Green Energy Legislation + (Tax Incentives + FIT) = Jobs and Economic Growth

by | Nov 2, 2010

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Creating jobs and reducing dependence on fossil fuels can go hand-in-hand; results are already demonstrating how effective public sector support for private sector renewable energy initiatives can create economic benefits to a region overall. Recent multi-billion dollar corporate initiatives – ranging from wind farms to solar and biomass – were sparked by the 2009 passage of the groundbreaking Green Energy Act (GEA) legislation in Ontario, Canada. These initiatives are already demonstrating that jobs and renewable energy industry growth can be achieved when combined with effective public sector support.

Some of the largest investments in Canadian history were negotiated and confirmed within the first year since the signing of the GEA, which ushered in the first true comprehensive Feed-in-Tariff (FIT) program in North America, and set ambitious goals for transitioning away from coal-generated energy. The legislation’s basic approach is that by creating a market for renewable energy, economic growth will follow. The legislation commits to a full transition away from coal-powered electric generation prior to 2014, which has created immediate demand for a broad spectrum of renewable energy power generation facilities and technologies.

Private sector investment and recognition from industry experts has followed on the heels of the legilation’s passage.  Stefan Gsanger, the World Wind Energy Association’s Secretary General, described it as “an historic international milestone” and “the most advanced piece of renewable energy legislation in North America.”

Legislation + Incentives = Foreign Direct Investment

For the private sector, the legislation has resulted in the award of almost 700 clean energy contracts, and is estimated to create 50,000 new jobs in the green energy sector. In January 2010, Samsung C&T together with a South Korean consortium announced they would make the largest renewable energy investment of its kind in the world – and they would do so in Ontario. This agreement consisted of $7 billion to build 2,500 megawatts (MW) of wind and solar generating capacity and four manufacturing plants. In return, the province guarantees the consortium will receive FIT rates for 20 years, plus additional incentives contingent on the plants meeting operational schedules beginning in 2013.

In March, OPA announced 510 projects for mid-scale FIT projects (10kW to 500 kW) with a total generating capacity of 112 MW. The following month, there were 184 new private-sector green energy projects, including a 300 MW off-shore wind projects in Lake Ontario – with a total value of $9 billion. Seventy-six of these projects are ground-mounted solar photovoltaic, 47 are on-shore wind and 46 are waterpower projects. The remainder includes: biogas, biomass, landfill gas, rooftop solar projects and one off-shore wind project.

Making All the Pieces “FIT”

Ontario’s renewable energy sector has expanded rapidly in the past few years, driven in part by the province’s commitment to eliminate coal-fired power by 2014 – the single largest climate change initiative in Canada.

The GEA was specifically designed to accelerate renewable energy production by offering generous FIT rates. The FIT is a core component of the value proposition for investment from the private sector.

The connection between the FIT and the growth of renewable energy production is clear. The number of wind turbines in Ontario has grown from 10 in 2003 to more than 670 by the time the GEA regulations were announced in 2009. Wind output from Ontario’s commercial wind farms reached 2.3 terawatt hours in 2009, a 60 percent increase over the previous year. How did this happen? FIT payments for wind power, for example, are 13.5 cents per kilowatt-hour (c/kWh) for on-shore and 19.0 c/kWh for off-shore projects. The FIT also includes both a price escalation clause linked to inflation over the 20-year contract and a “price adder” to encourage the development of Aboriginal and community projects.

Domestic content requirements – which dictate that foreign companies must source a certain percentage of their goods and labor from within the province – are part of what drives local job creation. For example, wind developers will be required to have a percentage of their costs come from Ontario goods and labor by the time the projects become operational. The requirement starts at 25 percent and increases to 50 percent on January 1, 2012.

Tax Incentives’ Role in the Equation

To further stimulate business investment, Ontario has launched a comprehensive, multi-year tax reform program that covers corporate, personal and sales taxes. As a result, the marginal effective tax rate on new investment has plummeted from 32.8% in 2009 to 18.6% in 2010 and will continue to drop to 16.2% by 2018. These tax cuts are making Ontario one of the most tax competitive jurisdictions in the world for new investment.

Through tax reform, the GEA and massive investments in education and infrastructure, the government of Ontario is determined to leverage the economic winds of climate change, innovative energy technologies and globalization to fuel long-term, sustainable job creation and growth.

The strategy hinged on winning the support of global investors, whose interest has demonstrated itself in the influx of applications received by the Ontario Power Authority since the passage of the GEA. By December 2009, more than 1,000 applications were submitted for consideration for renewable energy contract work.

Balancing the Equation

The investments by Samsung and other companies are expected to significantly expand market opportunities all along the green energy supply chain. These new investments will encourage major manufacturers to begin tooling up for a sustained commitment to supplying the growing sector with parts and technologies.

Manufacturers in Ontario can also bring to the renewable energy sector a wealth of expertise in advanced manufacturing drawn from the aerospace, automotive and electronics industries.

Renewable energy market-focused R&D is also growing in locations like Ontario with strong environmental legislation; demand fuels growth, which requires R&D. Across the province, there are publicly funded R&D labs specializing in advanced materials, engineering and other fields related to renewable energy. World leading companies from Magna International to Goodrich to Research In Motion (RIM) conduct R&D in  Ontario, in part because of the research talent pool and in part because the R&D tax credits available in the province are among the most generous in the world.

Can it be Duplicated Elsewhere?

While Ontario’s Green Energy Act (GEA) was crafted with programs and tax incentives that are unique to Ontario’s economy and needs, the approach has proven itself to be strong enough for replication in other jurisdictions.  The principal that strong legislation, particularly in combination with a comprehensive FIT program that stabilizes pricing for renewable energy, can result in economic growth is a sound proposition, worthy of consideration by other regions and jurisdictions striving to achieve both job growth and environmental leadership.

Mike Moen is Consul and Head of Economic Affairs for the Ontario Ministry of Economic Development and Trade at the Canadian Consulate in New York City. He manages trade, investment, economic and business interests for the Province of Ontario in New York, New Jersey and Connecticut. Mr. Moen is engaged to advance Ontario’s political and investment objectives to government and commercial stakeholders. He works with senior executives at Fortune 500 companies in life sciences, ICT, financial services, advanced manufacturing and renewable energy. Previously, Mr. Moen worked at Citigroup, Goldman Sachs and CIBC.

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