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Ontario’s Feed-in-Tariff program – an overview

On July 10, the Ontario Power Authority (OPA) introduced revised draft rules for the Feed-In-Tariff (FIT) Program, as well as a revised price list. This article introduces the major changes — use the table of contents at the right if you wish to skip to a particular section.


August 31, 2009
By Thomas Brett

Topics

The major changes include the removal of the “legacy project” status afforded certain projects in the initial version of the Rules and the introduction of a new regime for determining the priority of projects submitted in the initial period of the program, a period designated as the Program Launch. Other substantial changes include:

  • further definition of the Transmission Availability Test, the Distribution Availability Test, and the Economic Connection Test and the manner in which those tests will be used to prioritize applicants;
  • further definition of an aboriginal community, what constitutes aboriginal participation and how the aboriginal community price adder is applied;
  • new, more stringent provisions, for change of control of an applicant or a project (s. 12.1);
  • the clarification of the definition of Capacity Allocation Exempt Facilities.

The program launch
In the first draft of the Program Rules, priority was given to applicants with an existing capacity (“queue”) position during an initial “Initialization Period.” The OPA stated that it would respect the expectations of generators from their participation in the Distribution System Code capacity allocation process. Accordingly, those generators that had applied for, prior to February 23, 2009 (the announcement of the introduction of the Green Energy Act) and received a completed Connection Impact Assessment (CIA) prior to the commencement of the Program, would preserve their historical CIA completion time status, mandated by section 6.2.4.1 of the Distribution System Code. The queue, described in that section, gave connection priority to those projects for which transmission and distribution capacity was available and had been allocated.

The revised rules define a “launch application” as one that is submitted to the OPA prior to its deadline for projects wishing to be considered in the first Transmission Availability Test (see below). (That deadline will be set by the OPA, presumably by the date of the program launch or shortly thereafter). The applicants must also meet the mandatory requirements spelled out in sections 2 and 3 of the Rules. These provisions are unchanged from the initial draft, save for requiring that a FIT project applicant must not have signed a prior contract with OPA or other government agency, including a Standard Offer Contract — for example, the Renewable Energy Standard Offer Program (RESOP) — unless such prior contract was terminated prior to March 14, 2009 or more than 12 months before application to FIT. This will continue the ban against holders of RESOP contracts submitting their projects to FIT during the launch period. The OPA expects a large number of applications during the launch period. Applications received after the deadline will be assessed only after all applications that were made during the launch period have been assessed.

Each application made during the launch period will be given a Time Stamp. Each applicant must include the number of days it is prepared to accelerate the project’s commercial operation date (COD) ahead of when it would otherwise have to be pursuant to the Draft FIT Contract. Time Stamps will be awarded on the basis of the number of days by which each applicant has committed to accelerate the project’s commercial-in-operation-date, to a maximum of 365 days. Where two or more applicants propose the same COD acceleration and require the same connection resources, the earlier Time Stamp will be given to the one that scores highest on four listed criteria. Compliance with each criteria is worth one point. Each of the four points is equivalent to 90 days’ acceleration, so an applicant that agreed to accelerate its COD by 365 days, and satisfied the four criteria, would receive the maximum number of points – 365 + 360 or 725. The four criteria are:

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  • whether the project is “Renewable Energy Approval (REA)-Exempt.” A project receives one point if it is REA-Exempt. Renewable Energy Approval is the “single approval” which the Green Energy Act requires for renewable energy projects. The Green Energy Act also exempts renewable energy projects from review under the Planning Act. The contents of the REA, which are still being finalized, would consolidate approvals now given separately by the Ministry of the Environment under various statutes including the Environmental Assessment Act (EAA), the Environmental Protection Act (EPA), the Environmental Bill of Rights, and the Ontario Water Resources Act (OWRA). Under the current transition rules, renewable energy projects which hold a Certificate of Approval under the EPA, or is a PTTW under the OWRA, will not need an REA until those permits expire or are amended.
  • when the applicant has ownership of, or has contracted for, under a contract that caps its costs, a piece of major project equipment, it receives one point. For wind and solar projects, it must be equipment manufactured in Ontario.
  • whether the applicant’s or its affiliate’s management have had prior experience developing similar projects.
  • whether the applicant has financial backing for the project. If one, or a group of investors, together provide 50% or more of the project’s equity, the individual or the group must have a tangible net worth of $1 million at the end of each of the last two fiscal years.

If two applicants have the same number of acceleration days and the same total point score, the earlier Time Stamp is given to the one with the earliest Access Right Date (ARD); in other words, the one who first acquired ownership, leased, or otherwise gained legal control of the site. Finally, if everything else including the ARD is identical, the prior Time Stamp is allocated by draw.

All applications submitted during the launch period are subject to the Transmission Availability Test, and, if successful, the Distribution Availability Test, in order of their Time Stamps, so that, within the group of launch applicants, their order of receipt of a contract depends on the degree to which the application agreed to accelerate the commercial operations of its project, and its compliance with the four criteria.

The applicant must apply for a FIT contract prior to applying for a Connection Impact Assessment. If the applicant has already applied for a Connection Impact Assessment (CIA) or System Impact Assessment (SIA), and/or Customer Impact Assessment (Customer IA) prior to March 14, 2009, and if it has received a completed CIA, SIA, or Customer IA, before applying to FIT, it must rescind the study. It must therefore give up the capacity it acquired through the Distribution System Code process. If the applicant has also signed a Connection Cost Agreement, it must rescind the Agreement. Under the revised rules, capacity allocations for FIT projects are made only once FIT contracts are signed.

Whereas the initial FIT Program Rules considered receipt of a completed CIA a requirement for being considered during the initial period of the program (then called the “initiation period”), the revised CIA rules eliminate this requirement, and, in addition, require the applicant to withdraw from any previous CIAs or Connection Cost Agreements.

Tests for capacity availability
The revised rules introduce the necessity for a Distribution Availability Test (DAT) for those applicants that wish to connect their projects to the distribution system. The applicant must first have passed the Transmission Availability Test (TAT).

The TAT and the DAT assess the availability of transmission and distribution connection resources including Ontario Energy Board (OEB) approved transmission and distribution projects that would likely be in place prior to the projected commercial operation date of the generation project. The OPA, along with the Independent Electricity System Operator (IESO) and the transmitter, will determine whether the transmission resources are available to connect, in light of prior applications that have been processed, applications in the FIT production line or FIT reserve with an earlier Time Stamp, and any other generating facilities that are existing, committed or the subject of a ministerial direction. For proposed distribution connections, the OPA will make the determination of whether distribution resources are available in light of the same factors, in conjunction with the affected local distributor (LDC).

If the analysis of available distribution resources shows that there are OEB approved plans for the construction of the distribution resources sufficient to accommodate the application, but such distribution resources will not be in service in time for the proposed COD of the generation project, the application will be sent to the FIT Production Line. If there are no connection resources currently available, and no OEB approved plans to build them, the applicant will then become subject to the Economic Connection Test, subject to its being able to change or delete its proposed connection point without losing its Time Stamp.
If there are resources available, or plans are in place to make them available prior to the planned COD, the applicant will not be subject to the Economic Connection Test, presumably since the OEB will have already determined that the distribution or transmission expansion is “economic”.

The Economic Connection Test will be run for each region of the Province (“region” yet to be defined) at least every six months. The OPA’s objective in applying the test is to determine whether the cost to be borne by the ratepayers (their share of the connection costs that under OEB Distribution System Code are not paid by the applicant-generator) are “reasonable in light of the best information regarding ongoing transmission developments and other proposed generating facilities” (Rule 5.4(a)). The OPA proposes to model costs of investments necessary to connect proposed new generation to the transmission and distribution system, to the extent that such costs are allocated to transmitters or distributors (Rule 5.4(a)) and ultimately to ratepayers.

Before running any particular Economic Connection Test, the OPA will apply the TAT, and to applicants that are connecting to the distribution system, the DAT, to all projects in order of Time Stamp awaiting the Economic Connection Test, whether in the FIT production line, reserve, or that are otherwise eligible. The OPA does this to determine whether there has been a change in connection resources available since the last Economic Connection Test was applied. If the transmission and distribution resources are available, the OPA will offer a FIT contract. The remainder will be subject to the Economic Connection Test.

Those applicants for whom transmission connection reserves were deemed not available but passed the Economic Connection Test, would either remain in, or be offered the opportunity to join, the FIT Production Line. If such applicant did not pass the Economic Connection Test, it is placed in, or will remain in, the FIT reserve, even if it was previously in the FIT Production Line. Changing circumstances may have made the project less attractive (“uneconomic”) relative to other proposed projects.

Applicants that fail the Distribution Availability Test because while there were plans that had been approved or were pending approval by the OEB to provide distribution resources which would accommodate the project, such distribution resources would not be in service by the Commercial Operation Date, would remain in, or be placed in, FIT production line, assuming they passed the economic test. If there were no such resources or OEB approved plans or plans pending approval, the applicant will remain in the FIT reserve.

Once in the FIT Production Line, the applicant is eligible to “retry” the TAT and the DAT to determine whether transmission or, if distribution resources, respectively have become available on the occasion of each subsequent Economic Connection Test. However, once in the Production Line, 10% of the application security becomes non-refundable on withdrawal.

Aboriginal and community participation
An important part of the government’s green energy policy is to increase the number of projects involving Ontario First Nations and local communities. The revised rules provide that OPA will pay more for power purchased from a renewable energy project if it has defined levels of aboriginal ownership. An aboriginal community is defined to include a First Nation, that is a legal band, a corporation that is wholly owned by one or more aboriginal communities, and an entity which is deemed by the OPA for FIT purposes to represent the collective interests of a community that is substantially composed of Metis or other aboriginal individuals. Aboriginal participation level in a project is defined as the percentage of the economic interest in the project held by an aboriginal community. An Aboriginal Participation Project is one in which the aboriginal participation level is greater than or equal to 10 per cent. The maximum incremental price adder available under FIT currently ranges from 1.5 cents/kwh to 0.6 cents/kwh based on 100 per cent aboriginal ownership.

The definition of Community Participation Project is still under development. The maximum price adder for “community projects” ranges from 1.0 cents/kwh to 0.4 cents/kwh.

Projects with an Aboriginal or Community Participation Level of over 50 per cent will pay Application Security of $5,000 MW regardless of the form of renewable energy, a reduction from normal levels of $10,000 MW to $20,000 MW.

Assignment of the contract or change of control
The revised rules prohibit an applicant from assigning its FIT application or a permit for one year following the submission of its application. The applicant may not permit or allow a change of control of the applicant until one year after the submission of the application. After one year has expired and before it has received an Offer Notice (to sign a contract), in respect of its Application, an applicant cannot assign its application to anyone other than an affiliate, or allow or permit a change of control of itself without the OPA’s approval, which cannot be unreasonably withheld. Once it has been offered a contract, it may not assign its contract or allow a change of control of itself under any circumstances. Similar provisions are contained in the draft contract, restricting assignment of the contract and change of control of the applicant. For example, during the first two years of commercial operation of the facility, there can be no change of control unless the original applicant retains a 25 per cent economic interest in the project.

Change of circumstances
The current version of the FIT contract and the Rules provide that if there is a change in legislation or IESO Rules, which, in the view of the OPA, after discussion with the affected applicants, would have a material effect on the supplier’s economics, or if the OPA makes a change in the program, which, in the opinion of the OPA, would have a material impact on the supplier’s economics, the parties will attempt to negotiate a revised price or other contract change that restores the original project economics. Failing agreement, the matter shall be determined by arbitration.

Right to refuse an application or change rules
The OPA retains the right to reject any application, whether or not it is completed properly and contains all the required information, in effect to reject it for any reason (although it must give written reasons for such refusal), and/or to discuss different or additional proposals with the applicant. If the OPA makes what it deems a Significant Program Amendment (a price reduction of more than 5% of the price from what it was at the time of its Time Stamp is deemed to be a Significant Program Amendment), an applicant can withdraw its application and is entitled to a full return of its security deposit. In addition, under the Draft Contract, the OPA can terminate the contract without liability other than to pay specified development costs and to return the security deposit. These costs exclude any equipment costs, which appear to be inconsistent with making contracting for a major piece of project equipment one of four criteria in assigning priority to applicants for FIT contract negotiations. It can also defer issuance of a Notice to Proceed.

Financial viability
The July 21st presentation on the revised rules stated that the applicant must have one or more Designated Equity Provider(s) (DEPs) that provide 50 per cent or more of the Project equity. The term is undefined in the revised rules themselves, nor do the rules appear to have an absolute requirement that there be Designated Equity Providers.

The presentation, and the revised Rules go on to provide that:

  • the DEP(s) must have tangible net worth of $1 million/MW of proposed contract capacity for each of the previous two years. Each applicant must provide the calculation of tangible net worth and year end financial statements for each of the last two fiscal years.
  • each DEP must provide the required equity contribution, only conditional upon specific (undefined) objective conditions.


Contract overview
The Rules provide an overview of the key provisions of the Draft FIT contract. That contract was published in draft form on June 10, and a final version has not yet appeared. Contracts are stated to be for 20 years, save for water power, which will be 40 years. Of particular note is the fact that OPA reserves the contractual right to terminate the FIT contract, even if the supplier is not in default, at any point up until the generator receives a Notice to Proceed (to construction). The OPA can also defer issuance of a Notice to Proceed presumably in the event that the anticipated transmission and/or distribution facilities intended to accommodate the generator were not yet ready, or that the cost of connecting the generator is in excess of that paid by the generator itself have been deemed uneconomic by the OPA. The contract will give the OPA the right to terminate, but not defer, capacity allocation exempt small generators with the return of the completion and performance security, and payment of development costs.



Capacity allocation exempt projects
A Capacity Allocation Exempt Project can apply for and receive a FIT contract without having to enter the launch period competition, and be ranked by Time Stamp. The DSC requires the distributor to make capacity available to the facility, subject to Section 6.2.8B (see below). The DSC (section 1.2) defines a capacity allocation exempt small generation facility as an embedded generation facility which is not a micro-embedded facility, and which has a name plate rated capacity of 250 kw or less in the case of a facility connected to a less than 15 kw line and 500 kw or less in the case of a facility connected to a 15 kw or greater line. Recall that a generation facility is embedded when it is connected to a distribution level facility either directly or through a load. A micro-embedded generation facility is defined in the DSC as an embedded generation facility with name plate capacity of 10 kw or less and a different regime will apply for such projects, the MicroFIT program. The Code also provides that where a distributor, pursuant to section 6.2.8B, notifies the OEB that a capacity exempt small generation facility cannot be “reasonably managed” without adversely affecting the capacity allocation of a generation facility, the matter shall be adjudicated by the Board, and the distributor shall not connect the capacity exempt small generation facility without a direction from the Board.

Thomas Brett (tbrett@foglers.com) is a partner at Fogler, Rubinoff LLP.