3.1.1 IIA framework

The IIA method evaluates the benefits and costs in terms of domestic prices from both financial and economic points of view rather than carrying out these analyses separately. Based on this method, the summation of the net present value of net financial cash flows ( $ {NPV}_t^{financial} $ ) and the present value of stakeholders’ impacts ( $ {PV}_{i,t}^{stakeholder} $ ) created by the program should be equal to the net present value of economic resource flows ( $ {NPV}_t^{economic} $ ) over its life. This relationship is expressed in Equation 1.

(1) $$ {NPV}_t^{economic}={NPV}_t^{financial}+\sum \limits_i{PV}_{i,t}^{stakeholder} $$

The rate at which financial, economic, and stakeholder impacts are discounted should be the economic opportunity cost of capital (EOCK). The EOCK is the measure of the real opportunity cost of funds used to finance investments that are drawn out of the country’s pool of capital (both private and public). For Canada, the EOCK is estimated to be 7 percent (Jenkins & Kuo, Reference Jenkins and Kuo2007; TBCS, 2022).Footnote ⁶

We now describe how we adopt this framework to evaluate Ontario’s FIT program for solar PV systems. Those electricity consumers who joined the FIT program by installing solar PV systems are the financial beneficiaries. From their perspective, the decision to join solely depended on the net financial impact of the investment over the PPA contract term (i.e. 20 years). However, there will also be some economy-wide benefits and costs that do not flow to the FIT participants, such as cost savings from avoided fossil-fuel-based electricity generation or the costs of integrating solar PV systems into the electricity network. While these items do not show up in the financial cash flow statements, the economic resource flow statement captures these impacts, eventually reflected in the net present value of economic impact ( $ {NPV}_t^{economic} $ ).

If the economic and financial analyses are done correctly, the difference between the two will be a series of distributional impacts that can be identified and measured. In addition to the private investors, four other stakeholders within the Canadian economy are affected by the FIT program: (1) Ontarian electricity consumers who did not join the FIT program; (2) the Government of Ontario; (3) the Government of Alberta; and (4) the Federal Government of Canada.Footnote ⁷ Given that the FIT program’s objective is to reduce GHG emissions in the electricity sector, we also consider the global environment as another stakeholder from the global perspective (i.e. the Canadian economy plus other economies).

Equation 2 specifies the general relationship shown in Equation 1 for Ontario’s solar FIT program.

(2) $$ {NPV}_t^{Canadian\ Economy}={NPV}_t^{FIT\; Participants}+\underset{\mathrm{Stakeholder}\ \mathrm{impacts}}{\underbrace{PV_t^{ON\; electricty\ consumers}+{PV}_t^{FG}+{PV}_t^{ON}+{PV}_t^{AL}}} $$

where FG, ON, and AL represent the Federal, Ontario, and Alberta governments, respectively.

The present value of the net impact from a global perspective ( $ {PV}^{Global\ economy} $ ) is derived by adding the environmental benefit from the reduction in GHG emissions to the present value of net economic impact from Canada’s perspective to arrive at Equation 3.

(3) $$ {NPV}_t^{Global\ economy}={NPV}_t^{Canadian\ Economy}+\underset{\mathrm{Global}\ \mathrm{Environment}}{\underbrace{PV_t^{GHG\; emission\ reduction}}} $$

It should be mentioned here that our analysis is retrospective, given that the FIT program has been in place since 2010, that is, for 13 years at the time of this study. Therefore, when we estimate the present values, we make a series of adjustments to ensure that the values represent the current year’s perspective ( $ t={t}_n $ ). In other words, the opportunity cost of net cash or resource flows realized in the earlier years of the program (between $ {t}_0 $ and $ {t}_n $ ) must be compounded to the current year (i.e. the year 2023 in this analysis). On the other hand, the flows that will be realized in future periods must be discounted back to the current year. Equation 4 formalizes the framework employed in our methodology to estimate the present value of cash and resource flows, where $ {NCF}_t $ and $ EOCK $ denote net cash/resource flows in time t and EOCK, respectively.

(4) $$ {PV}_{t_n}=\sum \limits_{t={t}_0}^{t={t}_n}{NCF}_t{\left(1+ EOCK\right)}^{t_n-t}+\sum \limits_{t={t}_{n+1}}^{t={t}_e}\frac{NCF_t}{{\left(1+ EOCK\right)}^{t_e-t}} $$

In the following subsections, we explain how we measure the net impact of the FIT program on each of the stakeholders listed in Equation 3.

3.1.1.1 FIT participants

From each participant’s perspective, the decision to invest in a FIT solar system depends on whether the present value of the payments under the PPA outweighs the present value of the solar PV system’s investment cost, maintenance cost, and income taxes. The annual inflow of a FIT project is the gross-of-tax revenues for the total MWhs of electricity generated in that year. Consequently, the first step in evaluating the participation decision is to estimate the annual solar-generated electricity by participant i in year t ( $ {q}_{i,t} $ ), which is the product of installed capacity ( $ {k}_i $ ) and solar potential yield (i.e. kWhs of solar electricity per kW of installed capacity) at the participant’s location ( $ {\theta}_i $ ). The output must be adjusted for efficiency losses over the system’s economic life at an annual rate of $ \alpha $ .

(5) $$ {q}_{i,t}={k}_i\times {\theta}_i\times {\left(1-\alpha \right)}^t $$

Next, the local electricity distribution company purchases the solar system’s output from the participant at the pre-determined PPA price ( $ {p}_{FIT_t} $ ). Equation 6 demonstrates how the yearly nominal revenues ( $ {r}_{i,t} $ ) for a representative participant are projected.

(6) $$ {r}_{i,t}={q}_{i,t}\times {p}_{FIT_t} $$

As shown in Equation 7, the cash outflows have three components: (1) the upfront capital expenditures at year 0; (2) the operating and maintenance expenditures of the installed system, that is, mainly the cost of replacing the inverter after 12 years of operation,Footnote ⁸ and (3) the income tax payable on the income from FIT payments after deductions.

(7) $$ {c}_{i,t}^{FIT\; participant}=\underset{\mathrm{capital}\ \mathrm{expenditures}}{\underbrace{c_{i, capex}}}+\underset{\mathrm{operating}\ \mathrm{expenditures}}{\underbrace{c_{i,t, opex}}}+\underset{\mathrm{income}\;\mathrm{tax}\;\mathrm{expense}}{\underbrace{TI_{i,t}\times CIT}} $$

While the capital and operating expenditures can be estimated by the system size, the taxable income varies over the 20-year evaluation period. Thus, to calculate the taxable income, the following items must be deducted from the revenues: operating and maintenance costs, capital cost allowance (CCA), and the interest paid on debt. The only operating and maintenance cost over the system’s economic life is the cost of replacing the inverter after 12 years of operation ( $ {OM}_{i,t} $ ). Under the Income Tax Regulations, the capital costs of solar PV systems are eligible for a 50 percent accelerated CCA on a declining balance basis. Finally, the investment is often financed by a mix of debt and equity, so the annual interest paid on the debt (denoted by $ {IE}_{i,t} $ ) is deductible from gross revenues. Thus, the taxable income ( $ {TI}_{i,t} $ ) is calculated by subtracting all the deductibles from the gross revenues, as expressed in Equation 8. For the years in which taxable income is negative, the losses are not carried forward but are used to offset taxable income from other business activities.

(8) $$ {TI}_{i,t}={r}_{i,t}-{c}_{i,t, opex}-{CCA}_{i,t}-{IE}_{i,t} $$

We use Equations 6–8 to project the benefits and costs to a representative FIT participant over the 20 years of the FIT contract.

3.1.1.2 Canadian economy

The Canadian economy benefits in the form of avoided purchases of natural gas by the displaced gas-fueled electricity generation plants in Ontario and the health benefits due to the relative reduction in emitted pollutants from these plants.Footnote ⁹ To quantify the economic benefits from savings in natural gas purchases in year t ( $ {B}_t^{econ} $ ), we measure the annual quantity of natural gas purchases avoided by displaced natural gas plants ( $ {NG}_t^d $ ) and multiply those quantities by the average price of natural gas in that year ( $ {p}_t^g $ ).

The equation for estimating the quantity of avoided natural gas has two components (Equation 9): (1) the total quantity of solar-generated electricity by all FIT participants in any given year ( $ {Q}_t=\sum {q}_{i,t} $ ) and (2) the weighted average of heat rates ( $ {w}_{j,t}{HR}_j $ ), that is, the rate at which gas-fueled plants would turn one unit of natural gas into one unit of electricity.Footnote ¹⁰ The first component must be adjusted for the avoided transmission losses ( $ {TL}_t $ ) that no longer occur because of the proximity of the electricity supply source to end-use consumers. Also, the second component needs to be adjusted for the annual reduction in the heat rates ( $ {l}_{j,t} $ ) to reflect the loss in technical efficiency of Ontario’s gas-fueled fleet over their operating lives.

(9) $$ {NG}_t^d=\underset{\mathrm{Solar}-\mathrm{generated}\ \mathrm{electricity}}{\underbrace{\sum \limits_t\frac{Q_t}{\left(1-{TL}_t\right)}}}\times \underset{\mathrm{Weighted}\ \mathrm{average}\ \mathrm{of}\ \mathrm{heat}\ \mathrm{rates}}{\underbrace{\sum \limits_{j,t}{w}_{j,t}{HR}_j{\left(1-{l}_j\right)}^t}} $$

It should be noted here that most of the natural gas used in Ontario comes from Alberta. For each unit of avoided natural gas in Ontario’s electricity generation, the Government of Alberta loses the royalty revenue ( $ {r}_t^{AL} $ ) that it would have collected from selling that unit to Ontario.Footnote ¹¹ Therefore, we consider the forgone value of royalty revenues to Alberta by adjusting the natural gas price when estimating the net economic benefits in Equation 10.

(10) $$ {B}_t^{avoided\; gas\; purchases}={p}_t^{gas}\left(1-{r}_t^{AL}\right)\times {NG}_t^d $$

Conducting an in-depth assessment of the air quality impacts of Ontario’s FIT program is out of the scope of this study. We employ a reduced-form screening method developed by the Environmental Protection Agency (EPA), known as benefit-per-tonne (BPT), to approximate the health benefit ( $ {B}_t^{health} $ ) associated with reducing a tonne of a given air pollutant from a particular source. As illustrated in Equation (11), the health benefits are the product of the quantity of displaced natural gas ( $ {NG}_t^d $ ), each pollutant’s emission factor per unit of natural gas ( $ {f}^{pollutant} $ ), and the BPT for reduced emission of each pollutant ( $ {BPT}^{pollutant} $ ).

(11) $$ {B}_t^{health}={NG}_t^d\times {f}^{pollutant}\times {BPT}^{pollutant} $$

On the economic cost side, three categories of costs must be accounted for: (1) the capital expenditures of the installed solar PV systems under the FIT program ( $ {C}_{t, capex}=\sum \limits_i{c}_{i, capex} $ ), (2) the resources spent on the operating expenditures of those systems ( $ {C}_{t, opex}=\sum \limits_i{c}_{i, opex}\Big) $ , and (3) the additional costs to the Canadian economy of integrating these systems into the grid ( $ {C}_{t,\mathit{\operatorname{int}}} $ ). Thus, the economic resource outflows and the present value of the net impact can be expressed as follows:

(12) $$ {C}_t^{econ}={C}_{t, capex}+{C}_{t, opex}+{C}_{t,\mathit{\operatorname{int}}} $$

(13) $$ {NPV}^{econ}=\sum \limits_t^T\frac{B_t^{econ}-{C}_t^{econ}}{{\left(1+ EOCK\right)}^t} $$

In addition to evaluating the economic impacts that directly affect Canada, we must evaluate the incremental global environmental impacts of the FIT program because there is certainly a reduction in global GHG emissions. This benefit is allocated as a global economic benefit in the stakeholder analysis rather than as a direct benefit to Canadian residents.

3.1.1.3 Electricity consumers in Ontario

One of the main challenges associated with FIT programs is that the compensation offered to the FIT system owners can lead to cost shifting onto nonparticipants. Ontario’s Independent Electricity System Operator (IESO) is a revenue-neutral electricity system operator; therefore, it shifts the incremental benefits and costs of the FIT PPA to its remaining consumer base. On the benefit side, the solar electricity generated by the FIT systems during the daytime will reduce the generation by natural gas plants, as they are generally the marginal generation source when solar panels produce electricity. This results in savings in natural gas purchases to generate electricity. On the cost side, the present value of the FIT contract payments (i.e. summation of all participants’ revenues, $ \sum \limits_{i,t}{r}_{i,t} $ ) will be passed on to all electricity consumers in Ontario.

Additionally, solar energy production under the FIT program is mostly located within the electrical distribution systems, and the electricity distribution companies will incur incremental integration costs to host the FIT capacity in their distribution network.Footnote ¹² The integration costs include various required investments ranging from upgrading transformers to the procurement of additional ancillary services such as reserves and fast-ramping resources due to the intermittency of solar output.Footnote ¹³

Consequently, the net incremental impact on Ontario electricity consumers is the present value of the difference between the benefits from savings in natural gas purchases for electricity generation ( $ {B}_t^{ON\; electricity\ consumers} $ ) and the costs that will be passed on to all electricity consumers across Ontario ( $ {C}_t^{ON\; electricity\ consumers} $ ).

(14) $$ {B}_t^{ON\; electricity\ consumers}={p}_t^{gas}{NG}_t^d $$

(15) $$ {C}_t^{ON\; electricity\ consumers}=\sum \limits_{i,t}{r}_{i,t}+{C}_{t,\mathit{\operatorname{int}}} $$

(16) $$ {PV}^{ON\; electricity\ consumers}=\sum \limits_t^T\frac{B_t^{ON\; electricity\ consumers}-{C}_t^{ON\; electricity\ consumers}}{{\left(1+ EOCK\right)}^t} $$

3.1.1.4 Government (federal and provincial levels)

The introduction of the FIT program has also created fiscal impacts on both the Federal and Provincial Governments in the form of changes in the expected tax revenues. Business income tax regulation had considered an accelerated CCA for investments in clean energy generation equipment such as solar PV systems. Therefore, both government levels have experienced some level of forgone corporate income tax revenues as a result of having accelerated rather than regular capital cost deduction rates (50 percent vs. 30 percent annual deduction allowance). In other words, the CCA creates a tax shelter for businesses by shifting investments toward clean energy generation equipment, but those benefits for businesses translate into forgone tax revenues for the government. Equation 16 shows that the cost to the government at year t ( $ {C}_t^{Gov} $ ) is estimated by multiplying the change in taxable income at that year ( $ {\Delta TI}_{i,t} $ ) by the corporate income tax rate ( $ {CIT}^{Gov} $ ).

(17) $$ {C}_t^{Gov}={\Delta TI}_{i,t}\times {CIT}^{Gov} $$

The present value of the net impact on government levels is estimated as shown in Equation 18.

(18) $$ {PV}^{Gov}=\sum \limits_t^T\frac{B_t^{Gov}-{C}_t^{Gov}}{{\left(1+ EOCK\right)}^t} $$

We must also adjust the gains from the natural gas purchases avoided by the amount the Alberta Government loses in royalty revenues. The present value of forgone royalty revenues, a transfer from taxpayers in Alberta to those in Ontario, is estimated as follows:

(19) $$ {PV}^{AL}=\sum \limits_t^T\frac{p_t^{gas}\times {NG}_t^d\times {r}_t^{AL}}{{\left(1+ EOCK\right)}^t} $$

3.1.1.5 Global environment

Reduced GHG emissions are another quantifiable benefit of solar net-metered systems. A key policy objective of the governments of Ontario and Canada is to reduce CO₂ emissions by displacing fossil-fuel electricity generation (i.e. natural gas in Ontario). The benefits realized are a function of the type of generation being displaced, its carbon emission rates, and the carbon pollution price.

To calculate the value of environmental benefits, we first need to project the quantity of natural gas displaced by net-metered systems ( $ {NG}_t^d $ ) and then use the weighted average emission factor of the natural gas fleet in Ontario ( $ {F}_t^{CO2} $ ) to estimate how many megatons of CO₂-equivalent emissions will be avoided.Footnote ¹⁴ After estimating the associated levels of emissions, we assign a price to the CO₂ emitted to quantify the global environmental benefits. The present value of avoided CO₂ emissions that is attributable to the installed solar FIT capacity is estimated as follows:

(20) $$ {PV}^{environment}=\sum \limits_t^T\frac{p_t^{carbon}\left({NG}_t^d\times {F}_t^{C02}\right)}{{\left(1+ EOCK\right)}^t} $$

3.1.2 The LCCA

The LCCA for a given technology is the carbon price (in real terms) that would equate the present value of economic benefits from the avoided GHG emissions by the solar-generated electricity ( $ {NG}_t^d\times {F}_t^{C02} $ from Equation 20) with the present value of net economic costs of that technology over its economic life $ (\frac{C_t^{econ}}{{(1+ EOCK)}^t}) $ from Equation (13).

(21) $$ \sum \limits_t^T\left[\frac{NG_t^d\times {F}_t^{C02}\times LCCA}{{\left(1+ EOCK\right)}^t}\right]=\sum \limits_t^T\frac{B_t^{econ}-{C}_t^{econ}}{{\left(1+ EOCK\right)}^t} $$

After rearranging Equation 21, the LCCA for FIT systems can be estimated by dividing the present value of FIT systems’ costs by the present value of total electricity generated by those systems, as expressed in Equation 22.

(22) $$ LCCA=\frac{\sum \limits_t^T\frac{B_t^{econ}-{C}_t^{econ}}{{\left(1+ EOCK\right)}^t}}{\sum \limits_t^T\frac{NG_t^d\times {F}_t^{C02}}{{\left(1+ EOCK\right)}^t}} $$

3.1.3 Timing of investments

One of the most important steps in the process of project preparation and implementation is to decide on the appropriate time at which the project should start. The determination of the correct timing of investment projects will be a function of how it is anticipated that future benefits and costs will move in relation to their present values. In the case of solar PV systems, the expectations were that technological breakthroughs would reduce the investment costs for solar PVs. Hence, the question that arises here is how the financial, economic, and stakeholder impacts would have differed had the FIT program been implemented later than its original start. If investment costs are expected to fall in the future, the optimal option would be for the program to be implemented later than if investment costs remained constant or rose over time. We will test this prediction for Ontario’s solar FIT program. Given that this analysis is retrospective, the lessons learned from this analysis will be critical input for decision-makers when evaluating similar investments in the future.

3.2.1 Solar PV costs and PPA prices

Panels A and B of Figure 1 show the trends in the average (nominal) prices of solar PV systems in Canada by technology type (rooftop or ground-mount) next to the PPA prices offered to the FIT program’s participants based on the year they joined the program. Over the time that the program accepted new applications, the PPA prices were frequently adjusted to reflect the reductions in the cost of solar PV systems. The cost of a grid-connected rooftop system ranged from 5.27 CAD per watt in 2010 to 1.80 CAD per watt in 2019. Meanwhile, ground-mount installations tend to have larger system sizes and, therefore, reduced per-watt cost through economies of scale. Over 2010–2019, ground-mount systems had lower relative prices than rooftop systems. Additionally, with the declining trend in system costs over the period 2010–2019, those FIT participants who joined the program in the earlier years had investment costs of multiple times those of systems installed in later years.

Figure 1. The trend in solar PV investment costs over time.

Note: The costs of installing solar PV systems are taken from the 2019 National Survey Report of PV Power Applications in Canada published by the International Energy Agency PV Power Systems Program (IEA PVPS). The prices include all the system costs, such as the mounting materials, inverter, and installation costs. The offered PPA prices are extracted from the annual price schedules for the FIT program by Ontario’s IESO.

Figure 2 shows the number of FIT contracts by the year of installation and the technology type on the left vertical axis, and the cumulative capacity on the right vertical axis. Although rooftop systems make up most FIT contracts, the cumulative capacity of ground-mount installations is almost twice the capacity of rooftop systems. In fact, the maximum rooftop system has a size of 0.5 MW, whereas the ground-mount systems have up to 10 MW of capacity.

Figure 2. Number of solar PV FIT contracts by the contract start year.

The IESO contracted a total of 3,081 solar FIT contracts between 2010 and 2019, aggregating to 1,497 MW. In this study, we focus on distribution-connected systems with a total capacity of 1,407 MW. As shown in Figure 3, the first group of FIT contracts started feeding the distribution grids in 2010 with a 1.45 MW capacity. The generation capacity accumulated as new systems were connected to the distribution systems over the period 2010–2019. Starting in 2030, there will be annual reductions in the total capacity as the contract end-dates approach. The last year with an active PPA under the FIT program will be 2038, when the contracted FIT capacity of 2019 will reach its 20-year operation year (see Figure 3).

Figure 3. Active solar feed-in tariff (FIT) contracts.

3.2.2 Solar PV yield by location

The FIT systems are installed across the municipalities of Ontario. Because we observe the municipality in which each system is installed in the dataset, we match the annual yields provided by Natural Resources Canada with each system’s municipality. Annual yields have a mean value of 1,165 MWh/MW and a standard deviation of 21 MWh/MW, with a minimum and maximum of 1,131 MWh/MW and 1,268 MWh/MW. The low standard deviation in the annual yield values allows us to assume an average annual yield of 1,165 MWh/MW for all the systems under the FIT program.

3.2.3 Inputs for environmental impact analysis

To quantify the reductions in CO₂ emissions from natural gas-fired power plants displaced by the solar FIT systems, we use an emission factor of 52 kg of CO₂e per MMBtu of natural gas, that is, the same emission factor used in Ontario Energy Board’s reports (OEB, 2023). Then, we use two benchmarks to estimate the monetary value of these emission reductions: (1) the federal carbon pricing in Canada and (2) the estimates of the SCC published by the Government of Canada.

The federal carbon pricing schedule was enacted in 2019. Starting with 20 CAD/tonne CO₂e in 2019, the carbon price increased by 10 CAD per year until 2022 and is scheduled to increase by 15 CAD per year from 2023 to 2030. Eventually, the carbon price will reach 170 CAD/tonne CO₂e in 2030 and stay at 170 CAD thereafter (Government of Canada, 2021). Given that our evaluation period for the FIT program is spread over the period 2010–2038, we need a carbon price for the years before 2019. We assume a price of 20 CAD/tonne CO₂e for the years between 2010 and 2019. Additionally, Environment and Climate Change Canada regularly updates the recommended SCC values for cost–benefit analyses of public projects and policies. Table A1 in Appendix A shows the recommended SCC estimates over our evaluation period (2010–2038).

For the impact of the FIT program on the emitted air pollutants, we extracted the emission factors of relevant pollutants from the US EPA documents. According to EPA (2023), the main pollutants from gas-fired power plants are nitrogen oxide (NO_x), volatile organic compounds, particulate matter, carbon monoxide (CO), and traces of sulfur dioxide (SO₂). We use the estimated BPT values by Health Canada (2022) to calculate the monetary value of health benefits associated with reducing per tonne of these pollutants (see Table 2). Our analysis excludes CO and SO₂ because BPT for CO reduction is not estimated at the time of our study, and SO₂ emissions are insignificant.

Table 2. Emission factor and benefits-per-tonne of reduction by pollutant