the requirement that developers source at least 60% of their hardware in Ontario. The Liberals' theory, elegant as it was, did not conjure up an Ontario manufacturer of the lightweight "thin film" modules that Ghezzi's projects require. "Everyone's feeling a little stymied," sighs Ghezzi, who describes 2011 as a "make-or-break year."
That's not an overstatement. Last year, hundreds of farmers were gobsmacked to learn that Queen's Park was suddenly cutting its generous guaranteed rates for small-scale solar farms. In urban areas, homeowners who had installed rooftop panels under the first incarnation of Ontario's green plan were vexed by rule changes that put them at a financial disadvantage compared to individuals who got into the game more recently.
Meanwhile, the global solar firms now setting up production facilities in Ontario are nervously eyeing a World Trade Organization challenge launched last fall by Japan, whose officials argue that the Liberals have erected trade barriers. The United States and the European Union have asked to be included in the process, which could well take a year or more. Ontario officials are now in formal talks with the WTO.
The problems don't end there. A backlash is also brewing over the long-term effect on power rates, which will rise steadily to cover the cost of all those green subsidies. Could Ontario's solar industry be eclipsed before it even gets on its feet?
In the summer of 2008, Ontario's then-newly appointed energy and infrastructure minister, George Smitherman, went on a trip to Europe to figure out how to transform the province into North America's greenest jurisdiction.
It was only natural that his research would take him to Germany. Though hardly the sunniest place on Earth, Germany was widely credited for kick-starting the global solar industry in the early 1990s, using a feed-in tariff policy that granted solar energy producers guaranteed preferential long-term rates as compensation for betting on expensive technologies such as photovoltaic (PV) cells.
With rapid innovation, falling prices for ultra-pure silicon and improvements to the wafer production process, the solar industry has recorded an impressive growth curve, with total annual installation levels rising from just 21 megawatts in 1985 to over 7,300 MW in 2009. The acceleration has been such that Keith Stewart, an energy analyst for Greenpeace Canada, admits that his organization has consistently underestimated solar industry growth. Yet for all those numbers, solar power still accounts for only a tiny slice of global energy production.
The bulk of the solar industry is based in Germany, Spain, Japan, China and the American Sun Belt, although other regions are also beginning to see rapid growth. Areva, the many-tentacled French energy giant, recently decided to place a $3-billion bet on the nascent solar market in India, where the national government has launched a plan chock-a-block with incentives meant to spur 20,000 MW of solar power by 2022. Another European group is trying to figure out how to develop solar farms in the Sahara.
Germany, as Smitherman discovered, didn't require solar power producers to source components locally. Instead, it enticed the equipment industry with lucrative grants, especially in high-unemployment regions in the former East Germany. Waterloo's Arise Technologies, for example, secured a $35-million grant in 2007 to build a $70-million solar cell factory in Saxony. These German-based manufacturers now ship modules to emerging solar markets, and the country's government claims to have created more than 150,000 jobs in the solar sector. To Ontario policy-makers, such figures offered clear evidence that Western governments could leverage their own green energy policies to create green-collar jobs.
When Ontario's Liberals passed the ambitious Green Energy and Green Economy Act in 2009-the upshot of Smitherman's research trip-they formalized the link between renewable power and jobs with carrot-and-stick rules requiring solar and wind producers to source equipment in Ontario. McGuinty has said the policy will create 50,000 new jobs by 2013.
In the two years since the law was passed, Queen's Park has found itself in the awkward role of matchmaker, cajoling offshore solar manufacturers to set up factories in Ontario. Smitherman (who left the government for an unsuccessful run at the Toronto mayoralty) got his knuckles rapped in late 2009 when leaks indicated that he'd promised Samsung an inside track on $7 billion of equipment purchases if the South Korean giant built several factories in Ontario.
McGuinty formally unveiled the massive deal in January, 2010; it provides Samsung with $437 million over 25 years if the company delivers on its pledge to create 16,000 jobs. "We're trying to lay the foundation here for new economic growth in Ontario," the Premier said at the time. Last December, the company announced it would build a pair of wind turbine plants in Southwestern Ontario. Samsung has pledged to construct two more plants as part of the overall deal. But details are scarce, no construction has begun, and the opposition parties are demanding that the government come clean about the terms. The sweetheart deal also predictably irritated other equipment manufacturers, including giants like Mitsubishi. And, so far, the Samsung arrangement has done nothing to break the logjam that bedevilled solar developers like Paul Ghezzi.
Indeed, the mounting "supply chain" problem has caused headaches because provincial officials must give the thumb's-up before the factories can start selling panels and other components; after all, the program would seem pretty hollow if these companies, many of them foreign-owned, did nothing more than establish warehouses and sales offices in the province. "There's been no shortage of announcements," concedes Jim MacDougall, who oversees the feed-in tariff program for the Ontario Power Authority, adding that solar producers and regulators are now waiting anxiously for the manufacturers to get shovels in the ground. "The big question is when will companies commit money to Ontario facilities," says MacDougall. Meanwhile, green energy producers have project approvals in hand but are scrambling to source parts.
The Liberals, predictably enough, are bullish about the future. "The private sector has a way of organizing itself when these opportunities arise," says the current energy minister, Brad Duguid, who has spent much of the past year attending ribbon-cutting events at wind and solar plants. "Our read is that the integration has taken place." Others disagree. "The supply chain," states Ghezzi, "is a problem."
The poster child for Duguid's sunny outlook is a Canadian company that purports to be repatriating solar jobs from China. Kitchener-based Canadian Solar Inc., a $1-billion-a-year firm that makes solar panels, now employs 500 people at its subsidiary's factory in Guelph.
Corporate patriotism didn't drive CSI's decision to invest $60 million in Ontario. Like many other panel manufacturers, CSI leverages China's low-wage labour market to win business in Europe. In Ontario, the company had to pay to play. "We would not have built this plant without that Ontario content rule," says company executive Milfred Hammerbacher, adding that the firm plans to use the Guelph plant as a springboard into the entire North American market. "We don't intend to be here and leave a year from now."
The company, which claims to be the world's sixth-largest solar component supplier, was founded by Shawn Qu, an engineer who did his graduate work in semi-conductive materials at the University of Toronto. CSI made do with one-off contracts until 2004, when Germany set off a solar gold rush that mirrored the wind revolution in places like Denmark and Sweden. The firm hustled to build factories in China that crank out PV components (silicon wafers, solar cells and panels). Hammerbacher points out that several European countries, including Spain, Italy and the Czech Republic, moved to replicate the German formula, thus creating new markets for CSI.
Several foreign firms also appear to be testing the Ontario market, including giants like Siemens AG. SunEdison, one of the first American firms to make significant inroads into the commercial rooftop market, has enlisted two manufacturers-Canadian auto-parts supplier Samco Machinery and a Singapore-based electronics fabricator, Flextronics, that has a plant outside Toronto-to produce components for the company's Ontario solar installations. "We look at [Ontario]as a landing pad for Canada and other parts of North America," says SunEdison vice-president and country manager Jason Gray.
Other offshore firms seem to see Ontario the same way. Franco Traverso, the founder and chief executive of Silfab, a module maker based in Italy, says his company will begin construction on a factory in Mississauga in March. "We are thinking Ontario could be our North American base," he says, noting that the domestic content rules prompted Silfab to choose Ontario over another North American jurisdiction. Indeed, Silfab has felt the need to scout around for new markets because Europe has seen what Traverso describes as an "invasion of Far Eastern products."
Such developments have done little to mollify Paul Ghezzi, who is still waiting for Queen's Park to green-light a supplier of "thin film" solar modules for the rooftop projects he's planning. (Conventional PV systems are too heavy for many rooftops.)
At one point, there was hope. Two years ago, the Toronto electrical contracting firm Everbrite and a handful of partners pitched an ambitious plan to build a $500-million thin film plant in Kingston, using state-of-the-art technology and fabrication equipment licensed from a leading international firm. Queen's University thin film expert Joshua Pearce, who signed on to do research for the venture, says the Everbrite deal subsequently fell apart because the province wouldn't offer loan guarantees or any kind of upfront financing to help the investors. "They got no support beyond the feed-in tariffs," he says. "I personally am very frustrated."
Pearce is among the critics who say that some of the firms that have been licensed to set up factories in Ontario will do little more than assemble components made overseas. "It is embarrassing to call it manufacturing," he says, likening the province's emerging solar equipment industry to the maquiladora plants on the U.S.-Mexican border.
To add to Ghezzi's frustration, a previous generation of Ontario solar projects was built with imported thin film equipment sourced before the domestic content rules came into effect. One belongs to Enbridge, which completed an 80-MW solar farm in Sarnia last September; at $400 million, it is, for now, one of the largest such facilities in the world.
The 950-acre farm has 1.3 million thin film modules-each about the size of a kitchen cabinet door-and generates enough electricity for almost 13,000 homes. After auditioning a range of solar equipment suppliers, Enbridge decided to source the modules from First Solar, a well-regarded California clean-tech firm that builds them in factories in Ohio and Malaysia.
John Maniawski, Enbridge's senior director of power generation business development, says the company feels solar is a viable enterprise that satisfies the utility's strategic and financial goals. Enbridge, he notes, is planning to invest between $2 billion and $3 billion in renewable energy in North America over the next few years; the company is actively scouting around Ontario for new solar sites. But Maniawski knows he won't be able to turn to First Solar for components for this next set of projects: The company has opted not to locate a plant in Ontario because the provincial market doesn't offer enough scale to justify the investment.
Late last year, Energy Minister Duguid released a long-awaited report predicting that Ontario's power rates will double over the coming 20 years, rising by about 3.5% annually. The run-up represents the price consumers must pay in order to clean up and modernize Ontario's electricity system (including refurbishing nuclear plants) while also creating those green-collar jobs. Duguid estimates Ontario will spend $27 billion on renewable energy by 2030, a third of that on solar power.
In a province that's long enjoyed artificially low energy rates, any increases are bound to be unpopular, and the Liberals are trying to reduce the sticker shock with assorted rebates. Still, the opposition parties are eagerly attacking the cost of the green energy strategy in the run-up to the election set for this October. "The subsidies being offered were ridiculously generous," John Yakabuski, the Ontario Conservatives' energy critic, recently told The Wall Street Journal. "We would have never instituted the program."
More worrisome for Duguid and his officials is Japan's WTO challenge. "We weren't surprised that other jurisdictions have taken notice," says the minister, adding that he's confident the green energy policy will survive. If he's wrong, the WTO decision, a global precedent-setter, could gut Ontario's domestic content rules and lay waste to its pledge to create thousands of green jobs.
The solar firms testing the Ontario market are watching these proceedings intently, but not because they're all hoping the WTO will uphold Ontario's regulations. "We have members who are deeply against domestic content and members whose support is very strong," admits Elizabeth McDonald, president of the Canadian Solar Industries Association. Having researched the subsidy and incentive structures for solar manufacturing in jurisdictions like Japan, Joshua Pearce of Queen's isn't optimistic about the future. If the province has to water down or cancel its feed-in tariff policy, he says, "all those jobs will be gone."
The case underscores the difficulties that governments face in orchestrating the transition to a clean economy. Despite its leadership role in North America, Ontario is no longer alone when it comes to offering inducements to suppliers of renewable energy gear. And the green logic begins to wilt if manufacturers are compelled to build factories in every market they hope to supply. It's possible, for instance, that Ontario's emerging solar manufacturing sector will encounter export barriers when looking to crack other North American jurisdictions, specifically because of the province's domestic content rules. What's more, solar energy, though much cheaper than it was even three years ago, still suffers from a substantial price disadvantage compared to traditional sources, so a fractured North American supply network could make this form of subsidized power even more expensive for consumers.
In Germany, where the solar revolution began, critics are now questioning the huge size of the subsidies, estimated at $200,000 to $300,000 per job created. In other jurisdictions, the solar industry has had to lobby hard to defend its subsidies, even though module prices and the net costs of producing the energy are dropping rapidly. By contrast, observes Pearce, Japan offered generous upfront subsidies to solar equipment makers but warned them that the supports would be phased out within a decade, forcing the manufacturers to invest in innovation that would drive down prices. Nothing of the sort has been proposed for Ontario, he points out. "It's sad. There's no other word for it."
Despite all the glitches and the warning clouds on the horizon, some solar proponents are still hopeful, pointing out that most forms of energy production have benefited from a financial leg up-from tax breaks for oil and gas exploration to huge subsidies for nuclear plants. As Greenpeace's Keith Stewart says, "Let's not forget that Niagara Falls [generating station]was obscenely expensive when it was first built. But I think everyone's glad we built Niagara Falls."