The Vancouver Declaration resulting from the First Ministers' Meeting in March 2016 saw the beginning of a co-ordinated national approach to carbon risk mitigation. Buoyed by support from high-profile business groups (including key oil and gas sector leaders), the First Ministers' Meeting on Dec. 9, 2016 in Ottawa saw the adoption of the Pan-Canadian Framework on Clean Growth and Climate Change, which included several significant announcements regarding federal investment in green infrastructure, public transit, and clean technology and innovation.
Canada's industrial powerhouse, Ontario, is ahead of the pack when it comes to low-carbon electricity policy, and has been for quite some time. Ten years after the launch of the province's early procurement programs for wind, solar, hydro and other forms of renewable energy, the province enjoys a vibrant renewable energy sector with leading-edge manufacturing capabilities, a coal-free electricity system, and a project development and finance sector that is active around the globe.
Across the U.S. border, things have changed somewhat recently, at least, at the federal level.
Donald Trump has stated categorically on several occasions that he does not accept the science of climate change. He campaigned on a pledge to get fossil fuels burning again in the United States in order to boost American industry, and has also promised to tear up the Paris Accord. He also appointed Scott Pruitt, a noted climate change denier, as head of the Environmental Protection Agency (EPA). All of this represents a sea change for federal American energy policy. From an Ontario renewables perspective, how much does it matter?
In practical terms, a U.S. retreat from assertive renewable energy policies at the federal level will slow down the world's progress on the declining cost curve for solar panels. The price of solar photovoltaic modules drops 20% for every doubling of global manufacturing output volume, so, with less aggregate global demand, progress down the production cost curve will slow.
A broad U.S. retreat from renewable energy technology may also reduce the scale of available of capital available for renewable energy projects to a minor extent. But what is interesting to note about U.S. energy sector policy and, particularly, U.S. power sector policy, is that state-led initiatives are more important than those led at the federal level.
Furthermore, at this particular juncture in history, a U.S. retreat from technological innovation in the power sector would actually create a window of opportunity for innovative Canadian, European and Asian companies active in distributed generation, e-transportation, storage, smart grid and demand response technologies.
Tipping point crossed: The momentum of innovation
Will the U.S. go back to 19th-century energy technologies? No.
The distributed energy resource (DER) industry transformation is underway and the tipping point on levelized energy costs has, for the most part, already been crossed. In simple terms, whether you operate a home or a business, there is money to be saved by putting solar panels on your roof in Ontario today.
In slightly more complicated terms, Ontario's power transformation is proceeding apace because renewables now have the lowest levelized cost per kWh, even without taking into account the social and environmental externality costs of competing generation technologies.
According to Lazard, the levelized cost of generating a kWh of electricity from utility-scale PV technologies was down approximately 11% in 2016 from 2015, and rooftop residential PV technologies were down 26% year over year.1 The cost of generating renewable power from technologies other than solar, such as wind, hydro, geothermal, and biomass, also declined in 2016, though at a slower pace.
Viewed differently, the amount of global electricity produced by solar power installations has doubled seven times since the year 2000, while wind power output doubled four times over the same period. For the first time ever, renewable energy technologies began competing directly with legacy energy technologies on both price and annual investment levels in 2016.2 This reality creates a quandary for federal U.S. policy makers if they really intend to back away from renewables altogether.
That being said, although renewable energy technologies are cost-competitive and storage technologies hold great promise, renewables alone will not be capable of meeting the baseload demand in Ontario in the near future – particularly in urban centres. As a result, what is evolving both in Ontario and around the globe is a highly complex, distributed-but-connected system of two-way electricity flows where legacy plant and DER assets complement each other in a highly diversified, complex and integrated system: the energy cloud.
There are and will be significant opportunities for industrial economies that are able to adapt and take advantage of both the declining cost and rapid expansion of renewable and DER technologies, and the attendant development of energy cloud technologies. Although a U.S. pullback from all innovation in the space (no more electrification of transportation, no more consumer solar or microgrid development, no more smart thermostats) would certainly create breathing room for other centres of innovation worldwide, the prospect seems unlikely. Part of the reason for this, aside from the momentum of the energy system transformation that is underway around the world, is U.S. state policy.
State solicy vs. federal policy and the scale of our U.S. state relationships
While a Trump administration will likely be less supportive of renewable energy development, a lack of federal support does not itself spell the end of opportunity in the American renewable power industry. As is the case in Canada, the reality is that in the United States, subnational governments hold most of the authority when it comes to determining U.S. energy policy. The American states define net metering policies, renewable portfolio standards, community solar rules, and many other key aspects of electricity regulation.
What is important for Ontario going forward, then, is the prevailing attitude toward renewable energy and solar in the neighbouring Great Lakes Basin states. Two points to keep in mind in this analysis are: (a) the scale of the U.S. state economies themselves, and (b) the highly integrated nature of our trading relationship with the Great Lakes Basin states.
Clearly, the Canada-U.S. trading relationship is critically important to Canada and, particularly, to Ontario. What is less well-known is the size of the U.S. state economies when compared to some of our leading trade partners around the world. In this regard, we can think of Michigan as having an economy the size of Poland's, New York's being the equivalent of South Korea's, and Ohio being comparable to Sweden. Then, we must remember that these giant economies are located directly next to our own, linked by intricate energy and transportation networks, not to mention deep historical and cultural ties.
Ontario actually trades more with the state of Michigan than it does with the rest of the world combined. Conversely, Canada is the largest trading partner for all of the Great Lakes Basin states and the top export destination for 27 other U.S. states besides. Ontario alone ranks as the United States' fourth largest trading partner – right after Mexico.
So, what are our U.S. neighbour states' policies regarding renewable and where are things likely to go in future? As with most things in business, it's a mixed bag. Ontario has some neighbours which are taking the lead on renewables – such as New York and Pennsylvania – and other neighbours which have perfectly good renewable portfolio standards in place but have not taken an aggressive leadership stance in recent years.
From a political perspective, it is worth noting that some of the narrowest victory margins in the recent U.S. election were reported in battleground states surrounding Ontario in the Great Lakes basin. In Wisconsin, Michigan and Pennsylvania, the victory margin for Trump was narrow and ranged from 0.3% to 1.2%. These slim victories likely mean that state governors and state governments will need to tread a careful line to assess the electorate's opinion on a wide array of political issues – renewable energy policy being only one of them.
Interestingly, American public opinion on DERs is often counterintuitive and does not always run along party lines. While Florida voters were helping to install Donald Trump in the Oval Office, for instance, they simultaneously quashed a ballot initiative that would have killed rooftop solar in the state. A similar phenomenon occurred in Nevada. Despite candidate rhetoric, voters generally like renewable energy - particularly when it saves them money.
Current neighbour state policy snapshots
Michigan has in place a relatively favourable Renewable Energy Standard (RES) which has resulted in the investment of hundreds of millions of dollars in renewable energy programs, primarily in wind and solar. The Michigan RES mandated an increase in the renewable contribution of Michigan's energy mix from 3% to 10% by 2015, and the state successfully achieved this mix. Going forward, however, Michigan's renewable energy growth is less certain. There are currently several proposed bills to amend the RES proceeding through Michigan's legislature, some of which call for an increase in the standard, and some of which call for its repeal. The short-term future of Michigan's renewable energy sector will depend on the results of these proposals, and Ontarians would be wise to pay close attention.
Wisconsin implemented a mandate similar to Michigan's in 1999, called the Renewable Portfolio Standard (RPS), which required that 10 percent of the state's electricity come from renewable sources by 2015. The state was able to meet this goal, but the future of the RPS in Wisconsin is uncertain. Wisconsin remains largely reliant on coal, and is among several states that have challenged the U.S. federal Clean Power Plan in court. That said, in 2007 Wisconsin launched the Midwest Renewable Energy Tracking System (M-RETS), a market-based system designed to help utilities meet their renewable goals. Additionally, some reports indicate that support for solar is still strong among local governments and with the utilities themselves. Madison, Wisconsin, for example, recently adopted a plan committing the city to obtain 25% of its energy from clean sources by 2025, and utilities like Dairyland Power and Madison Gas and Electric have recently begun major, utility-scale solar projects.
The outlook is brighter in the Commonwealth of Pennsylvania, where an Alternative Energy Portfolio Standard (AEPS) requires that 18 percent of the state's power come from renewable sources by 2021, with 0.5 percent of the 18 explicitly coming from solar photovoltaic sources. Pennsylvanian electricity is currently 11 percent produced by renewable sources, so one can expect significant expansion over the next five years in order to meet the AEPS requirements. In 2015, $32 million was invested in solar installations in the state, with 13 MW of new solar capacity becoming available. Pennsylvania is expected to install 348 MW of solar capacity in the next five years, doubling the amount installed over the previous five years.
In addition, the 2015 Pennsylvania Climate Change Action Plan Update called for an increase in the AEPS mandate and for investment in rooftop solar. The Department of Environmental Protection has also indicated that it will draft a state plan to comply with the federal Clean Power Plan. These policies position Pennsylvania to see significant renewable energy and solar growth in the near future whether there is federal support from the Trump administration or not.
Ohio is another state with a renewable energy portfolio standard. In Ohio's case, the requirement is that 12.5 percent of electricity must come from renewable and alternative sources by 2027, and the law sets annual benchmarks and incremental percentage requirements that must be met along the way.
In 2014, however, a senate bill was introduced that created a two-year freeze on the standard, allowing for a panel to study the costs and benefits of the standard. In December of 2016, a bill was proposed that would extend the freeze or make the energy portfolio standard voluntary going forward. Fortunately, that bill was vetoed by Ohio Governor John Kasich just prior to the end of the year, thereby reinstating the portfolio standard. Kasich has repeatedly made clear that he is a supporter of renewable energy investment.
The state of New York is very likely to be a key driver of renewable energy policy development in the coming years. It has a vast economy which ranks just behind Canada's in size and, if an independent nation, would rank as the 12th or 13th largest economy in the world. With its size, global influence, and proximity to Ontario, New York's renewable energy policy will play a substantial role in Ontario's solar industry over the next few years.
New York continues to advance a highly progressive renewable energy policy that will very likely continue unabated through the Trump years. In August of 2016, Governor Andrew Cuomo announced the New York State Public Service Commission's approval of the Clean Energy Standard (CES), described as the state's most comprehensive and ambitious clean energy mandate in its history. The CES requires that 50 percent of New York's electricity come from renewable sources by 2030, with an aggressive phase-in plan scheduled for the next several years that calls for utilities and energy suppliers to be 30% renewable by 2021.
In addition, New York has developed a relatively robust capacity market and strong policies in support of smart grid technology, both of which bode well for investment in efficient and renewable sources of energy and for energy trade with Ontario. The smart grid, which is being implemented by the Energy Research and Development Authority (NYSERDA), provides, among other things, funding for Distributed Energy Resource Integration and for developing a "High Performing Grid" which accommodates a diverse supply of clean energy generation resources.
Pathways forward in the Great Lakes region
Generally, despite the results of the recent U.S. federal election, state policies across the Great Lakes region continue to support the growth of renewable energy and the adoption of energy system innovation. If the Trump administration follows through on some of its promises to drop funding and support for clean energy initiatives, these states are still poised to see growth in renewable energy and solar continue in the coming years.
Because of both the scale of our trading relationship with neighbouring U.S. economies and because of size of those economies themselves, the key for Ontario would be to nurture and support the continued development of renewables, DER's, and energy cloud technologies across the region.
The continuation of initiatives between Ontario energy regulators and U.S. state energy regulators to refine utility models and begin the re-write of the regulatory compact necessary in light of rapidly approaching technological change is time well spent. Along the same lines, beginning to focus on neighbouring states, and other leading U.S. markets, as key targets for the development of export opportunities for Ontario power sector manufacturers and innovators would also be well-advised.
Senior delegations from Ontario's energy, infrastructure, manufacturing, innovation, finance and policy sectors should be travelling to Great Lakes Basin states regularly to sell Ontario products and expertise, share ideas and support state and municipal level renewable energy initiatives.
As the rapid growth of both distributed and utility scale renewables continues, and as the electrification of the transportation and built infrastructure sectors continues to roll out, opportunities for innovation and industrial redevelopment across the Great Lakes region will continue apace. Given the momentum of technological innovation which is occurring across the space, it is highly unlikely that a pull-back from renewables at the federal level in the U.S. will have any material impact on opportunities for Ontario renewable energy sector companies.
That being said, the anticipated shift in U.S. federal policy should serve as a useful reminder for Ontario energy sector stakeholders both of the significant opportunities which exist very close to home and of the importance of high-quality relationships with our neighbouring U.S. states.
1 Levelized Cost of Energy Analysis 10.0, https://www.lazard.com/media/438038/levelized-cost-of-energy-v100.pdf
2 Wind and Solar Are Crushing Fossil Fuels, https://www.bloomberg.com/news/articles/2016-04-06/wind-and-solar-are-crushing-fossil-fuels
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