The Ontario Power Authority issued
draft FIT program rules,
draft definitions and a
draft FIT contract for stakeholder comment on April 5, 2012.
Information on submitting comments on these "FIT 2.0"
documents is available on the
OPA's website. Comments are due by April 27, 2012. A
ministerial directive to the OPA concerning the FIT program was
issued the same day.
Lenders should be aware of some important differences in the terms
of the current FIT program and the proposed FIT 2.0. As well, the
changes to the program will affect the types of projects that are
most likely to move forward and therefore the types of projects
lenders will be asked to finance.
Projects with aboriginal or municipal council support will be
prioritized, as will those with equity participation from
aboriginals, local community members, public schools, colleges,
universities, hospitals and long term care facilities. Contracts
will be awarded in batches, with the first batches to be for
microFIT and small FIT projects. It is unclear when the next round
of large FIT contracts will be offered. In addition, opportunities
for ground-mount solar projects are limited, due to additional
restrictions on siting these types of projects. Taken as a whole,
the effect will be that projects receiving FIT 2.0 contracts will
by their nature tend to present additional challenges for
lenders.
Specific issues for lenders to consider under the draft FIT
documents are discussed below.
Curtailment
It is important to note that one significant issue for lenders
is not addressed in the draft FIT contract. The draft contains a
note to the effect that the protective provisions in the current
FIT contract dealing with changes to electricity market rules by
the Independent Electricity System Operator will be amended in
conjunction with the IESO's current renewable integration
initiative (SE-91). Lenders will need to wait for further progress
on the IESO front before they will be able to understand the
potential economic risks to a FIT 2.0 project resulting from
curtailment
Changes to Facility
Under the existing FIT contract, the OPA was not permitted to
unreasonably withhold consent to material changes to a facility.
The new FIT contract allows the OPA to withhold consent for
material changes to a facility in its sole and absolute discretion.
This may limit an electricity supplier's ability to change the
connection point, feeder, transformer, site location, design or
layout of the project after the application is made. Lenders will
need to pay even greater attention to their technical diligence to
ensure there is unlikely to be any need for changes to the facility
after financial close.
Liquidated Damages for late COD
The new FIT contract requires all electricity suppliers to pay
liquidated damages of $0.25/kW multiplied by the contract capacity
of the facility for each day of delay in achieving commercial
operation beyond the Milestone Date for Commercial Operation
specified in the contract. (This only applies to a limited subset
of projects under the existing FIT contract.)
Like the existing FIT contract, the twenty year term (forty years
for hydro) of the new FIT contract commences on the Milestone Date
for Commercial Operation even if commercial operation has not been
achieved by that date. However, under the new contract the right of
the supplier to "buy back" the truncated portion of the
term has been eliminated. The term may now only be extended at the
option of the OPA. Lenders will want to give careful consideration
to the possible impact of these new provisions on project economics
in the case of delays to commercial operation, and consider whether
risk mitigants such as additional reserves are required as a
result. This issue is likely to be of particular concern for
lenders to rooftop solar projects, which will have eighteen months
to reach commercial operation under the new FIT contract (in
contrast to three years under the existing contract).
Domestic Content
The current FIT contract requires the OPA to respond within 60
days of its receipt of a domestic content report; however, the new
draft proposes only a "reasonable" time period. The draft
provides that the electricity supplier and the OPA will cooperate
to finalize the domestic content report "within a reasonable
time period" if the OPA finds the domestic content report
deficient following its initial submission while the existing FIT
contract provides the supplier with 30 days to respond to
deficiencies and gives the OPA an additional 30 days to review
those responses. Lenders were already uncomfortable with the
post-COD nature of the domestic content report, so the lack of firm
time lines is likely to add to this discomfort.
Termination for Convenience/Stop Work Direction
The existing FIT contract permits the OPA to terminate the
contract prior to obtaining Notice to Proceed (though this right
was waived by the OPA in many cases). Since receipt of Notice to
Proceed is typically a condition precedent to financial close, this
is not an issue of concern on a typical project loan transaction
(although it may of relevance on portfolio level financings,
depending on the conditions precedent for each draw).
The new FIT contract introduces a right for the OPA to terminate
the FIT contract for convenience on 20 days' notice even after
the issuance of Notice to Proceed. If the OPA exercises this
termination right, the supplier is entitled to return of its
completion and performance security, and payment of accrued amounts
owing to it under the contract, plus its "Sunk Costs"
(defined as the reasonably incurred costs to develop, construct and
commission the facility) and the net present value of the
supplier's anticipated profits during the term.
Of even greater concern, the new FIT contract introduces a right
for the OPA to issue a "Stop Work Direction". This
direction requires the supplier to permanently cease development
and construction of the facility. Although one section of the new
draft expressly entitles the OPA to issue this direction prior to
issuing Notice to Proceed, in another section there is no time
limitation. As such, it appears the OPA would also have the right
to issue a Stop Work Direction after Notice to Proceed (or possibly
even after COD, since it is unclear when "development and
construction" is complete). Under the current drafting, it is
also unclear whether the supplier is entitled to any compensation
if it receives a Stop Work Direction.
In addition to the risk of not receiving compensation sufficient
to pay out their loans, lenders will also want to consider what
rights they will require vis-à-vis the supplier if a
termination notice or Stop Work Direction is issued. For example,
the FIT contract specifies a process to determine the amount of
compensation payable to the supplier for termination for
convenience by the OPA. Lenders are unlikely to want to sit on the
sidelines and leave such an important issue to be determined
without their input and involvement.
Force Majeure
The force majeure provisions in the new FIT contract are less
supplier-friendly than those in the current contract. Specifically,
a supplier will not be able to invoke force majeure to the extent
that the event was within the reasonable control of the supplier or
resulted from a failure of performance of a third party (unless the
failure of performance of the third party was itself caused by a
force majeure event as defined in the new contract). As well, if
requested by the OPA, the supplier must provide evidence to
demonstrate that it has made commercially reasonable efforts to
remedy the force majeure situation and must represent and warrant
that such evidence is complete and not misleading. Lenders are
likely to focus on this issue most closely during the pre-COD
period, particularly given the shorter milestone dates for rooftop
solar discussed above.
Lender's Rights
A few changes have been made to the "Lender's
Rights" section of the contract.
First, the draft FIT contract now permits lender's security
agreements to cover assets and to secure debt relating not just to
renewable generating facilities owned by the supplier, but also to
those owned by affiliates of the supplier. This should generally
facilitate cross-collateralization and portfolio-wide financings.
However, microFIT facilities are not permitted to be included in
multi-facility security agreements (although it is rare that a
microFIT facility would be included in a portfolio given the
restrictions imposed in that program). Also, a requirement has been
added that the other renewable energy facilities included in the
security agreements must be the subject of a contract with the OPA.
This will make it more difficult to use projects in earlier stages
of development as collateral for the financing of contracted
facilities, and vice versa.
Second, while the current FIT contract includes the form of
consent and acknowledgement agreement that the OPA will enter into
with the lender, the draft contract refers only to an agreement
"in the Prescribed Form". We believe the likely
explanation for this change is that in some cases suppliers and
lenders have entered into an out-of-date version of the agreement
based on the form attached to the FIT contract, rather than using
the version available on the OPA website, which has undergone some
changes. Detaching the form of agreement from the FIT contract will
eliminate this problem. However, given the crucial nature of the
consent and acknowledgement from a lender perspective, it would
have been helpful either to see the proposed new form or to get
confirmation that the current form will continue to be used under
the new FIT contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
