Energy Manager

News
Uncertain times

For the first 100 years or so of electricity in Ontario, electricity was delivered by a vertically integrated publicly-owned monopoly utility named the Hydro-Electric Power Commission, known later as “Ontario Hydro”. The brand continues to be so strong that Ontario is likely the only place where “hydro” is synonymous with “electricity”. But for small problems like $20 billion in stranded debt, life was relatively simple.


November 6, 2010
November 6, 2010
By Ernest Belyea

In 1998, a series of legislative initiatives brought forward by the Government of Ontario began a multi-year restructuring of the entire electricity system involving the disintegration of Ontario Hydro and an attempt to establish a competitive market for electricity in the Province. These ambitious initiatives ultimately resulted in no less than seven major corporate entities, each with a different function and our now “hybrid” electricity market. 

Along the way we have had a competitive retail market for all of seven months, a failed IPO for the new Hydro One Inc., the owner and operator of the Province’s transmission lines, and a very public wrongful dismissal action involving a former CEO of Hydro One Inc., who is now an Anglican minister.

The transformation that began in 1998 continues with the newest government initiative, the 2009 “Green Energy and Green Economy Act”. While previously the major focus in electricity planning and procurement was “reliability” of the system, this recent legislation has as its goal nothing less than changing the supply mix itself and the creation of a “Green Economy” in the Province through the creation of 50,000 jobs. The Act amended no less than 15 pieces of legislation to facilitate renewable energy projects and was followed with the Minister George Smitherman’s directive to the Ontario Power Authority (OPA) to create the Feed-In-Tariff (FIT) Program. Although the FIT Program was the first of its kind in North America, it is actually in line with a world-wide trend towards renewable energy already evident in Europe and Asia, and now gaining momentum in the United States due to the implementation in many states of renewable portfolio standards for local utilities. Indeed, in many ways the initiative is too late to achieve the lofty goal of creating a Green Economy. On its surface, the green initiative appears to have been an overwhelming success if one evaluates it from the perspective of the huge number of applications for FIT Contracts and the megawatts (MW) of projects in the pipeline. However, the ultimate success of the initiative is uncertain and it is not without its detractors.

Foremost among those are the renewable energy developers shut out of the transmission capacity they need by the sweetheart deal made between the Province and Samsung C&T Corporation. Just weeks prior to the OPA awarding the first FIT Contracts, the government announced its deal with Samsung involving $500 million in incentives for a promise (but no guarantee) to create 16,000 jobs by establishing wind and solar manufacturing facilities in the Province and to develop 2000 MW of wind and 500 MW of solar projects. More importantly, as part of the deal, the Minister of Energy directed the OPA to hold 500 MW of transmission capacity in reserve for Samsung in Haldimand and Essex counties and the municipality of Chatham-Kent. In these areas, this puts Samsung at the head of the queue for a limited resource likely eliminating other projects already in the works. This sole source transaction, the exact terms of which remain undisclosed, is infamous for its lack of transparency and competitiveness.

Advertisement

The domestic content provisions of the FIT Program have also garnered much disfavour. They are under attack by the Government of Japan at the World Trade Organization, the failure to satisfy the requirements has draconian consequences (the contract may be terminated) and there is a continuing dance between project developers, who are looking for domestically produced product, and potential investors in local manufacturing, who are having difficulty assessing the stability of the investment climate, about who will commit first to the other. There have been many announcements about potential new manufacturing facilities but precious few if any have broken ground.

Consequently it is increasingly likely that the application of domestic content requirements will have to be delayed, otherwise 2011 projects will simply be unable to meet the requirements because of insufficient local capacity. And finally it all comes down to price. Since 2005 the OPA has procured 7000 MW of new generation on line and has 10,000 MW in the pipeline. Significant amounts are also being spent on transmission system and distribution system upgrades required to accommodate all the new supply. All of which is to say that the price of electricity is rising and so is the temperature of ratepayers. Premier McGuinty’s liberal government just defeated an Opposition motion in the house to exclude the 8% of the Provincial portion of the harmonized sales tax from electricity bills. Newspapers bleed daily articles attacking the price increases. A Provincial election is a mere year away.

In 2002, after only seven months the Provincial Government closed the retail market and froze electricity prices because it could not take the heat. The current government just cancelled an 850 MW gas-fired power plant in Oakville because it could not take the heat so near an election year. The Tea Party is controlling the political agenda in the United States, and in Toronto voters have just overwhelmingly elected Rob Ford as the city’s new mayor. These are indeed interesting and uncertain times.

Ernest Belyea is a lawyer with Bennett Jones LLP. He has been practicing law for over 20 years and has been recognized as one of the leading Energy-Corporate lawyers in Canada.