Canada: Feed-In Tariff Program Contract Changes Create More Certainty In Early Stage

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on CleanTech, Energy, and Environmental, August 2011

On August 2, 2011, Brad Duguid, Ontario's Energy Minister, announced that the Ontario government had initiated a change to create greater contractual certainty at the project approval stage of the province's feed-in-tariff (FIT) program.

As discussed in our April 2010 Blakes Bulletin: Ontario Announces 184 Feed-in Tariff Contracts for 2,421 MW of Renewable Energy, the FIT program is North America's first comprehensive guaranteed pricing structure for renewable electricity production and has resulted in the most substantial investments in green energy development in Canadian history. The FIT program offers stable prices under long-term contracts with the Ontario Power Authority (OPA) for energy generated in Ontario from renewable sources, such as bioenergy (biomass, biogas and landfill gas), onshore and offshore wind, solar photovoltaic (PV) (ground-mounted or roof-top) and waterpower (naturally flowing water). Section 2.4(a) of the FIT contracts provides the OPA with the right to unilaterally terminate a FIT contract before the OPA has issued a notice to proceed (NTP) and the supplier has paid the incremental NTP security, upon notice and repayment of the security deposit and pre-construction development costs up to a prescribed limit. The pre-NTP stage in the FIT contract is a lengthy process which exposes the supplier to risk and uncertainty.

Effective from August 2, 2011, all FIT suppliers who are able to demonstrate a completed domestic content plan and a manufacturing equipment agreement, and all FIT suppliers who do not require a domestic content plan, may request a waiver of the OPA's termination rights under section 2.4(a) of the FIT contract. FIT suppliers of PV or wind renewable fuel must submit additional information to the OPA within the prescribed timeframe. Different requirements and deadlines apply to capacity allocation required (CAR) suppliers and capacity allocation exempt (CAE) suppliers. In both cases, the termination provision is automatically reinstated if the applications are not received before the deadline.

As a result of this change, if a termination waiver is granted to a supplier, any subsequent termination by the OPA in the absence of a supplier default is subject to the ordinary rules of contract. In his directive to the OPA, Minister Duguid stated that this change is designed to eliminate the risk undertaken by suppliers and strengthen the financing and purchasing of equipment from Ontario manufacturers (to view the Minister's direction, click here). Suppliers are still required to submit a financing plan, connection impact assessment, and obtain all regulatory approvals before proceeding to the construction stage.

This new directive has the potential to enable suppliers to obtain waivers to protect up to 1,800 projects currently in the pre-NTP contract stage (representing 3,500 MW of potential generating capacity) from possible termination under section 2.4(a) of the FIT contracts (to view an article about the directive, click here). While the waivers would not eliminate the possibility of FIT contracts being terminated by the OPA, the change removes the contractual right of the OPA to terminate the contracts for convenience and the limitation on the amount of costs that the supplier would be able to seek to recover in such event. The threat of termination has become an increasing concern to suppliers as the leader of the Ontario Progressive Conservative Party has threatened to cancel the FIT program if his party wins power in the October 6, 2011 provincial election.

While the August 2 announcement has outlined the principal terms of the change, a number of matters such as the timing and process remain to be detailed. The OPA will be hosting a web-enabled teleconference to discuss the process for obtaining a termination waiver and to answer questions. The teleconference will take place on Tuesday, August 9, 2011 at 2 p.m. Eastern Standard Time. To participate in the teleconference to listen to the session and view the presentation, click here.

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