Samsung deal: Criticism justified, but missing the bigger picture

I have a column in today’s Toronto Star that’s bound to upset a number of solar and wind developers, and the investors behind them. I argue that the $7 billion Samsung deal announced last week in Ontario isn’t a bad deal at all, and that Ontario was right to jump on the opportunity when it presented itself. The deal is controversial because the government gave Samsung an “economic adder” that amounts to a 4 per cent premium (on a price per kilowatt-hour basis) to existing feed-in-tariffs available to other solar and wind developers. The government also set aside 500 megawatts of transmission capacity for Samsung, which in addition to building four manufacturing plants (wind blades, wind towers, solar inverters and solar modules) also wants to deploy 2,000 megawatts of wind and 500 megawatts of solar in Ontario.

Samsung has said publicly that it plans to become the largest maker of solar panels by 2015, and wants to become a major player in wind. The fact that it chose Ontario as the launchpad is significant. This is a huge deal, and while not perfect, it has the potential to bring tremendous long-term benefits to Ontario. Sure, other developers would love the special treatment Samsung got, but have those developers been willing to step up, develop a comprehensive supply chain, and sign a deal that commits them to X amount of renewables and create X thousand amounts of jobs? My only big criticism of this deal is that the government may be overlooking some amazing Ontario-made opportunities — local consortia who have big plans but can’t seem to get the attention and support of the Ontario government. This apparent lack of confidence in local entrepreneurs and investors doesn’t send a good signal. Premier Dalton McGuinty needs to do a much better job of nurturing and having confidence in local ventures, even if they lack the deep pockets and brand appeal of an anchor tenant like Samsung.

Were smaller developers in Ontario betrayed? I can see why they think so, but I don’t recall anyone in the current government ever saying the feed-in-tariff program is the only way they will sign up renewables (or any source of power generation) in the future. What the feed-in tariff program and Green Energy Act does is let these developers access the program, equally, without having to go through an expensive RFP process. The fact is the FIT program, as it is, is more than generous to these developers. And while transmission is scarce, there’s a solid commitment to build more. So there is a bigger picture here, one that needs to be put into perspective.

Okay, let’s open this one up to some civil debated…

12 thoughts on “Samsung deal: Criticism justified, but missing the bigger picture”

  1. Hmm, OK let’s take a long-term view. (less than 2 years from now)

    October 2011 – OPA drastically slashes FIT rates due to huge oversubscription to FIT program. Maximum Renewable Energy System (RES) capacity that can be absorbed into Ontario Hydro’s grid (20%) was applied for within the first 60 days of the program coming into play (October 2009). PV & wind sales stop.

    Higher cost Ontario-made PV products not competitive with Chinese-made PV products in world market. Branch plant PV factories (heavily subsidized by government programs) close. Solar companies that started up to take advantage of FIT all go bankrupt.

    Provincial election also October 2011 – Liberals lose due to backlash over short-sighted RES program & massive debt from recession.

  2. I completely agree–and for similar reasons. If they get the transmission thing addressed so that it is no longer such a limiting factor in which projects go ahead and when, then this looks like a great idea to me (although as with so much the final proof will be in the execution).

  3. I’m shocked–shocked!–to find government intervening in the energy industry!

    Seriously, I pretty much agree with Tyler’s Star article. A good point: if it had been called a tax break, or called a “temporary refund adjustment”, would people still complain?

    And, isn’t this sort of government-led industry incubation is precisely the strategy that brought Korea from third world status to the economic powerhouse in lightning time. We should always be skeptical of this kind of thing–the government needs to be kept on its toes, and we need to be aware of the downsides of protectism/favoritism. But we shouldn’t just reject government involvement for dogmatic or ideological reasons.

    I’d also address the criticism that this sort of thing is just a dressed-up, and expensive, makework program. Even if that were true, it’d be a good thing. No, government shouldn’t keep industry propped up forever. And we probably need to accept that Ontario in the future is not going to be the manufacturing centre it once was.

    But too-rapid de-industrialization is disastrous for the many people caught up in it. When a town loses its manufacturing base, the young, the qualified and the mobile can move on, often to better things. But many, many other people don’t. They get stuck in a spiral of declining property values and rising social problems. It’s a huge waste of human capital in an environment of depression, despair, drink and drugs. Post-manufacturing towns die a long, squalid death. I’ve seen this situation up close, in the North of England, and it’s not pretty. So if this deal helps us make it through a rough transition–a transition that may well do in midwestern cities like Detroit, with great human cost–then I say chalk up one more in the “win” column.

  4. Andrew McCegney paints quite a scary future, but I think this extreme pessimism is not justified. On the question of Ontario solar panels competing against cheaper Chinese imports, first, China has aggressive RES targets and are set to absorb the lion’s share of their own output; second, Ontario’s Green Energy Act has a minimum Ontario content rule that steps up to 60% next January, and the rules make it impossible to meet that without some Ontario-made PV and inverters. Both are good high-tech, value added products that create skilled employment.
    As for the electoral calculation, it’s anybody’s guess, but I’m not convinced the public will blame McGuinty for the recession, nor decide the election on the RES.

  5. Glad to see this government investment. $400 M was just one payment of the many Ontario has given the auto sector in recent years. Its a change toward what I want the province doing with my tax dollar investments, and I’m certain Ontario’s green majority feels the same.

  6. Tyler,

    On the whole, I agree with your assessment. With this deal, I see the glass more full than empty. The province needs to develop a new, job-spinning manufacturing base, and cleantech is the best option of the available candidates. What’s more, Samsung clearly has major-league aspirations, and it now has the incentive to commit to the province for a large measure of its future success.

    Where I would quibble with you is in your criticism of the government for not having confidence in the local cleantech vendor community. While the government could do more nurturing of local players, we also should consider that our investment community has let us down, demonstrating — yet again — its own lack of confidence and vision. That’s one of the reasons we never developed a thriving IT sector, notwithstanding RIM and a few other successes.

    Rather than letting history repeat itself in a different sector, the provincial government sought a major international player that was committed to make things happen. I can’t fault it for cutting the deal with Samsung.

  7. This is utterly disgraceful. This is a clear example of corporate colonialism impinging itself onto our government. What has happened throughout modern history is the privatization of a country’s resources, which in many cases leads to a lack of monetary funds to then purchase these resources, and of course, desolate poverty. I’m not saying that this is the fate of Canada, but what is Democracy when we have no say in these issues? Democracy should be the election of ideas for the betterment of society, not of people who are more concerned with profit. Politics has become so outdated with the needs of mankind today as well as our technological and scientific knowledge. If anyone isn’t familiar with one of the proposed solutions to many of our societal problems, then here is a link for The Venus Project:
    http://www.thevenusproject.com/
    and also The Zeitgeist Movement (activist arm)
    http://thezeitgeistmovement.com/

  8. Found this blog post that had an interesting stat on it. The math seems sound, if anyone can refute the claim please show me where it’s wrong:

    “Ontario planned a $23 billion deal for new Canadian made reactors to be built for about 2,500MW worth of reliable base-load power for 60 years (life span of reactors). This current deal is $7 billion for 2,500Mw of stochastic power for 20 years.

    Nuclear deal=$153,333 per MW-year
    Samsung wind/solar deal=$1,400,000 per MW year.

    This new deal is almost 9 times as expensive as the planned nuclear plant that was canceled because it was ‘too expensive’.

    Anyways just found that very interesting.

  9. Not a correct comparison.

    $23 billion for the nukes would be the all-in cost of building the thing and operating it, and much of it would be an upfront cost before the thing starts generating power. The Samsung power is sold as generated over 20 years, so the province pays the feed-in-tariff plus 4 per cent incentive for every kilowatt-hour of wind and solar generated, and only when it is generated. The only correct comparison is price per kilowatt-hour, and since we don’t know what that would be for nuclear we can’t compare, but some studies suggest it’s as high as 15 cents — more than the wind portion of what Samsung would be paid (i.e. representing 80 per cent of Samsung’s build).

  10. Alright I see what you’re saying. Thanks for that.
    I don’t know? I’m still not behind this deal.
    I don’t like how foreign investors were pushed to the front of the line over Ontario companies and I just watched Minister Duguid on Focus Ontario, and when he was pressed about the increase in tax payers bills and that Smitherman’s promised 1% increase would more than likely be much larger over the next couple years, he looked very uncomfortable and dodged the questions.

  11. I think there’s clearly errors in the above comparisons of the Samsung deals and AECL reactors. Tyler claims that the Samsung power would be paid in uniform amounts over the comparison period. ?? Last I heard, the costs of PV power are ENTIRELY up-front capital, wind very similar, both more than nuclear which has a relatively high fuel and operating labour input cost included in the $23 billion.

    Don’t get me wrong, I like wind and solar and think the Samsung deal is alright mainly because it requires lots of good manufacturing locally, but an AECL deal would do at least as well in maintaining the local economy on a per-kwh-delivered basis over 60 years, and for a LOT less money per-kwh-delivered.

  12. The above comparison is obviously flawed. The Samsung deal includes costs for renewable power generation (at 2,500 MW) but also building four new manufacturing plants (these are part of the total costs of the deal). The question, what portion of the $7 billion is being allocated to renewable power generation. Currently, the average cost for wind generation is around $1-2 million per MW of nameplate capacity, solar can be around $4 million/MW. The AECL deal was reported at $10 million/MW ($26 billion for two 1,200 MW Candu Reactors). These numbers are hard to reconcile because nuclear reactors rarely get delivered on budget (or run at full capacity), and nameplate capacity on wind is not the same as usable power (this varies by siting, conditions, etc.). But at least we’re comparing apples to apples with the above comparison.

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