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If Albertans Bank on Renewable Energy They'll Get Robbed

10/03/2014 06:02 EDT | Updated 12/03/2014 05:59 EST
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Since taking office in mid-September, Alberta's new Premier Jim Prentice has talked an active game on the energy file. From the perspective of those who believe that Canada's energy exports are vital to the country's economic health, many of his comments seem positive.

He has stressed the need for Alberta to find new markets for its energy exports; he has stressed the importance of working with aboriginal groups to secure buy-in on securing those routes to the coast; and he's raised the possibility of an Alberta/B.C. partnership to facilitate energy transport.

But there is one area where Mr. Prentice's energy policy comments are troubling. According to newspaper reports, Mr. Prentice has embraced the idea of replacing Alberta's coal-fired electrical generation, not with natural gas, but with renewable energy -- wind and solar power. Mr. Prentice is reportedly a "big fan" of renewable power, and wants to "make investments" in renewables in the context of an "overall climate plan" for the province. Not surprisingly, these comments have met with the approval of the wind and solar power lobbies who could see a windfall of governmentally-mandated "investments" at the expense of tax-payers and rate-payers. But experience suggests that the bank accounts of Albertans will take a big hit should the plan move ahead.

First, let's review the reality of what power costs. The most authoritative source that compares the costs of different kinds of electricity generation on an apples-to-apples basis (energy economists call this the "levelized cost of power") is the U.S. Energy Information Administration. In its most recent estimations (from April 2014), the EIA lists the cost of generating new coal power (looking to 2019 construction) at $96/MWh; natural gas at about $65.00/MWh; solar (photovoltaic) at about $130/MWh; and solar (thermal) comes in at a whopping $243/MWh. Wind looks slightly better than it has in the past, at an estimated $80/MWh for on-shore wind, but wind carries its own problems -- it's intermittent, it requires redundant back-up power sources, and as we showed in a study of Ontario's experience, it tends to produce power when you need it the least, and stops producing when you need it the most.

But let's set aside the abstract estimates of power costs, and look at experience in the Canadian context. Last year, in a study for the Fraser Institute, senior fellow Ross McKitrick (also a professor at the University of Guelph) looked at the mess that Ontario got itself into following the same goals espoused by Mr. Prentice.

What McKitrick showed was that in pursuit of a renewable energy transition in Ontario, power prices were driven to some of the highest rates in North America, with additional rate hikes of 40-50 per cent pending in the next few years. The study showed that 80 per cent of the wind-power generated in Ontario was out of phase with demand -- 80 per cent! -- and that this surplus power was sold to the United States at a loss to Canadians: the province has already lost over $2 billion on this mess, with additional losses of $200 million/year ongoing. McKitrick's economic model predicts that as a consequence of these policies, returns on investment in manufacturing in Ontario will decline by 29 per cent, and in mining by 13 per cent. Adding insult to injury, the very modest environmental benefits realized by Ontario through the transition to renewables could have been secured at one-tenth the cost if the province had simply continued to use existing technologies to retrofit aging coal plants.

Premier Prentice's rhetoric about doing more to reduce greenhouse gas emissions is understandable, and his stated aversion to unilateral Canadian greenhouse gas controls, or dubious carbon-capture schemes is laudable, but his focus on government promotion of renewables is misplaced. With the cost of gas-fired generation projected to be cheaper than coal out to 2040, it's logical to expect that as coal plants age beyond their useful life, they will be replaced or retrofitted to burn natural gas. That will affordably and naturally reduce provincial greenhouse gas emissions as well.

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