Toronto: Ontario is about to enter the next phase of its groundbreaking Feed-in Tariff (FIT) program. New rules and contract language are expected to be released shortly. Four preparatory steps have already taken place: The report of a panel charged with reviewing the FIT program has been released, the Ministry of Energy has responded to the report’s key recommendations, the Ontario Power Authority has released draft rules and standard contract language for FIT 2.0, and stakeholders have provided input on the draft materials to the OPA. The OPA says it expects to release the final rules and contract shortly.
Many in the industry are anticipating increased renewable power development activity once the new rules and contract are released, albeit at a somewhat slower pace than during the previous phase of the FIT program. Government policy has affirmed that the intention is to continue with a relatively aggressive program, designed to achieve 10,700 MW of new renewable energy capacity by 2015. However a number of factors could make that target difficult to achieve. The new proposed rules create some additional termination risks for developers, and establish incentives for Aboriginal and municipally led power projects. Lewis T. Smith of Stikeman Elliott notes that, "Projects with aboriginal or municipal council support will be prioritized, as will those with equity participation from aboriginals, local community members, public schools, colleges, universities, hospitals and long term care facilities. Contracts will be awarded in batches, with the first batches to be for microFIT and small FIT projects." Under the new system the government is expected to conduct an annual review of FIT prices, publishing updated prices each November that will take effect on January 1st the following year.
A number of concerns were raised by stakeholders when the draft rules and contract were released. For example, APPrO after noting that it “supports a measured renewable energy procurement program which can continue to provide economic and environmental benefits to Ontario” said, “However, the proposed form of contract contains several new provisions that are unnecessarily onerous for even experienced developers and their lenders. If this evolution of the FIT Program is intended to continue to promote viable renewable energy projects, several amendments should be made to the draft FIT 2.0 Contract.” APPrO’s specific comments included the following:
“Pricing: The FIT 2.0 Rules provide that the Contract Price being offered will not be known until an Offer Notice is extended. While the FIT 2.0 Rules contemplate pricing being reviewed on an annual basis, it appears that the OPA could offer a different price at the time of any Offer Notice. This approach to pricing makes it very difficult for developers to determine the pricing for their suppliers and financiers during the period between pricing reviews. If different pricing is offered than that in effect at the time of application, the applicant should be able to decline the Contract Offer and receive its Application Security back without penalty. …
Distance to Grid Connection: The FIT 2.0 Rules refer to a requirement that the distance between a Facility and its grid connection not exceed an unspecified distance and contain a Note to Draft suggesting there will be consultation on this issue. Since the distance to connection is fundamental to any project, this provision could be unduly restrictive. APPrO requests an opportunity to participate in any consultation. …
Incremental Projects: The FIT 2.0 Rules eliminate Incremental Projects as eligible projects. It is illogical to disallow expansions of large scale wind projects, particularly since such projects will have already received local public support and be familiar to the surrounding community. …
2.4(b) Termination prior to Notice to Proceed: The compensation payable to the Supplier in the event of Termination prior to Notice to Proceed should be broadened to match the compensation payable if the OPA terminates the contract following Notice to Proceed. Given the sole and absolute discretion afforded to the OPA to terminate, there is no rationale for the distinction in reasonable compensation to the Supplier. …
Termination for Convenience: The OPA now has the ability to terminate the contract for convenience at any time after Notice to Proceed, in its sole and absolute discretion, and without any time limitation. This new provision is extremely concerning, particularly since the OPA can exercise this right even after the Commercial Operation Date. This provision should be deleted as it places too much uncertainty on both equity and debt providers. The OPA right to terminate at any time up to Notice to Proceed (a right it does not have in its non-FIT Program contracts) should be sufficient. …
New Events of Default: A further concern is several new events of default. An event of default arises if (i) before the 10th anniversary of COD, where priority points were awarded for having an Education or Health Host, the Education or Heath Host ceases to qualify as such and (ii) a project with an Aboriginal Community, Community Investment member or Education and Health organizations as equity participants (i.e., a Participation Project) ceases to qualify as such (e.g., an Aboriginal Community decides it no longer wants to hold an equity interest). Under the proposed contract, the Price Adder will be lost as has been the case previously but, more problematically, an organization over which the developer has no control could decide to terminate its involvement or breach its commitments to the developer and trigger an event of default. …
Changes to the Facility: Certain provisions relating to the development and operation of the facility have the potential to remove key decision-making power from the developer. Section 2.1(b) changes the element of reasonableness to “sole and absolution discretion” in the decision of the OPA in response to a request from a Supplier for consent to a change in a facility. This should be returned to a standard of reasonableness (as should all decisions by the OPA in relation to the FIT 2.0 Contract). As a public body, the OPA should always be obligated to act in a reasonable manner. …
Curtailment: The provisions dealing with payment for curtailment have been deleted. This needs to be addressed in a manner that provides satisfactory compensation and certainty as to when these provisions may be invoked. The draft FIT 2.0 Contract simply contains a note to draft indicating that provisions that address changes to IESO market rules will be amended to incorporate the IESO’s SE-91. The Minister’s Direction, which directed the OPA to make the revisions to the FIT Program, states ‘For new large FIT projects, the OPA shall amend the FIT contract to provide for greater generator accountability in circumstances where generation must be dispatched off.’ Clarity on the treatment of curtailment is required and APPrO requests an opportunity to consult with both the OPA and the IESO on this contract issue. In addition, Suppliers should be provided with the option to terminate the agreement if implementation of the IESO’s SE-91 Renewable Integration initiative materially adversely affects the Supplier. APPrO wishes to have an opportunity to consult further on this issue.”
See related article, “FIT Review solidifies and refines the program,” IPPSO FACTO, April 2012.
— BLG Energy Markets Bulletin
See also: Summary of changes proposed for FIT 2.0