Tuesday, June 22, 2010

Feed-In-Traffic, eh!

Despite that half of the U.S. Congress doubts the validity of global warming science, the country is going green in a big way. Utilities are following mandates to mix greater levels of renewable energy with that derived from fossil fuel. Oil and gas producers are blending ever higher levels of ethanol or other renewable fuels with old fashioned gas.

To say the least there are still a few kinks to get worked out of the renewable energy system. For example, some energy projects have had difficulty getting off the drawing board due to lack of access to the electrical grid. Investors have lost millions in on engineering and design stage companies that could not find the right infrastructure or rate arrangements to make construction and operation economically feasible.

Ontario’s Power Authority in Canada has adopted an ingenious scheme to pay for renewable energy called the “feed-in-traffic” program or FIT. Our good neighbors to the north tout the program as North America's first comprehensive guaranteed pricing structure for renewable electricity production.

FIT works like this. Utilities can contract for renewable energy generation such as biogas, solar or wind generated power, among others, under standardized prices and contracts. Prices are set to cover project costs and allow for a “reasonable return” on investment over the contract term. The Ontario Power Authority has authority over the program, evaluating projects and approving participants.

The idea is to achieve fossil fuel independence at a faster rate by paying up for renewable energy and avoiding the pitfalls of government subsidies that have been used to support such endeavors in the past. In the first seven months of the program, projects representing 2,500 MW of power have been approved. Seventy-six of the approved projects are ground-mounted solar photovoltaic, 47 are on-shore wind and 46 are waterpower projects. There are also seven biogas, two biomass, four landfill gas, one roof top solar and one off-shore wind projects.

It would be encouraging to see if Ontario’s FIT program works, since it embodies some very basic market forces as part of the scheme. However, there is still a very heavy hand of government regulation in setting prices that may make the FIT program just another regulated utility snarl.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


No comments: