A grand old fashioned industrial policy

The Globe & Mail is reporting on a new deal between the Ontario government and Samsung:

South Korean industrial giant Samsung Group will invest $7-billion in Ontario to build 2,500 megawatts of wind and solar power.

Samsung and the Korea Electric Power Corp. are receiving a generous sweetener of $437-million. But the so-called economic development adder is conditional on the group creating manufacturing jobs in Ontario.

Under the deal, the Samsung group will operate wind and solar power plants in Ontario over the next 20 years.

In addition to the sweetener, the group will receive the going rate for the electricity it produces – 13.5 cents a kilowatt hour for wind and 44.3 cents for solar.

The Samsung group is promising to create 16,000 jobs in a province whose manufacturing heartland has been hit hard by the global economic recession. But only about 4,000 of those jobs will be permanent.

 

There are a few interesting points about this.  2,500 MW is a very large project but it still only represents 6% of Ontario’s electricity needs (projected need by 2025).  I point this out because it is very clear that wind, solar and tidal energy – by even the most aggressive policies like Ontario are still only going to make up a small portion of generation by 2025.  In Ontario’s case, they are projecting about 15% in total will come from non-hydro renewable energy by 2025.

Ontario is 15 times larger than New Brunswick so on a scale basis this Samsung project would amount to about 166 MW in generation here.

The bigger issue is the job creation.  This is old time time industrial policy.  Paying $437 million up front and giving a guaranteed market for power for 20 years at premium rates 13.5/kwh for wind and 44.3/kwh for solar.  This is a huge government subsidy to sustain 4,000 manufacturing jobs.  

Again, if you scale this it would be equivalent to a manufacturing project that created and sustained 266 jobs here (4,000/15) but I think it is an important objective to tie the manufaturing and direct job creation in green energy to energy policy objectives.

The Globe and Mail had a very good article on this last week.  The Hydro-Quebec MOU is providing 14 TW of power to New Brunswick at 7 cents a kwh, Ontario is bringing on new green power at between 13.5 and 44.3 cents/kwh. 

The government of Ontario will say they are getting cheap power from hydro and from Bruce Power (nuclear) to offset the high cost green energy and that the green energy is tied to a longer term economic objective (thousands of jobs in the sector).

You know I favour ambitious sector development efforts.  I am not sure this is a particularly good one –  but I don’t know enough to see all the angles.  It seems to me that making Ontario consumers pay 44.3/kwh for wholesale solar electricity (the retail price now in Toronto is around 12/cents a kwh) will end up being a high price to pay for the new jobs created (in addition to the $437M). But a high percentage of Ontarioians heat with natural gas and there is also the feed in tariff model that is coming online so in the end who knows?

But again back to industrial policy.  If New Brunswick took such a focused approach to sector development I would be supportive.  In addition to Samsung, they are spending hundreds of millions on other projects in this sector (in addition to the guaranteed markets). 

I think we should be deliberate and intentional about developing a few key sectors here.

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3 Responses to A grand old fashioned industrial policy

  1. mikel says:

    You missed the criticisms at the site:

    “Under Ontario’s feed-in-tariff program introduced last September, green energy developers can earn up to 80.2 cents for each kilowatt-hour of electricity. The Samsung deal could make it difficult for other companies to enter the market, because the province has limited capacity to transmit electricity to residents’ homes.

    “They’re threatening to kill the feed-in-tariff program before it’s even learned to walk,”

    4000 permanent jobs is 200 jobs per year, not a huge amount. And as comments at the site point out, what will this do to others?

    But I’m confused. As it says above, they were guaranteeing 80 cents per kwh, with this deal David says its between 13.5 cents and 44 cents per kw/h. I just looked at my power bill and it says that under 500 I”m paying .057 cents per kw/h, and over 500 its .058 cents per Kw/h.

    The distribution charge is a little over double the going rate, so doubling it still only equals 11 cents per Kw/h. If they are paying the GENERATOR 44 cents, wouldn’t that mean they’d charge the customer more, which means by 2025 power rates are going to increase over 400%-over 800% for other green producers? Hell, I”d be far better off getting off the grid completely NOW. Or am I missing something.

  2. Anonymous says:

    What you are forgetting about is the indirect jobs; manufacturing jobs have quite a healthy multiplier. Depending on the sector, it is something like 2.5 times in spin off. For automotive, I think it is closer to 4 but you probably have a text book some place with those numbers. The reality is they are likely looking at 10-12,000 jobs.

    So, they are attracting FDI from a major multinational and creating 4000 permanent jobs plus spin off in a sector that is in early development with a bright future. I’d take that over selling off the few assets we have to subsidize a struggling industry that has seen its prime.

  3. mikel says:

    Again, read the criticism in the post above. This is relevant as it applies to David’s frequent argument about FDI. There’s nothing wrong with FDI EXCEPT when it does the same thing people complain about government services doing-unfairly subsidized ONE company over others.

    We can call this “the Irving Effect” and we know how it turns out. You get one company that is ‘too big to fail’, and it keeps coming back to government for more money whenever it wants or needs to and the government can’t let it be a bad investment.

    As for ‘indirect jobs’ thats a little overdone. First off, ‘indirect jobs’ can be saved other ways. Here in southern ontario everybody knows about the industrial layoffs, however, ‘indirect jobs’ weren’t affected very severely because with the federal government’s home renovation tax credits people were investing in their homes like never before.

    Here in Waterloo the city lost two industrial manufacturers, NCR and Lazyboy, that was over 2000 jobs in a city of 100,000 and the city never even missed a beat.

    For solar power, those subsidies could have had investment RIGHT HERE, you don’t NEED FDI, there’s tons of investment money right here. I can start a solar manufacturer very easily, in fact I have a book on how to make solar panels at home. The tricky part is the solar cells, and you can now buy them in bulk online, from a variety of sources, and they get cheaper all the time.

    So when you look at the jobs for Samsung you HAVE to look at “The Irving Effect”, when Samsung gets their power purchased at a guaranteed price higher than competitors, it KILLS investment. But governments don’t tend to like ‘mishmash’ job creation. At election time they like to say “look at Samsung, aren’t we wonderful”. In the long term that may be a poor strategy.

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