TODAY’S STUDY: THE JOB POWER OF IN-SOURCING NEW ENERGY

Denise Bode, the CEO of the American Wind Energy Association, uses the term insourcing to describe what the New Energies do by building domestically. “Insourcing,” Bode said recently, grows local revenues and jobs by “leveraging both foreign and domestic investment. It is the opposite of outsourcing.”

The report highlighted below validates Bode’s point. It describes the success Canada’s Ontario province has had at building local energy infrastructure and employment through its New Energy incentives.

Anecdotal evidence is also emerging that suggests the U.S. is beginning to lose business opportunities to its northern neighbor due to the failure of Congress to institute similar long-term, transparent and stable federal incentives for the New Energies.

With all their ballyhooed “real-world” business experience, it is possible the new conservatives in Congress will understand the fundamental business adage that “you’ve got to spend money to make money.” Hopefully they will be willing to do so, since spending on New Energy will not only make money but also create jobs and CONSERVE this good earth.

Maximizing Jobs from Clean Energy; Ontario’s "Buy Local" Energy Policy
John Farrell, January 2011 (The New Rules Project)

Executive Summary

Ontario’s bold renewable energy program contains excellent examples of policy that marries economic and environmental goals. Unique among programs that set a guaranteed price for electricity from renewable energy projects, Ontario’s program also boasts a domestic content requirement. Sixty percent of the value of wind and solar projects interconnected under the program must be sourced from within the province.

Ontario’s clean energy program encourages local ownership and distributed generation, in part to broaden support for renewable energy and in part to capture the increased economic impact generated from local ownership.

The domestic content requirement has already resulted in the promise of 43,000 jobs and dozens of new manufacturing plants to support the 5,000 MW of new clean energy. The public cost of these jobs compares very favorably with state and federal job creation strategies in the United States. If U.S. states were to emulate Ontario’s strategy the public costs would likely be significantly lower, given Ontario’s currently low retail price for electricity and its weaker wind and solar resources.

Ontario’s domestic content provisions have been challenged by Japan and others in a complaint to the World Trade Organization, although it is unlikely that a definitive ruling would occur before the program is implemented. American states could also be vulnerable to challenges under the commerce clause if they imitate Ontario, although economic development strategies that offer incentives to in-state business development (rather than barriers to out-of-state businesses) have been upheld in the past.

Ontario’s renewable energy driven economic development strategy, although still in its infancy, offers significant lessons to American states. With as much as 70 percent of U.S. renewable energy systems manufactured overseas, state policymakers could learn from Ontario’s success.

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Introduction

Those pioneering states and nations willing to bear the short term higher costs of renewable energy are increasingly developing policies that allow them to maximize the economic benefits generated from these up front costs.

Ohio, for example, requires that 50 percent of the renewable energy needed to meet its state renewable electricity mandate be generated inside the state. Germany’s pioneering Feed-in-Tariff (FIT) law, which gave a guaranteed price to renewable energy sufficient for a return on investment, applied only to in-country generation.

The province of Ontario, Canada, has gone one step further. Companies eligible for its FIT prices must spend 40-60 percent of the cost of the wind or solar installation inside the province. Ontario also provides an incentive for community owned facilities and fast-tracking for distributed generation.

While still in its infancy, Ontario’s coherent and focused program has generated a remarkable response from both investors and manufacturers, a response that could translate into tens of thousand of new well paid jobs. Indeed, Ontario’s FIT may compare very favorably with the cost per job created in traditional incentive programs in the United States.

Ontario’s renewable energy program is an excellent example of policy that marries economic and environmental objectives. This Policy Brief offers insights and information on Ontario’s unusual clean energy program with a focus on its cost, economic potential, and unique provisions to encourage local content and ownership…

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Program Costs and Benefits

Unlike the various solar programs in the United States, Ontario’s is not funded through tax incentives or grants but through the price paid for the electricity. Thus the payments are based on performance, unlike many U.S. tax incentives that are based on cost. All contracted projects are paid per kWh generated, with all payments and interconnection costs passed through to ratepayers. The FIT Program will make payments of approximately $1.15 billion per year once the currently contracted projects (2,600 MW) come online. This translates to a cost per kWh of approximately 0.8 cents (Ontarians consume a total of 145 billion kWh per year)…

Tyler Hamilton of the Toronto Star put the program costs in perspective:

“Yes, we are paying 80.2 cents per kilowatt-hour for small rooftop solar, a rate often cited by critics to stir up anger over the program, but let’s keep it in perspective. Small solar only makes up 1 per cent of all FIT applications and its current contribution to Ontario’s overall system supply is about .08 per cent – too small to register on your bi-monthly bill. Yet this .08 per cent is bringing economic activity and skills development to all corners of the province and allowing homeowners, communities and aboriginal groups to participate directly in the greening of Ontario’s energy system.”

It’s hard to draw direct comparisons to American renewable energy policies, because incentives are split between utilities, states and the federal government. However, commercial wind power projects in the United States require a similar price of 11 cents per kWh to be profitable (with 4 cents coming from federal tax incentives and accelerated depreciation and the remainder from utility power purchase agreements).

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Residential solar photovoltaic (PV) projects in East Lansing, MI – with similar solar resources to Toronto – require 70 cents per kWh, with federal incentives providing 15 percent of project revenue. The local utility, Consumers Energy, recently offered a pilot feed-in tariff program with a price of 65 cents per kWh, although that dropped quickly to 52.5 cents as program subscriptions immediately passed the 250 kW price-drop threshold. Consumers Energy only offered a 12-year contract, compared to the 20 years guaranteed in the Ontario FIT Program.

Figure 4 illustrates the difference between project financing for a residential solar PV program in Toronto, Ontario, and East Lansing, MI . Both projects require 70 cents per kWh over 20 years to provide an 8% inflation-adjusted return on investment. The Consumers’s Energy FIT expires after 12 years, after which time we assume the project will take net metering. The FIT price of 52.5 cents per kWh has been adjusted to reflect this shift, for a 20-year average of 35 cents. A hypothetical project using a ($4.00 per Watt) state rebate instead of a FIT has also been included, although state solar rebates of this magnitude generally run out of funds quickly and is unlikely to be enacted in Michigan.

It should be noted that there are several differences the chart cannot capture. For one, the Ontario FIT Program has no budget or size cap, unlike the Consumers Energy pilot FIT (with a program cap of just 2 MW) or typical utility rebates (with a fixed budget). For another, the federal tax credit for solar energy in the U.S. is only useful for individuals who have sufficient tax liability. A U.S. family of four with the median family income of $44,000 would require 12 years to successfully absorb the tax credit on a 5 kW residential solar array, but tax law only gives them 5-6 years (until 2016, when the entire tax credit may expire as it has in the past). In other words, U.S. incentives are less generous and less certain than the FIT Program.

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FIT Program Ratepayer Cost

The feed-in tariff is paid for with incremental increases in the cost of electricity, but calculating the cost of the FIT Program is complicated because the program supports generation by many different technologies and the prices paid vary by project size. Additionally, while the Ontario Power Authority provides data on the number of projects contracted by technology, they do not provide this data by size tranche. Therefore, we had to estimate the proportion of contracted MW in each size tranche to arrive at a size weighted price per kWh by technology (generally by using a price closer to the lowest size tranche).

Table 3 estimates the expected payments for electricity generation by technology based on these estimates (and does not factor in price inflation).

Net Cost of FIT

The $1.15 billion per year is the gross cost of the FIT program, but it is more useful to compare the cost of the FIT Program to the cost of delivering electricity in alternative ways. Currently the price of residential retail electricity is about 7 cents per kWh in Ontario, lower than all but 5 U.S. states. The cost to operate its existing coal plants, at current coal prices, is $37 per MWh (3.7 cents per kWh), compared to the costs of the FIT program, which across all technologies averages $193 per MWh (19.3 cents per kWh).

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However, since Ontario plans to close its four remaining coal-fired power plants, which account for 21% of Ontario's existing electricity capacity (31,000 MW) and 19% of the total electricity production (31 of 163 TWh), the FIT Program costs ($193 per MWh) should be compared to the costs of new power generation. The California Energy Commission estimates that a new gas-fired combined cycle power plant (a traditional replacement for coal power) has a levelized cost of operation of $115 per MWh.

However, the cost of operating a coal- or gas-fired power plant is higher when environmental externalities are included and the Ontario program is driven in part by environmental considerations. The four Ontario coal power plants (and a fifth retired in 2005) were responsible for emitting 30,000,000 metric tons of carbon dioxide, 0.32 metric tons of mercury, 116,000 metric tons of sulfur dioxide and 31,000 metric tons of nitrous oxides in 2005.19 One Canadian study calculated the health and environmental impacts of coal power at $127 per MWh (and $20 per MWh for gas), increasing the operation cost to $164 per MWh.20 A study in the U.S. came up with a smaller figures for coal and natural gas power plant externalities, $32 and $16 per MWh, respectively, but did not include the cost of greenhouse gas emissions.

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Figure 5 illustrates the difference in the cost of existing coal, new gas, and renewable energy power plants. Put in the context of new gas generation, the FIT’s marginal cost to ratepayers – not considering environmental costs – is $78 per MWh or $465 million per year.

There is one significant omission from the chart: renewable energy systems are typically variable whereas coal power plants provide ongoing baseload power. However, the relative values are difficult to calculate, especially when some renewables (e.g. solar) provide the most power at times of peak demand, a time when the most expensive power plants would typically need to be operated.

Even though the FIT Program has a higher cost per MWh for power than existing electricity sources, the cost differential is much smaller when compared to building comparable fossil fuel generation. Furthermore, the environmental and health benefits may make new coal more expensive than new renewable energy brought online because of the FIT Program. Finally, the feed-in tariff program will likely have a lower cost over time as the contract prices decrease to reflect falling prices of new renewable power, as they have in Germany’s feed-in tariff program…

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Evaluating the Cost of Clean Energy Job Creation

Previous sections estimated the net cost of Ontario’s FIT program. Here we will examine the job creation impacts of that program.

New Industry

The domestic content requirements have generated a stampede of proposed new manufacturing facilities in Ontario to meet demand for locally produced inverters and solar modules. A total of 1 to 1.3 gigawatts in manufacturing capacity has been announced since the introduction of the 2009 FIT Program, with several additional manufacturers promising to produce inverters, trackers or racking equipment inside of Ontario.

Not all of the proposed solar manufacturing facilities will actually be built, and some may actually cannibalize others. For example, a new polysilicon refining plant is on the list of new arrivals. Without the locally produced silicon, projects would need a local module and inverter on top of local labor. With the polysilicon, a project could probably get by without a locally made inverter or mounting system.

Also, the ramp up in capacity may exceed the long-term demand for Ontario-made solar modules and inverters within the province. Local demand will exceed supply until 2012, but thereafter there is a projected oversupply of locally produced modules for the Ontario market.35 However, these domestic manufacturers should also be able to serve the international market. Indeed, many of them have already announced that intention.

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New Jobs

The overall job creation goal of the FIT Program is to generate 50,000 new direct and indirect jobs in Ontario.36 There are essentially two ways the program develops jobs. First, it attracts new manufacturers who will hire workers to produce the necessary materials to build renewable energy systems that comply with the FIT Program’s domestic content requirements. Second, it creates construction, installation, operations and maintenance jobs in the renewable energy sector.

Table 9 reveals that the province has manufacturing plants with plans to create 2,300 to 3,000 jobs and several other promised new facilities without job estimates. Filling in job estimates for these facilities, the total number of new manufacturing jobs is likely between 2,700 and 3,200 new manufacturing jobs, if all the plants are built as promised.

One study of job creation from solar PV manufacturing suggests a total (direct and indirect) employment boost of 10 jobs per MW during PV production. Because most of the module manufacturers coming to Ontario will bring 1-2 jobs per MW (a direct job), this suggests a multiplier effect of 5-10 jobs for every manufacturing job.37 Thus, a conservative estimate of the total jobs created (directly and indirectly) from new manufacturing plants assumes that half of the expected manufacturing jobs materialize (1,500) and that they support, indirectly, an additional 6,000 jobs, for a total of 7,500 jobs (a multiplier of five).

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The construction, operations, and maintenance of new renewable energy projects makes the second piece of the jobs puzzle. In April 2010, the Ontario Power Authority said the 2,445 MW of renewable energy under contract would create 20,000 direct and indirect jobs.38 In a November project update, the program had executed contracts for more than 1,200 projects, accounting for 2,620 MW.39 So the jobs number may be even higher.

But the FIT Program isn’t solely responsible for all of the new jobs from renewable energy projects. The province signed a deal with South Korea-based Samsung group to invest $6.8 billion in wind and solar projects totaling 2,500 MW by 2016.40 The projects will receive the feed-in tariff payments, will have transmission capacity set aside, and will be eligible for $437 million in bonus incentives if its efforts succeed in creating 16,000 jobs. The incentives would cost a typical ratepayer an additional $1.60 per year for 25 years.

Some of those 16,000 jobs come from four new manufacturing plants in the Samsung agreement, two for wind towers and blades and two for solar modules and inverters. The Siemens turbine blade plant in Table 9 is the first of these four facilities.

Table 10 attempts to summarize the job creation from the FIT Program thus far. The results are impressive, with the contracted projects, the Samsung deal, and the expected development of manufacturing plants getting Ontario over 85 percent of the way to its goal of 50,000 jobs from the FIT Program. Overall, the 43,500 jobs would come in support of 5,000 MW of renewable power, or around 9 jobs per MW.

These estimates are in line with actual data from Germany where more than 300,000 jobs have been created in the renewable energy industry from 2000 to October, 2010. These jobs were created in the development of more than 8,700 MW of solar power and 20,000 MW of wind power from 2000-09, for a job per MW ratio of ten to one.

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Cost per Job

With over 40,000 jobs on the way, Ontario’s clean energy program appears to have had remarkable success in generating employment. One question is the cost per job created and how that cost compares to job creation programs south of the border.

For the manufacturing jobs, the cost is largely absorbed as part of the FIT Program, as the manufacturers have been attracted by the prospect of a new, sizable market for solar and wind power. Thus, the 20,000 jobs expected from the FIT Program can be measured against the cost of the program. The 2,445 MW under contract in mid-2010 have an expected annual cost of $1.15 billion in electricity payments. The marginal cost of the program (compared to equivalent capacity from combined cycle natural gas) is $465 million. Thus, the cost of the 20,000 jobs (in net present value over the 20 years of the program) is approximately $5.8 billion, or $290,000 per job.

However, the province has additional incentives for attracting investment by manufacturing companies. In March 2008, Ontario launched the Next Generation of Jobs Fund to provide $1.15 billion to attract clean energy companies.45 Specifically, the fund exists “to help companies with a mission of helping the environment, by doing such things as reducing pollution, saving energy, or making transportation more efficient.”

The Samsung deal (with its over $400 million in employment incentives) was financed through the Next Generation of Jobs Fund. The cost of these jobs is significantly less than for the FIT Program overall, with $437 million in incentives for 16,000 jobs coming out to $27,000 per job. However, it’s just as accurate to say that the 16,000 jobs from the Samsung deal should be part of the calculation for the FIT Program job costs. Merging the two provides a cost per job of $173,000 for 36,000 jobs.

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Other solar manufacturers have been getting incentives from the Fund as well. 6N Silicon, owner of Calisolar, received $8 million from the Fund. We were unable to discover how many of the proposed manufacturing plants listed in Table 9 were recipients of subsidies through the Jobs Fund. Table 11 illustrates the cost per job of the FIT Program, dividing the 43,500 total jobs over the $6 billion FIT program cost and $437 million Samsung incentive.

Compare the cost per job of $143,000 with the cost of new solar manufacturing jobs in the United States. A recent New York Times story examined a core of new solar manufacturing facilities being built in Ohio and Michigan. Five new or expanding manufacturing facilities in the region netted an average of $635,000 per job in federal and state tax incentives for 770 new jobs.

The chief economist and senior economic advisor to the vice president says the U.S. economic stimulus program cost $92,000 per job created or saved.49 Recent case studies of economic subsidies by Good Jobs First found that per job subsidies for manufacturing and research facilities ranged from $4,000 to $1.2 million; one analysis found an average subsidy for renewable energy manufacturing jobs of $61,000.50 Studies of both Minnesota and Maine in the late 1990s found the states spent more than the federal standard for subsidized jobs (many of which paid below the market wage).

Ontario’s program also seems to be generating jobs at higher wages, on average, than U.S. job creation programs. One study by a Southwest U.S. economic development agency put the average salary in solar manufacturing at $70,000 per year. Other estimates show lower, but still robust salaries of $40,000 to $50,000 per year for line workers and a solar-industry average of almost $60,000.53 Salaries for solar installers are $30,000 to $40,000 per year…

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Conclusion

Ontario’s feed-in tariff policy provides a robust regime for encouraging renewable electricity generation while maximizing the local economic benefits of this new power generation. The domestic content provision ensures that projects will have significantly higher local value-added than would otherwise happen, encouraging more renewable energy industries to locate and hire in Ontario. The community project price adders will also increase the jobs and economic impact of the renewable energy industry, by encouraging the development of projects that provide more jobs and more economic impact per MW than absentee owned projects. Finally, the feed-in tariff distributed generation policy makes it easier for small scale projects to get on the grid and contribute to clean energy and economic goals swiftly.

The province’s policy seems to be an effective job strategy, with a cost per job comparable or lower than seen in American job subsidy programs. But Ontario is getting both high wage jobs and an abundant supply of clean energy, not just subsidizing job creation.

The international trade dispute over the domestic content provision is unlikely to have a significant impact soon. Canada has remained adamant that Ontario’s feed-in tariff complies with the country’s international trade agreements and ultimately, the World Trade Organization has no power to compel the province or country to change its program. Even if the province were willing to modify its program to avoid retaliatory tariffs, the adjudication process could stretch for years, allowing Ontario to meet many of its clean energy and economic goals long before an international agreement and any reduction in the domestic content provisions is reached.

Ultimately, Ontario’s feed-in tariff program is doubly robust, because even in the absence of the domestic content provisions, the local ownership price adders will result in greater than usual economic impact from renewable energy development than with absentee owned projects.

Ontario’s FIT Program has brought a surge of jobs and economic development. And given the uncertainty of the international trade dispute, it’s unlikely that development will slow in the foreseeable future.