Could Ontario Be the Next Germany?

Ontario’s proposed Green Energy Act passed a second reading in March and was ordered to the Standing Committee on General Government for public comment, ending as REW goes to press. Changes to both the Act and the feed-in tariffs may still occur, but as it is almost certain to pass (the Act is supported by the Ontario Liberal Party, which controls 71 of the 107 seats in the Legislative Assembly), the Ontario government started a parallel process in February to work out the deployment details.

In a separate initiative, the Ontario government will also launch a C$250 million (€150 million) Emerging Technologies Fund, which should be operational on 1 July 2009. This fund will match investments from private sources, such as venture capital firms, in Ontario-based technology companies, including cleantech firms. It might, for example, be leveraged by innovative solar companies seeking to establish a broader presence in Ontario by developing technologies locally.

We believe that the combination of the Green Energy Act and the Emerging Technologies Fund will dramatically improve the business conditions for cleantech endeavours in Ontario. Combined with the province’s integration into the North American Free Trade Agreement (NAFTA) space, traditionally low manufacturing costs and abundant skilled workforce, this Act may actually turn Ontario into the most attractive beachhead for European and Asian renewable energy technology companies seeking to expand into North America.

This fund seems to be making a difference already. For instance, Nicolas Morgan, co-founder and vice president of Business Development at Morgan Solar, a Toronto-based venture developing a concentrating photovoltaic panel, observed: ‘For a while, it looked like Morgan Solar would have to move to the US to attract investments. As a young company with two products to commercialize in the next 12 months, we have been talking to a number of investors and have received offers of financing on condition that we move to the US. Ontario’s Green Energy Act and the Emerging Technology Fund may change all that. We are now hopeful that we can launch our venture in Ontario.’

How does Ontario compare to Germany?

Looking solely at installed capacity, Ontario and Canada are dwarfed by Germany. While Germany has over 5000 MW installed, the whole of Canada has less than 50 MW. California, the largest PV market in North America, has 530 MW by comparison. Capacity-wise, Ontario therefore has lots of catching-up to do, currently standing roughly where Germany was 20 years ago.

Comparing the inputs to the economics of energy is more flattering for Ontario. It might surprise even Canadians themselves to learn that Ontario receives more sunlight than Germany, which is located a little further north than the Canadian province. In fact, large parts of Ontario get 10%–15% more sunlight per year than southern Germany. (Left: Houses in the community with solar panels, credit Ontario Green Energy Act.)

Since the incentives take the form of a feed-in tariff in both Ontario and in Germany, as opposed to California where they are added to the electricity savings (through net metering), local electricity rates are less important to the return on investment for solar systems.

On the other hand, Ontario electricity rates are much lower than in both Germany and California, meaning that public support to expand the energy supply side has not been as strong as in those two jurisdictions. Instead, the political incentive used to motivate the Ontario public and justify the Green Energy Act has been the promise of a province free of coal-fired plants.

‘Ontario has the potential to become a mini-Germany,’ confirms Ian MacLellan, Systems Division president and founder of Ontario-based solar cell manufacturer ARISE Technologies. ‘Obviously, with 82 million inhabitants in Germany – more than six times as many as the 13 million in Ontario – we will never get the same volumes as in Germany. But, if our politicians and bureaucrats manage to make the process of developing solar systems as simple as it is in Germany, I would expect Ontario to see a development similar to that of Germany, only at a relatively smaller scale. We have to recognize that Germany, through their ‘1000 roofs’ programme (1990–1995) and later their ‘100,000 roofs’ programme (1999–2003), gained years of experience which we don’t have in Ontario, so even if the politicians have sought to learn from the German experience, I expect it will take time in Ontario as well. One cause for concern is the 100 MW cap which leads to an automatic 9% lowering of the tariffs, an uncertainty which I believe will keep some from investing in Ontario,’ he notes. (Left: The Sun Simba HCPV is a high concentrating photovoltaic system. It is not yet available, and is still in the prototype and testing stage of development. Credit: Morgan Solar)

Ontario FITs favour systems below 100 kW

MacLellan explains further the effect he anticipates from the suggested tariff structure on the type of photovoltaic projects that will be proposed: ‘At ARISE, we feel the feed-in tariffs play to our sweet-spot. On the other hand, developers of solar parks will probably be disappointed. If you take our previous estimate of 100 MW for 2010 we assume that 20% of the volume will be solar parks, 40% will be commercial rooftop systems between 10–500 kW and 40% will be residential and smaller systems up to 10 kW. In other words, we are looking at only four or five solar parks of a size of 4–5 MW next year.’

For systems up to 100 kW in size, the Ontario FITs at the recommended rates would be superior to the German FIT. That is especially true for residential and smaller rooftop installations with rates at 80.2 CAN cents/kWh (68 US cents/kWh) for rooftop solar photovoltaic systems below 10 kW. It’s worth noting that, in 2007, systems below 10 kW made up 40% of the German market – it appears that the Ontario FITs will stimulate a similar initial focus on smaller systems. And as with Germany, Ontario systems would benefit from a guaranteed 20-year fixed rate.

Interestingly, a handful of companies had already announced the development of large solar parks under the previous incentives, the Renewable Energy Standard Offer Program (RESOP), which paid a lower rate of 42 CAN cents/kWh (€0.25/kWh) to all solar project categories. In April 2008, for example, Toronto-based SkyPower and SunEdison of Baltimore launched the construction of their First Light solar park, a 19 MW project (broken down into two phases each falling under the current 10 MW threshold) consisting of more than 200,000 panels near Kingston, Ontario, and announced they would be pursuing six more projects.

Even though RESOP was suspended the following month, in May 2008 (according to our contacts at SunEdison, the First Light project was delayed as a result, but construction has resumed and is scheduled to be completed by August 2009), those companies may now find even a minimal 5.5% increase – from 42 CAN cents to 44.3 CAN cents (36 US cents to 38 US cents) – welcome, especially if it applies retroactively to projects they already saw as financially viable. To discuss this last possibility, the Ontario Power Authority recently called for comments on the application of the new incentives to ‘legacy’ projects.

Is it time to set up shop in Ontario?

The main criticism of the Act is that it does not establish long-term targets for renewable capacity. Some observers argue that regulatory policy stability is not guaranteed, and the minister concerned can still change policies if political priorities shift. While regulatory uncertainty remains indeed a source of risk, some cleantech companies have decided not to wait for more assurance from the government, and jumped in with announcements of new installations in Ontario.

Everbrite Solar, a division of Toronto-based Everbrite Industries, has licensed a turnkey manufacturing technology from an unnamed supplier overseas, to invest CAN$500 million (US$400 million, €300 million) in a photovoltaic manufacturing facility in Kingston, Ontario. Arizona-based First Solar and solar project developer Recurrent Energy of San Francisco acquired and are planning to develop multi-megawatt solar projects in Ontario, and thin-film module manufacturer Nanosolar Inc. is considering setting up a regional assembly plant in the province, according to a local newspaper.

It has been made clear that the Act will favour businesses with operations in Ontario and include requirements for a certain amount of domestic content (at a level yet to be decided). With the Ontario value chain in cleantech needing considerable strengthening, early movers are likely to see significant advantages. Apart from a handful of local manufacturers, additional suppliers are needed to get new projects off the ground. Ontario-based companies like ARISE Technologies, 6N Silicon, Timminco and Menova Energy are leading domestic players, but they all depend on outside partners to complement their offerings. This need is likely to create opportunities for best-in-class providers from Europe and Asia.

This sentiment was shared by Nicolas Morgan of Morgan Solar: ‘The proposed feed-in tariffs are well designed from a solar perspective. Currently, the province lacks capacity in the solar supply chain, so we believe there will be more wind projects in Ontario in the first couple of years. The fact that the province is committing to invest substantial amounts in a smart grid, however, means that the timing is perfect for companies like Morgan Solar.’

But MacLellan is less concerned with the supply chain: ‘Bottlenecks are not a problem for ARISE Technologies, but may be for newer companies in Ontario. ARISE probably has installed more rooftop systems in Ontario than anyone else and has established all the necessary partnerships in the supply chain. On the financing side we will rely on our international partners, at least until the Canadian banks enter the market with products.’

And other incentives to setting up operations in Ontario may help further build local R&D and manufacturing capabilities – chief among them, the Next Generation Job Fund, which covers 15% of the cost of establishing operations in Ontario for direct foreign investment, and generous R&D tax credits covering a wide range of activities. Universal healthcare and a federal pension plan, Ontario’s proximity to a market with over 400 million people through NAFTA, and a very cost-competitive workforce compared to the US (with the third largest manufacturing base in North America after Texas and California) complete the picture.

So, while this is not a foregone conclusion, the stars seem to increasingly align to make the Ontario market more attractive.

The path to success in Ontario

As we alluded in our previous article in Renewable Energy World magazine, Roadmap for A Changed Landscape: Consolidation and Integration in the Solar PV Business (Nov/Dec 2008), businesses with a winning formula must take advantage of international expansion opportunities such as those emerging in Ontario, or risk being rapidly outflanked by their competitors. With average factory gate prices of crystalline modules already 24% down on 2008 levels due to overcapacity, and module prices decreasing, favourable business environments like the ones being created in Ontario should be explored pro-actively.

However, uncertainty remains about the level of interest among businesses and home owners in Ontario in investing in rooftop systems in these constrained economic times, even with a good return on investment.

Indeed, the federal election results from October 2008 saw voters in Ontario reject party leader Stephane Dion’s proposed ‘Green Shift’. The Liberal party, who had put that initiative at the centre of its campaign, lost 7% of votes in Ontario, and the Green party failed to pick up a single seat in the province, suggesting that ‘green’ may not be as important for Ontarians as for Germans. After all, the Alliance90/Green Party holds 51 seats in the Bundestag, while its Canadian counterpart has seats in neither the federal parliament nor the provincial assembly. In this context, a market entry strategy in the residential and commercial segments should include a solid local awareness campaign built around the financial and societal benefits of a rooftop system.

Canada has not been impacted by the economic recession as much as the US has, but property prices have nonetheless fallen and businesses have considerably reduced their spending. With Canadian banks still some way from being able to offer financing products for retail and commercial solar systems, new entrants to the Ontario market should consider partnering with other financial institutions and PPA providers (such as SunEdison for commercial rooftops) to ensure they can offer a turnkey solution to prospective customers. (Left: Solar PV panels by Bright Solar Inc, a Toronto-based green energy company.)

Be it made of residential, commercial, or solar farm installations, or a mix thereof, any solar project portfolio should include a financial risk alleviation component, driven by a project mix diversification strategy, and tight management of the committed projects. For the latter, a well-articulated market strategy, bolstered by a targeted partnership and networking programme, will go a long way in facilitating the right financial and project development support.

Generating local goodwill would also help address the politically-motivated resistance to the subsidized programme that, left unaddressed, will inevitably gain further traction and likely derail solar projects and the progress of the province towards a cleaner energy mix. History has shown that the price to pay to address this problem after the fact was, too often, underestimated by the solar industry and its political supporters. It is especially regrettable since it can be tackled cost-effectively through a discerning awareness-building programme, making good use of innovative actions such as a social media campaign to build thought leadership and positive word-of-mouth around positive messages.

A point worth considering is to note that one in four Canadians are already on Facebook, and Toronto had the largest Facebook community until it was overtaken in 2007 by London, a characteristic that could be leveraged effectively to build local support for solar energy. A timely industry- and/or government-led grass roots awareness campaign would greatly help fuel exponential interest in the programme, and make sure that solar power really ignites in Ontario.

Greg Boutin and Jon Worren are independent partners co-operating together on projects, www.growthroute.com. E-mail: gregboutin@gmail.com or jon.worren@gmail.com