Ontario's Green Energy Act: Domestic Industry and International Trade Wars

When the Canadian province of Ontario introduced its Green Energy Act in 2009, its local content restrictions, which now dictate that new solar power plants have at least 60% of their equipment sourced in Ontario and new wind power plants require at least 50%, were seen as a way to build a new industry in the province which had been hit hard with factory closures. What never seemed to be considered were international trade rules. In 2011 Japan and the EU complained to the World Trade Organisation (WTO) about the local content rules, arguing that they were a barrier to entry. And according to media reports it looks like that argument was successful and that the WTO will rule against the local content restrictions, forcing the Ontario government to change the law.

Trade wars over local content requirements are now global. In 2010, China ended its domestic content subsidies for wind farm development after a complaint by the United Steelworkers union made the US government take the issue to the WTO (China dropped the subsidies before a WTO tribunal heard the case). Ironically, when compared to the Ontario case, this ruling was seen as beneficial to the U.S. renewable energy sector and employment as it would improve trade. Just last week, the U.S. decided to impose import tariffs on Chinese-produced solar panels as it argues that Chinese industrial practices are illegal and undercut American manufacturers with cheaper products. The EU is also considering trade measures against Chinese solar power manufacturers. And the US, EU and Japan are looking into taking India’s local content requirements in its Jawaharlal Nehru National Solar Mission, which are similar to the Ontario requirement although at 30% are lower, to the WTO, as well.

Less restrictive local content bonuses are now under contest, such as those in Greece and Italy where if solar installations use European-produced equipment the project receives a slightly higher feed-in tariff than if imported equipment were used. China has levied a complaint at the WTO over those measures; however, given that China issued its complaint just after the U.S. tariff decision on Chinese imports, it is likely that its complaint is more of a political gesture because even under WTO rules some industrial assistance is possible, the bonuses were already approved by the European Commission, which is quite strict, and only EU countries were mentioned. Turkey, for one, has a very complicated bonus system for installations that use locally produced equipment with discrete bonuses for different components: In a solar PV installation, for example, if the cells, modules and inverters were manufactured in Turkey, the feed-in tariff rate received would rise from 133 USD/MWh, the base rate, to 200 USD/MWh. China has made no complaints about this system.

The reasons for these trade wars is partially due to all governments using renewable energy as a policy measure not just to produce clean energy but to promote new industries and increase employment. There have been a number of complaints by groups and unions in Ontario about possible changes in the local content restrictions, which they argue, quite rightly, could limit the growth of the clean energy sector in the province or even reduce the progress that has been made. The EU complained about the Ontario content restrictions as it could limit the export of goods produced from their well-established companies and factories to Canada and this important politically for them. Germany, for example, regularly publishes employment figures in the sector. China itself benefits from exports from its large solar module industry.

It is clear that investment in the Ontario solar sector has risen with the passage of the Green Energy Act, and this growth likely stems from local content rules, although it is not clear if there would be more installations without the rules given available grid capacity. But even having the local content rules under attack at the WTO will limit growth due to regulatory uncertainty. Renewable energy projects generally require large upfront capital costs, while operating expenses are low, unlike more traditional energy projects (with the possible exception of nuclear power). It is, therefore, required that a developer has some certainty over revenue in the long term, at least 10-15 years, in order to acquire financing. This certainty of revenue is the reason why feed-in tariffs have been so successful. Yet now there is regular uncertainty in those countries involved in the trade dispute because WTO decisions could change the policy, possibly even retroactively. The main reason why a company producing solar modules would build a new plant in, say, Ontario rather than in a cheaper location is because they would know that there would be a captive local market for its products. And this economic development argument is politically important — in most cases renewable energy incentives would be politically dead if it were not for the belief that industry will benefit.

In one sense, all these new trade wars over renewable energy can be a seen as a good thing: the clean energy sector is now seen as something so important industrially, and is so global, that governments are feeling the need to protect their own. If, as expected, the Ontario local content restrictions are rules as illegal by the WTO, the other countries that have similar systems will also be forced to stop their incentive systems, and governments will need to think of new ways to promote industrial development. Incentive bonuses for using locally produced equipment have a better chance of surviving the WTO (although it is never certain what they’ll say) and could be a good way for governments to continue promoting industrial development.

Creating local clean energy sectors is an important goal, and not one that should be dismissed. Besides giving political support to the incentives, increased competition can reduce costs and improve innovation. The question is how to balance local industrial development with international trade, an issue that affects many other industries. All these clean energy industry development policies have the goal of developing local clean energy companies that can export as well as supply their local markets. Developing a local clean energy sector would be a waste of time if other countries restrict imports or impose high tariffs due to protectionist measures.

Lead image: Ontario sign via Shutterstock