Monday, August 1, 2011

The economics of CO2

I went to visit The Naturalist and The Quilter today.  They took advantage of a green energy policy by the Ontario government that was aimed at increasing solar power creation in the province.  I got to watch them show off their immense solar array that was about 10 meters tall and perhaps 15 meters wide.  The engineering aspect of the project was really neat but the economics of supporting it looked mighty suspicious indeed.  Energy around here is sold for approximately 8 cents per kwh and Ontario Hydro is committed to buying solar energy from producers like the folks I visited at a much higher rate; initially the price was 80 cents per kwh and now it is down to 64.  Essentially what the government did is force everyone using electricity to subsidize these solar installations by paying 10 times the going rate for electricity.  People who installed these very expensive machines were looking at paying back their investment in full in 8 years and then making pure profit from that point forward.  While this unquestionably reduces emissions and gives good investment opportunities to local people with capital and real estate I really have a lot of doubts as to whether this policy was remotely sensible.

First off, why was it set up so that anyone buying into the program would make such immense profit at the expense of the regular ratepayers?  Clearly if you want anyone to opt in you need to make it possible to recoup the initial investment but the rate was simply set way too high to start.  Secondly I question the strategy of having huge numbers of individuals set up solar panels in their backyards when it is abundantly obvious that a large number of panels built in an ideal location would generate much lower setup costs.  It has the 'local' feel to it but is certainly inefficient.  Thirdly I wonder why anyone thought it was the best possible use of capital to generate electricity at such a low return on investment.  If the utility was buying at 30 cents there would be practically nobody who would view setting up their own solar panel as a good investment and yet they would still be generating electricity at 5 times the normal cost!

So here is the big dilemma:  Since we have finite dollars to spend and want to achieve the maximum emissions and CO2 reduction how should those dollars be spent?  In some kind of imaginary fairyland we simply produce all of our power from solar and wind and reduce electricity sourced emissions to zero but the cost of doing so would be a stupendous capital investment and then quintupling the cost of electricity; hardly a palatable solution.  In the real world where capital is limited the clear choice is to produce the maximum emissions reductions possible per dollar invested and solar and wind power are laughable in that regard.  There are ways to close old, dirty, inefficient coal plants and replace their output effectively but local solar isn't that way at this point.  If we want to have cleaner air and lower emissions we need to invest in nuclear power and high efficiency fossil fuel plants burning coal if necessary, gas where possible.  These options are drastically better from a ROI perspective and that is the perspective that matters in the long run.  Right now the government is supporting options that look good from a PR standpoint and bad from the standpoint of actually making the world a better place.


  1. Disagree. I think that we should spend a ton more on electricity and make an awesome and low emissions grid (I do agree on the use of nuclear as part of the solution... it's costs are quite high as well though). Obviously, downloading that directly to the people would be destructive to those without a lot of money so we would need green power enormously subsidized. Pay for it by abolishing the army, and increasing estate taxes.

  2. " If we want to have cleaner air and lower emissions we need to invest in nuclear power and high efficiency fossil fuel plants burning coal if necessary, gas where possible."

    Or, we need to drive less, go to bed earlier and wake-up earlier with sunrises, and use a helluva lot less building environmental control with Air Conditioning and Heating.

    Switching my laptop from coal/nuclear power (I'm in Minnesota) to solar/hydro is, in my eyes, a neglible zero sum. Turning OFF my laptop and playing a board game with family or talking to my neighbors? That's what will save my small community of 100 people I see throughout the year who I care about.

  3. @Matt

    I support your solution! However, I think we can both agree that your solution just isn't politically feasible at this point. If you went to any party leader and advised them to adopt this stance they would tell you that it would be political suicide - just see the incredible furor over estate taxes in the US where they were attacked as 'death taxes'.

    I differentiate greatly between hardcore, radical green policies (like yours, which I support) and policies which have a chance of being implemented in the near future. My suggestions above are a compromise between the ideal that you suggest and the political reality. I think the government could easily win an election on the promise of keeping costs down and reducing emissions very substantially so that is what I suggest.


    I agree with you too! Again though, how do we enforce these things? People do this on a personal level all the time but they don't do it nearly enough. Keep in mind that even if Canada somehow went to zero emissions instantly (impossible for many reasons) the developing world is going to continue to ratchet up emissions drastically over the coming decades. Watching other people consume while being extremely frugal is something that people are very, very bad at doing. I think we should all take steps to live cleaner lives but we simply aren't doing that - we need more concrete plans that are actually enforced.

  4. As usual, when we hash things out we end up agreeing completely:) I was coming a bit hardcore... exactly as you said I was suggesting what I think we should do as opposed to what is feasible.

    I do think that we have a political climate that is healthier than our neighbors in terms of discussing taxes. The HST debate in BC shows that many people resist taxes but a fairly nuanced public discussion is possible.

    I enjoyed your estate taxes post. In the states, the bush tax cuts also included provisions to drastically cut estate taxes for the enormously wealthy. Pressure was applied from many sources including the family making the most bank off of Wal-Mart.

  5. There are a few really positive things about the solar panels project that you're leaving out. One of the problems with solar energy is that you need to have a backup system for cloudy days, but by distributing your panels as widely as possible you are reducing this problem.

    Limiting the amount of power that can be sold at this rate by any one individual means that the solar grid is widely distributed, and that no money needs to be spend on acquiring land. Also, it was individuals who needed to come up with the cash to build the panels, and their investment will be paid off over time.

    So while I agree that 80 cents per kwh is higher than necessary, I think that this particular approach to solar energy is excellent.

  6. Theoretically more people buying these systems means higher volume of sales, which leads to a decrease in production costs, which reduces the length of ROI, and thus the subsidy requirement. Perhaps the subsidies could be considered a kickstarter.

  7. Snuggles has a good point here. The government isn't throwing money into a hole, it's paying kickstarter money to what are essentially small businesses.

    If it takes 8 years to pay for the solar panels (which are presumably bought on loans) at 64 cents a kWh, then how long would it take at 8 cents a kWh? Probably thousands of years because of the interest. But lets suppose that 8 cents is enough to pay for the maintenance of the panels and still make a profit (I don't know if this is true) - in that case this is the government subsidizing citizens making capital investments in our energy grid.

    I really don't know if this is good policy or not, but I think the analysis of whether it is is more complex than what you've done here. We need to know whether these solar panels are actually self-sustaining things when the construction cost is ignored; whether this program will encourage enough solar panel construction to significantly reduce the cost of small scale solar panels (possibly to the point where the subsidy becomes unnecessary); whether the long term plan is to continue the subsidy at a high rate or lower it as the initial costs of building the panels is paid off for a large number of participants; how efficient the solar panel industry is at spinning of more jobs and more economic activity when it earns money (no reason to think it is worse than average).

    Also, Denmark has had a program like this since 2000, and I am reasonably sure that the Denmark program was used as a model for ours. We know that they have been successful, so I think this might be an example of following good evidence.

  8. Thing is that Denmark's program is successful from the perspective of paying money to get solar power. I don't question whether or not we can do that, as obviously we can, but rather I question whether that is a good thing to pay money for when we can achieve much greater reduction in emissions by investing in high efficiency gas power plants instead. We don't have the capital to reduce our emissions to zero or anything near it but we do have the capital to reduce them by 70% and doing so doesn't use any solar power.

  9. I'm having trouble understanding where the 70% figure comes from. Currently less than 40% of our electricity is generated by coal and oil, and that would be the only power up for grabs in terms of reducing emissions by using higher efficiency gas power plants. Of that 40%, presumably some are pretty bad in terms of emissions while others are presumably already pretty good.

    If you just mean we could reduce the worst of our power plants by 70% by replacing them, then we could reduce them by more like 99% by replacing them with wing and solar. This would not involve generating 100% of our electricity with solar panels, it would involve generating less than 10% of our electricity with wind and solar. Denmark does more than 20% and does not appear to be in as favourable a position as Ontario for either. They accomplished this in around a decade - certainly replacing old power plants would take about as long.

    Even if we could reduce the average of the 40% by 70% that would be equivalent to replacing a total of 28% of our generating capacity with solar/wind. Maybe that's a very high target, but the difference between that and what we should reasonably believe we can achieve is not that huge.