Auditor General of Ontario Report: Incompetent or Intentionally Misleading?

When I re-read the recent Auditor General’s report on renewable energy, I continued to find significant deficiencies. The report was either written by incompetent people, or was written in a way to intentionally mislead the reader.

On page 104 of the report, it states, “Ontario’s FIT prices were originally designed with the intention of allowing a reasonable rate of return, defined as 11% after-tax return on equity, for developers of all types of renewable energy projects.” Later in that section is states, “The OPA said it initially developed Ontario’s FIT prices based on the long-established and successful
FIT programs in Germany and Spain. We noted that the internal rates of return offered to the developers in these countries varied depending on project risks and ranged from just 5% to 7% in Germany to between 7% and 10% in Spain.”

The report is comparing return on equity (ROE) to internal rate of return (IRR). Further, the report offers no explanation to the reader that these are two entirely different concepts. ROE is the return earned on the equity portion of the investment. IRR is the return on all capital, including equity. For example, if you invest $1000, and the IRR is 10%, then the investment will earn $100. But if you can borrow 80% of the $1000, at an interest rate of 7%, then your equity is only $200. The $100 in income goes first to pay the interest – $56. The balance of $44 is your return on equity, or 22% of the equity amount of $200. Internal rate of return is 10%. Return on equity is 22%. (Note that I have simplified things a bit and assumed that the borrowed amount remains borrowed for the life of the investment. In practice, lenders usually like the loan to be paid off over the life of the investment instead of just at the end. This would reduce the return on equity, but the point remains – return on equity is higher than IRR if you can borrow for less than the IRR.)

Surely the Auditor General understands the difference between ROE and IRR. If not, then there is serious incompetence. And surely the Auditor General knows that his writings need to be accessible and understandable to media, politicians, and bureaucrats, most of whom would not understand the difference between ROE and IRR. If the Auditor General doesn’t understand that, then we have a serious problem. Who else reads the reports?

So where are we left? The only plausible explanation is that the Auditor General was writing a report with a strong bias against renewable energy, and the policies designed to enable it. Another word for that is propaganda. Shame.

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