Solar Incentives: Could Ontario Be the Next Germany?

Ontario’s proposed Green Energy Act passed a second reading on March 11 and was ordered to the Standing Committee on General Government for public comment, ending May 5.  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 on February 10 to work out the deployment details.

Credit: Jon Worren, Riverdale Partners

In a separate initiative, the Ontario government will also launch a CAN $250M (~US $200M, EUR €150M) Emerging Technologies Fund, which should be operational on July 1st, 2009. This fund will match investments from private sources such as venture capital firms in Ontario-based technology companies, including cleantech firms. It might be leveraged by innovative solar companies seeking to establish a broader presence in Ontario by developing technologies locally.

Based on our experience in helping renewable energy companies to model the economics of their technologies and scale their businesses across markets, 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 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 in North America.

So How Does Ontario Compare to Germany?

Looking solely at installed capacity, the comparison between Ontario and Germany is laughing material. While Germany has over 5,000MW 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, being today where Germany was roughly 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.

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 ROI of 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 “carrot” used to motivate the Ontario public and justify the Green Energy Act has been the promise of a province free of coal-fired plants.

Comparison of Germany, Ontario and California:
Key economic drivers for solar photovoltaic projects (Riverdale Partners analysis)

Note: all amounts converted to US$ at April 6, 2009 exchange rates

Ontario FITs Favor Systems Below 100 kW

For systems up to 100 kW in size, the Ontario FITs at the proposed rates would be superior to the German FIT. That is especially true for residential and smaller rooftop installations with rates of CAN $0.802 (~US $0.64, EU €0.47) for every kilowatt-hour of power generated by rooftop solar photovoltaic systems below 10kW.  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.  Like in Germany, Ontario systems would benefit from a guaranteed 20-year fixed rate.

Note: all amounts converted using April 6, 2009 exchange rates

Is It Time To Set Up Shop in Ontario?

The main critic of the Act is that it does not establish long-term targets for renewable capacity. As the government suspended the the previous policy, which paid a fixed CAN $0.42 (~US $0.34, EU €0.25) per kWh to all solar project categories, two years after its introduction, some observers argue that regulatory policy stability is not guaranteed, and the Minister 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 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 seriously considering to set up a regional assembly plant in the province, according to a local newspaper.

It has been made clear that the Act will favor businesses with Ontario operations 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 significant 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 technology leaders, 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.
Other incentives to setting up operations in Ontario include the Next Generation Job Fund (NGJF), 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 400M people through NAFTA, and a very cost competitive workforce compared to the U.S., with the third largest manufacturing base in North America (after Texas and California), complete the picture.

So, while this is not a foregone conclusion by any measure, the stars seem to increasingly align to make the Ontario market more attractive. The key question is whether ambitious global players can afford to miss the train if Ontario emerges as a new solar locomotive?

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, businesses with a winning formula must take advantage of international expansion opportunities like this, 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, favorable business environments like the ones being created in Ontario should be explored pro-actively.

While doing so, new market entrants will need to carefully consider a number of factors when planning their moves in Ontario, relying on smart networking and targeted partnership strategies to grow their business locally. We will detail some of those considerations in an extended version of this article, to appear in the upcoming print issue of the magazine.

Greg Boutin and Jon Worren work together in the cleantech practice of Toronto-based Riverdale Partners, a boutique management consulting firm providing strategic planning, marketing and sales management services to fast-moving companies. Among other cleantech projects, Riverdale Partners recently helped a solar integrator grow in the German market, and is currently assisting a U.S. venture to position a new technology in the solar PV space. Detailed biographies of Greg and Jon are available at the company website.  

E-mails: greg@riverdalepartners.com and jon@riverdalepartners.com