Will net metering contribute to cheap renewable energy in Ontario?

The new Ford government has been quick to make a mark on the environmental policy landscape in Ontario. A few days after his swearing-in, he followed through on his promise to end the province’s cap-and-trade program (which puts the new Conservative government at odds with the federal Liberal goal to impose a carbon price on all provinces by the end of 2018). Shortly after came the announcement that over 750 renewable energy contracts across the province would be cancelled.

The cancelled contracts were said to be projects that had not reached project development milestones, though apparently at least one of the projects was under construction. Minister of Energy, Northern Development and Mines Greg Rickford said the projects were “unnecessary and wasteful”, while noting that the cuts would contribute to significant ratepayer savings.

These announcements will no doubt bring about a realignment of resources in the renewable energy sector in Ontario, which, despite this setback, still has significant potential to bring about cost savings that can hopefully be passed on to ratepayers. Under its new auction program, Alberta recently set a record for the lowest price for renewable energy in Canada, where the winning bidders will develop 600 megawatts of wind generation. With the winning bids at an average of 3.7 cents per kilowatt-hour, this means wind energy is competitive with traditional electricity sources in the province.

This is a trend that is repeating itself globally too. In what has been described as a renewable energy auction “revolution”, solar prices as low as 2-4 cents per kWh have been observed in auctions from Germany, Brazil, India, Mexico and Saudi Arabia.

Auctions for new capacity are planned by Ontario’s electricity system operator starting in 2020, and if renewable energy prices in other jurisdictions are any guide, new grid-scale solar and wind projects are well positioned to gain a large share in the new capacity coming online in the next few years.

Another policy that many in the renewable energy field are hopeful about is Ontario’s new net metering program, which enables customers with renewable energy installations to obtain credit for electricity they put into the grid, where each credit is valued at the retail price of electricity. The goal is to bolster distributed generation, whereby large numbers of small-scale renewable generators (think homes with rooftop solar) create and consume power onsite, then export any surplus generation to the grid.

There are several advantages from distributed generation.  When homes consume the energy they create onsite, they avoid distribution line losses – about 7-9% of electricity sent along the grid is lost in transit. There is also typically not any alternative use for your rooftop, which means no opportunity costs for rooftop solar installations. And in the summer months, solar cells on your roof create shade, which reduces heat gain.

On the other hand, distributed generation also has several drawbacks. Economies of scale mean that small-scale residential solar installations cost significantly more than the grid-scale projects that have been winning the auction bids cited above (about 2 to 2.5 times as much). Since most net metering participants send about a third of their generated energy back into the grid, the ideal distributed generation system would locate new installations to minimize the chance of a service disruption if too much power is exported. But, as far as I can tell, the current net metering program doesn’t include location optimization criteria. Homeowners can participate as long as they find their private benefits are greater than their costs (and most homeowners who decide to do this are high income earners).

Which brings us to another problem. Given the way electricity rates are set in Ontario, incentivizing consumers to adopt net metering by offering participants retail pricing is probably not optimal. This is because retail prices include the fixed costs of power infrastructure that generators and distributors incur, but that net metered consumers avoid paying when they generate their own electricity, even though they still use the grid a lot of the time. Since retail prices are set to ensure these fixed costs will be recovered, eventually retail rates will go up for other consumers. In California, one recent estimate suggests residential solar installations have shifted about 5% of total revenue from net-metered households to non-net-metered households. The irony is that these higher retail rates will then incentivize even more net metering.

The assumption behind many statements about net metering seems to be that anything which increases the share of renewable energy in the grid is a positive development. But if we care about getting the biggest reduction in greenhouse gases for each dollar spent,  there are many factors we need to consider to obtain the greatest value out of new renewable energy investments.

At the end of the day, we want to create a reliable, low-emission energy system that is resilient when faced with large fluctuations in energy demand. All things considered, the net metering program in Ontario, as currently designed, will probably not lead us in the right direction. There are many complex details to consider (that are beyond the scope of a blog post). Basically, it all depends on getting the incentives right. And the last thing the renewable sector needs right now is a backlash against high cost renewable energy, particularly when there are so many low-cost opportunities for grid-scale renewables.