Ontario News

Energy industry assesses the implications of Ontario’s new government

By Thomas J. Timmins, Sean Conway and Sean Whiting, Gowling WLG  

During the run-up to the recent Ontario election, Doug Ford's Ontario PC Party released its policy platform "For the People: A Plan for Ontario." The PC Party’s stated plans for Ontario's energy sector contained several broadly-worded promises of keen interest to Ontario's electricity generation sector: they would repeal the Green Energy Act, cancel energy contracts in the pre-construction phase, re-negotiate other energy contacts, declare a moratorium on new energy contracts and scrap Ontario's Carbon Tax and Cap-and-Trade Program. Following its victory on June 7th, 2018, the PC Party now forms a substantial majority in the provincial legislature and is fully at the helm of Ontario's energy policies and programs.

          Power suppliers and others in the energy industry have begun efforts to meet with representatives of the new government and to better understand its policy priorities. Although specific policy details were not shared by the PC Party in advance of the election, their election promises combined with early actions provide useful indications of intent. For example, moving quite quickly after its election win, the new government announced two significant changes: the cancellation of the Cap-and-Trade Program and the cancellation of a mid-sized wind farm project, WPD Canada's 18.45 MW White Pines Wind Farm in Prince Edward County.

 

The End of Cap and Trade

Background

          On June 15th, Premier Doug Ford stated that, “as a first order of business,” his first act in the legislature would be to scrap the province's Cap-and-Trade Program and immediately begin an orderly wind down of all programs funded out of the cap-and-trade carbon tax revenue – including Ontario's GreenON rebate program. Premier Ford did subsequently commit “to honour arrangements where contracts have already been signed and orders have already been made...”, but also indicated that decisions “to continue any specific initiatives currently supported by the fund [would] need to be paid out of the tax base and [would] be made on a case-by-case basis.”

          On July 3rd, the Government of Ontario revoked the cap-and-trade regulation and prohibited all trading of emission allowances.

          To replace the Cap-and-Trade Program and the programs its revenues funded, Ontario is now contemplating the formation of a fund to invest in emission reduction technologies. GreenON is one of the programs to be wound down. GreenON was a not-for-profit Crown agency that provided support and financial incentives to individuals and businesses to encourage the development of energy-efficient technologies by offering rebates to purchasers of such technologies. The GreenON website currently states that rebates will be honoured if a work agreement was signed with a participating contractor on or before June 19th, 2018 for work that will be completed by October 31, 2018, or a rebate application is submitted by November 30th, 2018.

          The Ontario Cap-and-Trade Program had begun in January of 2017. The program set a cap on facilities generating more than 25,000 tons of greenhouse gases, and the cap was to be lowered in subsequent years. Companies who had difficulty complying with the cap could purchase credits via public auction, which were then tradeable in a secondary market. The proceeds of the credit auction sales were designated for various green energy and emission-cutting programs. In 2017, Ontario signed a landmark agreement to link its carbon market system with those of California and Québec, creating a very large, three-jurisdiction market. Since the 2017 agreement, two Joint Auctions were held and a total of 188,803,658 current and 14,633,000 advance allowances were sold. Estimates suggest that Ontario accounts could hold contracts worth around $2.8 billion CND – all of which are now potentially in limbo pending the cancellation of the program.

 

Potential liabilities

It remains unclear what exiting the Cap-and-Trade Program might cost Ontario, and what its cancellation means for the businesses who purchased and possess potentially valueless allowances. The Government of Ontario will also need to formally notify Québec and California that it is withdrawing from the agreement linking their cap-and-trade markets. Under the signed agreement, the parties undertook to endeavour to give one year’s notice before pulling out of the system. As of July 10th, it is unclear whether the Government of Ontario intends to provide this notice and what specific consequences may be faced if it does not.

          It is well within a new government's remit to repeal acts implemented by a previous government, however, in this particular instance revoking cap and trade may require significant coordination and cooperation with the federal government as the federal government’s proposed carbon-pricing program, the Greenhouse Gas Pollution Pricing Act, will impose a $20/tonne carbon tax effective January 1st, 2019 in provinces where GHG standards do not meet federal standards. In this regard, on July 4th a spokesperson for federal Environment Minister Catherine McKenna said the cancellation of the Cap-and-Trade Program in Ontario was the equivalent of withdrawing from Ottawa's national climate change framework. As a result, some $420 million that had been earmarked for transfer to Ontario under the federal Low Carbon Economy Leadership Fund, is under review. Premier Ford has indicated that he would challenge legally the federal government’s ability to impose its own carbon-pricing system, but it is unclear how successful such a challenge would be –at least from a purely legal perspective.

          The obvious question for businesses in possession of allowances is: what value do their credits now hold? With the announcement that Ontario planned to leave the three-jurisdiction market, California and Québec have closed the market to Ontario. Businesses holding some $2.8 billion in allowances have no market to offload their purchases, and it is unclear what legal remedies are available to these parties or whether refunds are forthcoming.

 

The termination, renegotiation and moratorium of energy contracts

Background

          The PC Party's promise to terminate pre-construction contracts and to renegotiate other existing contracts should give pause to stakeholders with interests in Ontario's Feed-in-Tariff program ("FIT"). The FIT program was introduced in 2009 to encourage a greater use of renewable energy sources in Ontario and as an economic recovery stimulus plan. The program operated as a standardized process to contract for renewable energy procurement. Five major FIT major contract rounds have been completed since the inception of the program in 2009 (FIT 1 – FIT5), with numerous tweaks and changes made to the contract forms and terms along the way. The specifics of the PC Party's plan for various energy projects remains unclear. However, the consequence of cancelling pre-construction contracts and renegotiating others does raise questions of potential liability for the Government of Ontario and stakeholders in these energy projects.

 

Know Your Contract

          Pre-NTP

Project stakeholders will need to understand which FIT contract offer they possess and where they are in their respective development process in order to determine what contractual rights they have. Those parties who have not yet received Notice to Proceed ("NTP") from the Independent Electricity System Operator ("IESO") should seek guidance regarding the precise termination provisions in their contracts. It seems likely that the government will exercise termination rights on at least some projects where (a) NTP has not been granted and (b) the applicable FIT contract contains pre-NTP termination provisions. It is worth noting that because of the local and community ownership incentives presented by the IESO in the later stages of the FIT Program, the vast majority of these uncompleted/Pre-NTP projects are owned to some degree by indigenous communities and/or rural municipalities.

          Post-NTP

Projects contracted under FIT 4 and FIT 5 form contracts are open to a possible termination by the IESO in the period after NTP and prior to the commercial operation date ("COD") as "post-NTP" termination rights were granted to the IESO in those contracts. If the Government of Ontario does decide to terminate or re-open post-NTP contracts that have not yet achieved commercial operation, it should expect to pay significant termination fees to make the contract counterparty whole for project costs incurred.

          Post-COD

If the Government of Ontario chose to seek to terminate or re-open post-COD FIT contracts, it would need to negotiate with the individual contract counter-parties on the basis of specific contract terms. In this case, as is the case for both Pre-NTP and Post-NTP contracts, the over-all approach and tone of the Government will have a direct (positive or negative) impact on both the reputation and the attractiveness of Ontario as a great place to invest. Unilateral or arbitrary action (à la Spain 2008) could reasonably be expected to have a negative impact on the credit rating of the Province.

          Interestingly, there are precedents for the early termination of operational electricity generation contracts from other jurisdictions around the world and, in this era of energy abundance and continually declining prices for renewables, a mutually-acceptable financial settlement that would see the cancellation or 'de-contracting' of large scale generation projects even after they have achieved commercial operation is, at least theoretically, possible.

 

Past Experience

On February 11, 2011, the Ontario Government placed a moratorium on offshore windfarm development in the province, causing many significant projects that were then under development to grind to a halt. Naturally, legal action then ensued.

          Two notable cases bear mention. The first was a Chapter 11 NAFTA challenge filed against the Government of Canada. There, the developer alleged that the Government of Ontario acted "in an expropriatory, arbitrary and discriminatory manner" when it deferred offshore wind development and that the decision to put the moratorium in place was made in an arbitrary and political manner and was unrelated to the government's claim it was undertaking scientific work to address regulatory uncertainty. In that case, the NAFTA panel found that the Government of Ontario's failure to undertake the scientific work necessary to remedy the regulatory uncertainty amounted to a breach of Article 1105 of NAFTA and awarded C$26,182,900 in damages. In this case, the interplay between provincial and federal spheres of responsibility presents a good preview of what might happen if the Government of Ontario decided unilaterally to cancel FIT contracts held by indigenous communities. The potential impact that such a cancellation might have on Ontario's indigenous communities should be a significant concern – both for the members of those communities who have dedicated time and resources to the development of those projects and for the ratepayers of Ontario who could ultimately bear the cost of settling the FIT contract disputes that would likely arise. The interplay of federal and provincial duties and obligations – by contract, by treaty and by common law- creates a complex web of federal and provincial liability and significant exposure for the provincial government.

          The second case was a claim against the Government of Ontario for, among other things, breach of contract, misfeasance in public office, and the intentional infliction of economic harm. The plaintiff sought $2 billion in damages after it alleged that the Government unlawfully deprived it of a lucrative project for an improper political purpose and alleged that the Government's decision to announce the moratorium when it did specifically targeted the particular plantiff. The Government's move to dismiss the action on the basis that the plaintiff had no reasonable cause of action was initially successful but then overturned on appeal.

          The Ontario Court of Appeal allowed the claim to go forward after it ruled that the factual allegation that the Government had announced the off-shore wind moratorium only hours before the plaintiff was to close its financing was enough to warrant a pleading of misfeasance in public office. The action is ongoing.

 

Conclusions

As the Government of Ontario provides more clarity on its plans for an "orderly wind-down" of the Cap-and-Trade Program and the cancellation of energy project contracts, the future prospects of Ontario's vibrant energy sector should come into clearer focus. Gowling WLG's Global Renewable Energy Practice is keeping a watchful eye on developments in Ontario and can address any questions or concerns stakeholders may hold.

This article is based on an earlier release originally published July 12 in Gowling WLG’s blog, at gowlingwlg.com. Reprinted with permission.

 

For further information see also “What the new Doug Ford Government means for the Energy Sector” at this location:

https://mcmillan.ca/What-the-new-Doug-Ford-Government-means-for-the-Energy-Sector-A-detailed-analysis

 

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