Gerson-Lehman Group on Energy

Samsung Buries Ontario Deep into Third-World Abyss
January 24, 2010

this Analysis by: GLG Expert Contributor
Analysis of: [Canada]Samsung Signs $6.6 Billion Deal to Build Wind and Solar Power in Ontario
Published at: greeninc.blogs.nytimes.com
Summary
Economies of the Third-World are usually defined by “sweat shops” or “branch-plants” operations. The definition has recently been enforced onto the province of Ontario by Samsung’s “Green Deal” as a reminder to all, that the auto-industry “branch-plant” policies of 60’s have just found a worthy successor which -- as opposed to the already known perils of car industry – has, in the long run, all the features of setting the Province on the slide into the socio-economic oblivion.

Analysis


[ 1 ] Let’s start with assorted problems first, In 2006, the U.S. Department of Energy's Office of Energy Efficiency and Renewable Energy did a review of recent literature discussing the "non-technical barriers" and suggestions to make renewable energy use more palatable. We shall mention a few major issues that should have had a substantial impact on the Samsung decision-making deal and, as it is, would have cast even more ominous impact on the Province :


[1.1] High capital cost of renewable energy technologies compared with conventional energy.

[1.2] Failure to account for all costs and benefits of energy choices. This includes failure to internalize all costs of conventional energy (e.g., effects of air pollution, risk of supply disruption) and failure to internalize all benefits of renewable energy: e.g., cleaner air, energy security. ( NOTE: This issue is clearly ideologically tainted as the “air pollution”, if needed, can be totally alleviated by a fraction of the cost of installing the brand new -- and never, so far, having fullfiled the promises, anywhere in the world where it was installed – energy distributing environment from the scratch.)

[1.3] Inadequate workforce skills and training. This includes lack in the workforce of adequate scientific, technical, and manufacturing skills required for renewable energy development; lack of reliable installation, maintenance, and inspection services; and failure of the educational system to provide adequate training in new technologies.


[1.4] Contract bidding mechanisms: Governments place an obligation on supply companies to accept electricity from renewable energy generating technologies which have been awarded contracts by government. Generators win these contracts by taking part in a competitive bidding process organized by the government or a specified agent of the government. Historically, competition has usually taken place within technology 'bands', that is, such that competing bids are only compared between generators employing the same technology. For example, wind generator against wind generator. Essentially, this means there are usually different competitions going on at the same time for each technology. Generally, the lowest bids are awarded contracts, provided they meet any criteria set down by the government as part of the competitive process. Examples of such a mechanism in practice include the UK's Non-Fossil Fuel Obligation (NFFO), Ireland's Alternative Energy Requirement (AER) and the French EOLE.The only problem there is the lack of stakeholder/community participation in energy choices and renewable energy projects.
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[ 2 ] Let us now leave out the first two issues that are highly important; however, as they have been completely omitted by the Ontario-Samsung deal, there are issues [1.3] and [1.4] that tell the story in full:

[2.1] R. Denley wrote in The Ottawa Citizen:”…. In a global economy, the winners are the countries that develop companies of international scale, companies that create high-value jobs at home and produce big taxes that support their national governments. The also-rans can buy a slice of the second-tier action if they are willing to offer big enough incentives. It's much like colonialism, but the countries with the money don't have to go to the bother of running the colonies directly….” TheThird World definition indeed. It directly answers the issue [1.3] above that has been the Ontario curse from the day one and, with the 80’s to the new century educational and immigration patterns; it has fast started on the sure way South.

Ontario governments like to crow about how great this province is. The Samsung deal reflects a much different reality, a tacit admission that the best the Province is capable of is assembling things under careful supervision from foreign companies (Auto-Pact revisited.) To make it even more vivid, Samsung, which is a relative newcomer to the green energy business, has said it is looking to use expertise from its other heavy industry divisions, including its shipbuilding group, to establish itself as a major manufacturer of wind turbines!

[2.2] the deal had a familiar shape of a developing country “standard”. One partner was a successful international consortium with deep pockets and manufacturing expertise, the other a backward jurisdiction so hungry for jobs that it had to pay the big company what amounts to a bribe to do the deal. The whole thing was arranged directly with the jurisdiction's leader without the bother of competition. It's the kind of deal one might expect in the Third World, except that it was Ontario on the Third World side of the equation. But the worst is yet to come:


[2.3] there are numerous Ontario companies trying to get a foothold in the green energy business. After all, “wind turbines derived from the shipbuilding”, as was Samsung claim, don’t seem to be a rocket science métier. If the government had cut a similar deal to support made-in-Ontario innovation, it could perhaps have been justified. Instead, it is slamming the door on these Ontario companies right in their own backyard.

"The Samsung deal is not just about manufacturing wind turbines," said OEC spokesperson Paul Kahnert."…It's a private scheme to generate electricity at outrageous ... rates -for years to come…." Kahnert said the province's electrical utilities operators can buy, install and maintain made-in- Ontario windmills more cheaply without Samsung in the picture. The fact of the matter is therefore quite simple. The Ontario Government has given away $7B of taxpayer’s money to offshore interests with NO assurance that Ontario society’s investment will create the promised jobs and economies of scale for alternative power generation. There are, at least, two of possible explanations for this:


[2.3.1] One possibility is that companies make bids against future cost reductions, taking advantage of the preparation period that the mechanisms usually allow before the payment period begins. If the economics of development are not sufficiently attractive towards the end of this period then the project does not go ahead.

[2.3.2]Another possibility is that some companies actually make bids they know will never become economic and will never be developed purely to deny the opportunity for a successful bid to their competitors.

Analyses are solely the work of the authors and have not been edited or endorsed by GLG.This author consults with leading institutions through GLG
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