The business of green energy: Ford vs the banks (and NDP)

Almost immediately after the June 7 provincial general election, Ontario’s new government cancelled an array of so-called green energy projects. The one that has so far gotten the most attention was White Pines, a wind turbine development in Prince Edward County. Surprisingly, for me, the National Post‘s John Ivison published a column strongly criticising the White Pines move. For a second, I thought I was reading a Toronto Star editorial. Why would John Ivison of all people line up against this?

Ivison wasn’t the only John objecting to the government’s move. Business Council of Canada (BCC) CEO John Manley sent a letter to the premier dated July 23. The cancellation of White Pines and other renewable energy contracts would, Manley said,

revoke permits several years after the proponent obtained them from the appropriate regulatory bodies, cancel contracts with the lndependent Electricity System Operator that were negotiated in good faith, and unilaterally set the terms upon which the proponent may be eligible for compensation.

All this is true, but so what. The reason the new government cancelled these contracts is precisely because of the unilateral setting of terms hugely favourable to renewable energy, by the previous government. The current government doesn’t agree that those terms should have been so favourable. The current government thinks those terms are bad for Ontario ratepayers.

If you’re one of the Big Five Canadian banks that loaned a lot of money to green energy projects and “really cleaned up on green energy,” what does the readjustment of FIT rates do to default rate on your loans to Ontario FIT proponents?

Manley objects to the cancellation of these contracts not because he is the head of an organization that represents CEOs who understand business and know that renewable energy represents some money-making future. He objects because certain of his members jumped completely onto the RE bandwagon as soon as they saw the previous Ontario government was willing to pay any price to get as much RE as possible into Ontario’s grid.

What got these members onto the bandwagon was the previous government’s numerous signals to prospective investors that should investors decide to finance Ontario RE projects, loans would be risk-free. These members’ due diligence appears to have been to read the previous government’s press releases about the green energy future. In other words, they appear to have taken these press releases as a Triple-A rating.

One of these investment signals was the previous government agreement to pay owners of wind farms 13.5 cents per kilowatt-hour, which is close to 70 percent higher than the average cost of Ontario electricity. Wind farm owners needed this elevated rate, because their generator farms routinely post output-to-capacity ratios like the following.

Which BCC members am I referring to? These ones:

  1. CIBC
  2. RBC
  3. TD
  4. Scotiabank
  5. BMO

Collectively, these are what we call the Big Five Canadian chartered banks. These institutions were applauded for staying out of the mortgage-derivative free for all that got so many of their American counterparts into deep financial trouble in 2008 and 2009. The US banks were all too ready to accept rating agencies’ Triple-A stamp on mortgage bonds that carried high risk of default. Apparently so were the Big Canadian Five when it came to government press releases.

A while back I gave the keynote speech at one of the sessions of an energy/environment convention. I outlined Ontario’s experience with green energy, all backed up with recent data as usual. One of the data-driven conclusions of my talk was that green energy is a scam (though I didn’t use that exact word; it was a pretty pro-RE audience, my talk followed lunch, and I didn’t want to give anybody indigestion). Afterward I chatted with a number of audience members, one of whom, an executive with one of the Big Five banks, looked both ways before confiding “we really cleaned up on green energy.” I wish all Big Five executives were that up front.

I wonder if the Big Five were the reason for Manley’s letter to Ford. Think of it: let’s say Ford goes further, and cancels existing FIT contracts, or (more likely) lowers their per-kWh rates to something resembling reasonableness—let’s say today’s average per-kWh cost of Ontario grid electricity, which is in the neighbourhood of 8 cents. What does that do to FIT proponent revenue?

More to the point—if you’re one of the Big Five that “really cleaned up on green energy”—what does that do to default rate on Big Five loans to FIT proponents?

That depends on the per-kWh rate to which current FIT contracts are readjusted. If the new Ontario government takes a hard line on this, as it should, and FIT rates are readjusted so they reflect the current average per-kWh cost of Ontario electricity, then FIT contract holders are looking at a new rate of around 8 cents. That would be dramatic, considering that FIT projects receive from 13.5 to 80 cents per kWh.

I cannot say with certainty what exactly that would do to the default rate on Big Five loans underwriting FIT projects in Ontario. My guess is it would rise.

I wonder from Manley’s letter whether the Big Five CEOs who are BCC members also believe that rate would rise. Maybe not just rise, but skyrocket.

Might the prospective skyrocketing in that rate be the number one motivation behind Manley’s letter?

The Ontario NDP, which became the official opposition as a result of the June 7 election, also condemned the government move to cancel FIT projects. Here’s NDP energy critic Peter Tabuns commenting to Global News:

[The premier’s] war on science and the environment may be pleasing his friends in back rooms and fulfilling promises he made to social conservatives that supported his election bid … But for the rest of us, it’s going to means lost jobs, billions of dollars wasted, and tangible environmental damage.

Interesting.

Back in the early 1970s, the federal NDP leader, David Lewis, published a book called Louder Voices: the Corporate Welfare Bums. He was trying to draw attention to what he saw as a skewed political system that favoured the wealthy over the poor.

What would Lewis say today about one of the provincial NDP parties adding to the chorus of the louder voices of the corporate welfare bums who, for reasons of naked financial self-interest, oppose a conservative government’s rescinding of a program that transfers wealth from the poor to the rich.

3 comments for “The business of green energy: Ford vs the banks (and NDP)

  1. September 20, 2018 at 11:19

    Any chance of a clawback of the extraordinary FIT compensation leading to a suit for damages a la the cancelled Oakville gas plant?

    • September 20, 2018 at 12:25

      You mean the probability of legal action by FIT recipients?

      I’d put that probability at or close to 1.

      An aspiring if not actual legal representative for FIT contract holders was recently on TVO’s The Agenda, head to head with a Queen’s law professor who suggests there’s a fairly straightforward way to deal with such litigation.

      I’m biased in favour of the prof’s argument, of course, and I know as well as Justin Trudeau does that courts have a way seeing things differently than complainants/respondents.

      Still, this debate describes the initial arguments.

  2. September 23, 2018 at 17:30

    Steve. My guess is the Canadian Banks won’t suffer as much as many of the European banks because the developers of the wind projects got most of their financing from their country of origin. The others who might suffer are some of the Canadian public pension funds who acquired both some of the debt when it was rated by the credit rating agencies and in several cases even purchased the company from the original developer. It will be interesting to see how they are affected. Those pension plans include the Canada Pension Plan who just purchased several projects from NextEra.

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