The following commentary is provided in the Energy Markets Bulletin of Borden Ladner Gervais, LLP.
• Controlled Scope – Procurement Limits;
Application Windows: Unlike the initial open-endedness of the FIT Program, the issuance of contracts will now be subject to periodic procurement limits set by the OPA in its discretion. In addition, the OPA intends to announce application periods during which applications may be submitted. The OPA may also determine the type of FIT Project that may be the subject of an application submitted during a particular application period. It is also clear that applicants will be competing with each other and will be ranked based on points, time stamp and then availability of grid capacity. While specific procurement limits and the timing of the first application period have not yet been determined, we can anticipate early calls for 50 MW of microFIT and 200 MW of small FIT projects (less than 500 kw) as a result of the Minister’s Direction. And of available capacity, particular focus will be placed on projects (small and large FIT) with greater than or equal to 50% community and Aboriginal equity participation and hydroelectric projects.
• Project Eligibility
A number of changes have been made to eligibility requirements, some of which affect specific renewable fuels. For example, groundmount PV projects may not be located on property that include Class 1, 2 or 3 lands, or organic and specialty crop lands. Ground-mount solar PV projects may also not be located on or adjacent to residential lands nor on commercial and industrial property if it is the primary use of such property. Solar projects cannot exceed 10 MW and cannot utilize inverters and panels that have manufacturer’s capacity ratings that exceed 120% of the proposed contract capacity. Waterpower projects continue to be limited to a maximum of 50 MW. Incremental and behind-the-meter projects are no longer allowed. There are also specific provisions for co-locating projects and limitations on developers submitting similar projects during the same application period. In addition, a proposed project will need to be located within a certain distance from the facility’s contemplated connection point. The FIT 2.0 Rules do not yet specify this connection distance, which will be the subject of special consultations. Large FIT projects are more likely to be affected by an unduly short connection distance. While it is not clear what special consultations will be conducted beyond the FIT 2.0 Rules comment process, interested stakeholders should ensure their views are received by the OPA.
• Application Requirements
Small FIT projects (capacity allocation exempt) must now submit application security. In addition, an applicant must provide representations and warranties that attest to an awareness of certain project requirements, such as environmental permitting and particular FIT Program rules, and which confirm that certain preparatory actions have been completed in respect of the project, such as obtaining all access rights and independent engineer reports. The effect is to place a greater degree of responsibility as well as additional costs on the applicant to ensure the viability of its proposed project.
• Pricing
The draft FIT 2.0 Rules introduce a new price schedule that, as expected, reduces the prices paid for wind and solar. The pricing for other technologies remains unchanged. Price adders for Aboriginal and community projects have been maintained where the economic interest of Aboriginal and community participants exceeds 15% (formerly the minimum was 10%). The draft FIT 2.0 Rules have also changed key definitions and provisions relating to Aboriginal and community projects that will require careful review when structuring such projects. The Minister’s Direction also stipulates that price schedules and inflation escalators will be reviewed and updated annually in November to take effect as of January 1. In a significant departure from the existing FIT Program, an applicant offered a FIT 2.0 Contract will be offered the pricing in effect when the contract offer is made, not the price in effect when the application was filed.
• Domestic Content
The FIT 2.0 Contract maintains domestic content requirements, set at 50% for wind and 60% for solar facilities.
• Assignment; Change of Control
Any assignment of an application, or change of control of an applicant, is not permitted. Any violation of these prohibitions will allow the OPA to terminate the application and retain the application security.
• Priority Points System
Under the new proposed FIT 2.0 Rules, a new priority points system will be used to rank applications with the time stamp now acting as tie breaker. An application may only proceed if the proposed project can receive at least one point. The new system clearly assigns priority to projects that have a community, Aboriginal or municipal, education or health (“MUSH” sector) component, whether as a direct participant in the project or as supporting entity. Of the seven categories of points set out in the priority points table below, only two categories do not require some type of community, Aboriginal or MUSH sector involvement. One point may be awarded for the category of “system benefit”, which in actuality is a point for fuel type and unavailable to wind and solar projects. Two points may be awarded for “project readiness,” which is narrowly defined in relation to access rights, but as most serious applicants should be able to meet this requirement, it is unlikely that an applicant will gain significant competitive advantage through this category. The rules do not permit a project to obtain more than one type of participation project points but do permit certain combinations of project and non-project type points under certain circumstances.
• Connection Matters
The Economic Connection Test (“ECT”) will no longer be part of the FIT 2.0 Rules (and the existing ECT list will be terminated) but connection availability continues to be, as expected, a critical factor. Applications will first be ranked in accordance with the priority points system described above. Applications will then be assessed, in order of rank, as to whether there is available transmission and/or distribution capacity based on a transmission availability test (“TAT”) or distribution availability test (“DAT”) as applicable. The FIT 2.0 Rules urge applicants to consult with the applicable transmitter or distributor prior to submitting an application but the OPA reserves its discretion to determine whether an application can pass the TAT or DAT.
• Transition
Applications that were submitted prior to April 5, 2012 will be subject to the new FIT 2.0 Rules and pricing, and not the FIT Rules in effect when the application was submitted. An applicant may resubmit a pre-existing application during an application period and will be able to maintain its original time stamp. A resubmitted application need not contain the same information as was contained in the pre-existing application subject to the requirements that (i) the project be located on the same site, and (ii) the applicant must be the same person except that a change in ownership is permitted for the purpose of qualifying the project as a participation project. If a pre-existing application is not resubmitted during the first application period for the applicable project size, the pre-existing application will automatically be terminated. The OPA is also offering those who hold existing FIT Contracts the opportunity to terminate those contracts and receive back the application security without being subjected to any penalty.
Proposed changes to the FIT 2.0 Contract
A number of substantive changes have been made in the form of proposed FIT 2.0 Contract. We note a few of the significant amendments.
• Termination for Convenience
The FIT 2.0 Contract provides the OPA with the right to terminate the contract for convenience after issuance of a Notice to Proceed. The supplier would receive sunk costs and the net present value of future reasonably anticipated profits from operation during the term of the contract, but not following. If the parties do not agree on the amount payable by the OPA in damages, then the FIT 2.0 Contract provides for mandatory, binding arbitration from which there are limited rights of appeal. It remains at the sole discretion of the OPA to terminate the contract prior to Notice to proceed with limited liability to pay for pre-construction development costs. In addition, there is a new concept of a “Stop Work Direction,” which allows the OPA to direct a Supplier to permanently cease the development and construction of a facility. It is not clear whether the OPA could invoke this remedy without terminating the contract and making the compensatory payments described above. Clearly this provision detracts from the stability that a long term power purchase agreement is typically expected to provide. Developers, investors and lenders will wish to influence the OPA to remove this new clause.
• Liquidated Damages
New provisions impose liquidated damages for each day that the milestone commercial operation date (COD) has been missed. The new FIT 2.0 Contract no longer contains the provisions that previously permitted a supplier to extend the end of the term to 20 years after the actual COD in the event of a missed milestone COD for which liquidated damages have been paid.
• Pricing and Curtailment
The provisions that deal with payment of compensation when certain projects have been curtailed have been deleted. A note to draft states that a provision will be inserted in conjunction with developments in the SE-91 Renewable Integration Initiative of the Independent Electricity System Operator.
• Supplier Representations
The representations to be provided by a supplier have been expanded with increased limitation on the ability to invoke a claim of force majeure.
• Events of Default
The FIT 2.0 Contract contains new events of default that relate particularly to priority project categories. It will be an event of default if a project was awarded priority points for having an education or health host, and the host ceases to qualify as such education or health host at any time prior to the tenth anniversary of COD.
It will also be an event of default if a participation project (one comprising community, Aboriginal, education or health investment), other than a rooftop solar project, no longer qualifies as such participation project at any time during the term. For a participation project that is a rooftop solar project, it will be an event of default if, at any time prior to the fifth anniversary of COD, the participation level decreases to below 15%.
It may be reasonable for a supplier to lose the benefit of any price adder obtained for a participation project as a result of certain priority points. However, termination of the contract for default in such a case is arguably an unduly harsh consequence since such occurrences are likely to be outside the developer’s control.”
— BLG Energy Markets Bulletin