Toronto: Prior to the finalization of the Feed-In Tariff program, APPrO released a set of proposed changes to the program. APPrO’s comments focused heavily on fairness in terms of which projects would be eligible for the initialization period, and on adjustments to the pricing formula to recognize current financial conditions. One of the key recommendations was that the OPA should use standard indicators of project maturity to determine eligibility for the initialization period, rather than relying on lotteries.
Another key comment was that under Canadian tax law, it is almost impossible to make use of the losses a project typically experiences in its early years as part of the overall financing. APPrO’s comments are extracted below.
“APPrO would like to commend the OPA in general for the remarkably thorough and open process you have used for collecting stakeholder input during the development of the FIT program. Recognizing the large volume of issues that require resolution in a short time frame, your systematic use of regular stakeholder meetings with responsible officials, webcasts and online postings, greatly help to build understanding and confidence in the OPA’s plans for the FIT program.
“In addition, we are pleased to see that a number of the recommendations put forward by APPrO and APPrO members have been accepted into the revised plans. Full indexation prior to COD is a good example of changes that improve efficiency and effectiveness. To us, this demonstrates that the consultation process is on track to meet key objectives. Of course, with any undertaking on this scale and timeline there are a great number of questions to consider. So it’s not surprising that important issues remain to be addressed.
“Recognizing the short time remaining before release, APPrO presents the following summary of its recommendations for final changes to the FIT program. These recommendations are provided in the spirit of improving the FIT program and helping to ensure it achieves its central objectives as effectively and efficiently as possible. The recommendations below are numbered for the purpose of clarity, not to suggest any order of priority or sequencing.
1. As suggested by a great number of speakers in the May 12 meeting, we believe that use of a lottery system to select applicants has serious drawbacks in terms of efficiency and fairness, and should only be used in very limited circumstances. The limited circumstances we have in mind would be, for example, to allocate limited capacity amongst applicants belonging to a subclass of highly similar proposals that are difficult to distinguish amongst otherwise. Lotteries in APPrO’s view are only appropriate where there are no other options for selecting a subset of participants from within a relatively small class of projects facing very similar circumstances. Overall, it is very important that the previously established indicators of project maturity be retained as the primary determinants for inclusion in the initialization period.
2. Our previous comments on transitional arrangements for legacy projects were submitted on April 10 and remain valid today. We recommended at that time that all projects that submitted a properly-completed CIA or SIA application and received a queue position before the March 12, 2009 announcement of the FIT program be eligible as legacy projects in the initialization period.
3. APPrO also recommends emphatically that OPA work closely with existing biomass and biogas fueled power generators to determine what is required to allow them to continue operation in the context of the FIT program, given the challenging conditions in the market for renewable fuel supplies. In general, the FIT tariff for biomass has to be high enough to deal with expected increases in the prevailing market price for bio-fuels. Approximately 60 MW of existing biomass-fired power generation facilities at several locations in the province could either lose their fuel supply, or be forced to cease operation because fuel costs become uneconomic, if current FIT program proposals for biomass go ahead without additional measures. Existing bio-fueled generators should not be disadvantaged in any way by the FIT program, and it’s important to ensure that the additional cost of new FIT contracts are not incurred needlessly to build one set of plants while idling another that do essentially the same thing.
4. In terms of the FIT pricing model, the following comments are generic, across the full range of technologies:
a) As noted by many participants, it is incorrect to assume that Canadian developers are generally able to monetize the tax losses from new power projects in the early years of operation. Under Canadian tax law, only a very small number of companies can access such provisions, much fewer than would be needed to constitute an adequate response to the FIT program. The tariff needs to be adjusted upward to reflect the general unavailability of such write-offs to Canadian developers.
b) The use of a 70-30 debt to equity ratio is overly optimistic in today’s economic environment in most cases. 60-40 is closer to the norm, and for some kinds of technologies 50-50 is likely to be required.
c) In the current economic environment, it is not possible to obtain 20 year debt at 7%. 7.5 or 8% is a more reasonable estimate, according to recent reports
d) With respect to the use of a standard ROE in the pricing model, currently 11%, we believe this overlooks the highly divergent circumstances that exist for projects of different technologies. One size does not fit all in terms of expected rates of return on equity.
5. The average capacity factor of wind farms assumed in determining the FIT tariff should be adjusted downward. Wind projects will be the largest contributor of capacity to the program. The capacity factor of 30% used in the OPA model is overly optimistic given that the existing wind farms in Ontario (which represent the “low hanging fruit”) have on average only achieved 28% c.f. (This is based on IESO monthly report data from March 2006 to June 2008.) A diverse basket of viable projects is needed to provide meaningful signals for transmission build-outs through the Production Line and to encourage manufacturers to establish facilities in Ontario. The OPA’s current strategy of picking up the remaining low hanging fruit only during the initialization period does not send a strong signal to developers and manufacturers that the FIT program is here for the long term. Accordingly, the tariff should be increased to make a 26% c.f. project viable.
6. Differentiation would be appropriate in the tariff for thermal generation, i.e., biomass and biogas fueled projects, based on thermal efficiency characteristics. Those projects with greater thermal efficiency are in effect a different technology, with much greater benefits and higher capital costs.
7. As discussed on April 14, the contract assignment provisions are highly significant from a financing perspective and could make or break a deal. APPrO recommends that a stringent credit test be required for any assignee, essentially ensuring no diminution of credit quality.
8. While the general concepts put forward for the Economic Cost Test and related transmission and distribution build-outs look reasonable in principle, a number of questions remain that will take further effort to resolve. We look to the OPA to continue in the current spirit of openness and transparency to ensure that generation developers are able to rely on OPA systems to dependably gain a fulsome understanding of the plans for grid expansion and how they affect their projects.
9. Further to the above, APPrO recommends that the OPA work closely with the OEB and other stakeholders to develop the tools and techniques to ensure maximum alignment between the build-outs projected in the ECT and the actual capital investment programs of transmitters and distributors.
10. When final CIA or SIA cost estimates are received, if they are much higher than the original cost estimates provided to the generator, say 15% or more, there should be a straightforward “off-ramp” for the generator with minimal costs or obligations. The required postings of completion and performance security are significant, so developers need a means of managing the risk of changes in project viability caused by factors outside their control or they will have difficulty participating.
11. The timeline for responding to alternate connection proposals from the OPA should be 20 business days at a minimum, and longer if deemed appropriate by the OPA. This timeline is necessary in our view, for example, if it becomes necessary to send a line through a municipality that the developer has never dealt with, or if going through different territory requires new engineering work and/or internal approvals.
In parallel with these efforts, APPrO looks to the OPA for timely progress on bringing forward an amended version of the CESOP program for small CHP, workable under current economic conditions and compatible with the FIT program, once the FIT program rules and contract have been resolved.
Similarly, APPrO recommends that the OPA work with the Ministry of Environment and other stakeholders on the interpretation of the MOE’s proposed new guidelines on emissions from stationary engines and turbines, to ensure that viable, environmentally sound projects and technologies are not excluded from the Ontario market.
APPrO members were particularly pleased to learn last week that the OPA plans to adjust inflation indexing provisions to 100% until the contract execution milestone date. This is an important improvement in our view, and economically efficient because it will reduce the need for lenders to build in uncertainty premiums related to inflation during the pre-COD period.
APPrO was also encouraged to see the general approach outlined for curtailment payments on May 12. We look forward to reviewing further specifics in the contract language.
As you know, the FIT program is likely to have impacts on the electric system as a whole, which will require focused attention. For example, the increased amounts of intermittent renewable energy combined with conservation efforts expected in Ontario will result in requirements for significantly increased ramping capability and energy storage capacity to ensure that the new energy is available consistent with demand. OPA should work towards developing mechanisms to attract new energy storage projects and ensure that new and existing capacity will be incentivized to contribute to the increasing ramping requirement.
As is normal for broad-based organizations like ours, APPrO provides these comments as an indication of the general view of the organization, while acknowledging that individual members of APPrO may well hold differing positions on specific points.
Once again, we would like to thank you for the approach you have taken to the consultation process, particularly given the scale and timing of the task.
We appreciate the opportunity to provide this advice and look forward to working with the OPA and other stakeholders to resolve the issues identified.
Sincerely, Jake Brooks, Executive Director.”