Canada: Energy @ Gowlings: April 20, 2012 - Volume 10, Number 6

In this issue:

• Ontario Publishes Draft FIT 2.0 Rules, Contracts and Definitions

ONTARIO PUBLISHES DRAFT FIT 2.0 RULES, CONTRACTS AND DEFINITIONS

By: Thomas J. Timmins, Bruce Smith, Danielle Waldman, Lisa MacDonnell, Max Muñoz and Michael Martinez

A. Introduction

On April 6, 2012 the Ontario Power Authority (the "OPA") published the draft Rules, contract forms and definitions for the revised and updated Feed-in Tariff ("FIT") Program, based on the recommendations released by the Ontario Ministry of Energy on March 22, 2012 and the Ministerial Directive issued by the Ontario Ministry of Energy on April 5, 2012 (the "Directive"). (See: "A Step Forward on Solar: Ontario Government Publishes FIT 2.0 Recommendations")

There are a number of significant changes that are proposed pertaining to both the FIT Program and the microFIT Program arising from the Ontario Ministry of Energy's recommendations, and from a number of drafting changes that have been made in the FIT and microFIT Rules and contract forms. This article summarizes some of the more important details and provides some commentary with respect to the law applicable to the proposed revision of the FIT Program. Copies of the report of the Ministry of Energy, the Ministerial Directive, and the draft FIT ("proposed FIT Rules") and microFIT Rules ("Proposed microFIT Rules") and contract forms ("proposed FIT Contract") ("Proposed microFIT Contract") can be found on the OPA and Ontario Ministry of Energy websites.

Readers should note that the comment period with regard to the proposed changes to the FIT and microFIT Programs closes on April 27, 2012.

B. Overview

The release of the report of the Ontario Ministry of Energy on March 22, 2012 (the "Report") was seen as a positive step by most industry participants. In it, Ontario's continuing commitment to the development of renewable energy resources, and the technologies relating to that industry, were clearly set out; however, the desire of the Ontario government to take a more directive approach to renewable power procurement was made apparent. This policy makes sense in the context of the fact that Ontario's goal of procuring 10,700 megawatts of renewable energy, set out in Ontario's Long-term Energy Plan, has almost been achieved. Ontario has now clearly entered the build-out phase of its latest round of renewable energy procurement.

As a result, under the revised FIT Program, no changes were made to the domestic content requirements of the original FIT Program. However, there are enhanced discretionary contract termination rights for the OPA, a revised approach to prioritizing new FIT applications, and significant limitations on the locations where projects can be built. In addition, renewed emphasis on municipal council engagement has been demonstrated and, in attempt to streamline the burden, some Renewable Energy Approval ("REA") processes have been proposed. Finally, as predicted, the prices offered for renewable energy have been generally, but not entirely, lowered.

The following table sets out the current and proposed prices applicable to FIT and microFIT projects together with the per cent change from the original FIT Program prices made available in 2009:

C. Proposed Changes to the FIT Program

(i) FIT Rules

Enhanced Screening Process: The proposed Rules will institute a more vigorous screening process to ensure that sufficient transmission and distribution availability exists for a specific proposed project, as well as in respect of the FIT Program generally during a particular application period. If the application does not pass this screening, the application will be terminated and the applicant may re-apply at a later date.

More Closely Defined Procurement Limits: The OPA will have the ability to set discretionary limits on the issuance of FIT Contract offer notices for specified categories of renewable energy projects. The OPA will continue to announce application periods for the FIT Program but may now specify the FIT project types that may be the subject of an application during such periods, thereby giving the OPA greater control over the flow of FIT applications to be received and processed.

(ii) Evaluation Process

Under the proposed Rules, FIT applications will be evaluated in four steps:

Step 1 – Analysis of Completeness: This is a pass/fail process based on the application requirements specified by the OPA. Subsequent to application submission, unless requested to do so by the OPA, applicants will not be permitted to make corrective submissions.

Step 2 – General Eligibility Analysis: The basic eligibility requirements of the FIT Program remain unchanged; however, certain types of projects are no longer eligible for the program, including incremental projects and behind-the-meter projects. In addition, proposed land use planning threshold requirements have now been added to the program, requiring certain applicants to provide a written opinion from a land use planner or certification from municipal authorities that local land use planning and zoning restrictions have been complied with. In addition, because the OPA has now also instituted a system to grade the applications, in order to qualify as an eligible program all applicants must have received at least one point (see further discussion below).

Step 3 – Ranking by Prioritization and then by Time Stamp: Assuming that basic application completeness and eligibility requirements have been met under the proposed FIT Rules, FIT applicants will then be ranked based upon the number of "priority points" and their time stamp received upon application submission.

Priority points will be awarded by the OPA based on "project type" and "non-project type." Project type points may not be combined, but certain non-project type points may be combined with project type points in limited circumstances. The priority points that may be awarded are:

(Note that these criteria are terms of art with specific meanings assigned to them in the FIT Rules and Definitions.)

Step 4 – Connection Availability and Procurement Limits: Applications will be assessed, in order of rank, under the Transmission Availability Test ("TAT") and the Distribution Availability Test ("DAT"), as applicable, and a FIT Contract will be issued if the project passes the TAT and, if applicable, the DAT, where sufficient availability remains within the applicable procurement limits. If a project does not appear in the list on the OPA's website for applications that will be issued FIT Contracts upon completion of the TAT and DAT, as applicable, the application is automatically terminated and will not be offered a FIT Contract. 

Pricing: The pricing applicable to a project will be the price posted on the date of publication of the list of offered FIT Contracts by the OPA. The proposed FIT Rules continue to provide that the pricing applicable to previously executed FIT Contracts will not be affected by any revisions to the price schedule. 

Domestic Content: As mentioned above, the domestic content requirements have not be altered under the proposed FIT Rules and proposed FIT Contract changes.

Land Use Restrictions: There have been several detailed technical changes proposed by the OPA in the proposed FIT Rules; for example, with respect to the class of lands that a non-rooftop solar (PV) project may be constructed upon, the distance between connection points,  and the contract capacity and nameplate capacity of certain projects. 

Termination Rights: Most importantly, the proposed FIT Rules also indicate that the OPA may terminate an application upon notice to the applicant, at any time following the receipt of the application. Any such decision to terminate by the OPA will be final and binding upon the applicant, and not subject to appeal or judicial review.

(iii) FIT Contract Changes

The amendments made to the FIT Contract in connection with FIT 2.0 implement the policy changes described in the FIT Review and also include a number of drafting corrections and "housekeeping" items, including:

• Facility Amendments: Previously, the OPA was not permitted to unreasonably withhold its consent to an amendment or change to a Project. This provision has been amended to provide that the OPA's consent may be withheld in its sole and absolute discretion.
• Over-Capacity Restriction: Solar facilities must be designed such that neither the sum of the manufacturer's capacity ratings (in DC kW) for normal operation of the installed solar modules of the facility, nor the sum of the manufacturer's capacity ratings (in AC kW) for normal operation of the installed inverters of the facility, are greater than 120 per cent of the contract capacity. In other words, over-design to maximize output and anticipate panel degradation over time will no longer be permissible. This means that sub-optimal locations may no longer be economically viable and it reduces income potential for most developers. 
• Connection Impact Assessments: Applicants are no longer eligible to apply for a connection impact assessment in respect of a project until a FIT Contract has been awarded and entered into between the supplier and the OPA. 
• Termination and Stop-Work: Until the OPA has issued a Notice to Proceed, and in addition to terminating the FIT Contract, the OPA will be entitled to issue a stop-work direction, which will require the supplier to permanently cease development and construction of the facility.
• Milestone Date for Commercial Operation: Where commercial operation has not been achieved by the milestone date for commercial operation, suppliers may be required to pay $0.25 per kW multiplied by the contract capacity for each day after the milestone date until commercial operation has been achieved. 
• Termination for Convenience: Subsequent to issuing a Notice to Proceed, the OPA may terminate a FIT Contract in its sole and absolute discretion by providing 20 business days' notice to the supplier. This represents a significant change to the FIT contract, which is likely to be unacceptable to prospective financiers.
• Aboriginal Participation Projects: For a project to qualify as an aboriginal participation project, the aboriginal participation level in respect of the project must now be 15 per cent or more. In addition, the aboriginal price adder will only apply to a project that is an aboriginal participation project as at the commercial operation date.
• Community Participation Projects: For a project to qualify as a community participation project, the community participation level in respect of the project must now be 15 per cent or more. The community price adder will only apply to a project that is a community participation project as at the commercial operation date. In addition, as at the commercial operation date and on or before each anniversary during the term, the supplier must certify to the OPA that, in the case of a large FIT facility, it has had at least 50 qualifying members or, in the case of a small FIT facility, it has had at least 35 qualifying members during the period.
• Price Adder: Under the proposed Rule changes, where, during the term of the FIT Contract, the participation level for either a community participation project or an aboriginal participation project decreases to below or equal to 50 per cent, but above 15 per cent, the supplier will no longer be entitled to receive the applicable price adder for projects with a participation level greater than 50 per cent, but will be entitled to receive the applicable price adder (15-50 per cent).
• The following technology-specific milestone provisions will be significant to some industry participants, including, in particular, the reduced timelines for project construction after the FIT Contract has been entered into:
  
  

  Renewable Fuel	Milestone Date for Commercial Operation	NTP Response Date	Initial Security
  Biogas	Three years following the contract date	15 months following the contract date	$20.00 per kW of contract capacity
  Biogas (On-Farm)	Three years following the contract date	15 months following the contract date	$20.00 per kW of contract capacity
  Landfill Gas	Three years following the contract date	15 months following the contract date	$20.00 per kW of contract capacity
  Renewable Biomass	Three years following the contract date	15 months following the contract date	$20.00 per kW of contract capacity
  Rooftop Solar	18 months following the contract date	15 months following the contract date	$50.00 per kW of contract capacity
  Solar (PV) Non-Rooftop	Three years following the contract date	15 months following the contract date	$50.00 per kW of contract capacity
  Waterpower	Five years following the contract date	24 months following the contract date	$20.00 per kW of contract capacity
  On-Shore Wind	Three years following the contract date	15 months following the contract date	$20.00 per kW of contract capacity

  
  
  

(iv) Restrictions on Assignment of FIT Contracts and Change of Control

A significant change in the proposed FIT Rules is the more comprehensive restriction on assignment which no longer allows applicants to either assign FIT applications to any other person or permit changes of control. Where such events occur, the OPA is permitted to retain the application security as liquidated damages. This constitutes a fundamental change to the FIT Program as, despite the wording of the previous version of the FIT Rules, the OPA had permitted the changes of control at the application stage where the application had not received a FIT Contract at any time after one year from the date the application was submitted.

(v) What To Do With Existing FIT Applications?

Parties with FIT applications that were submitted by April 5, 2012 will be permitted to re-submit their applications to the OPA pursuant to FIT 2.0 as follows:

1. during the first period for applications opened by the OPA for small FIT projects (whether the project in question falls within the definition of a small FIT project or is a large FIT project that is restructured to become a small FIT project); or
2. during the first application period for large FIT projects opened by the OPA if the project in question is and remains a large FIT project.

("Small FIT projects" and "large FIT projects" are new defined terms under the new program definitions.)

Pursuant to the proposed FIT Rules, no details or evidence pertaining to pre-existing applications that had been previously submitted to the OPA may be considered in the renewal process for applications. The proposed FIT Rules state that the OPA will return or cancel any existing application security or deposit; however, the FIT Rules do not specify timelines, meaning that there is a theoretical potential for double security deposits to be required for a period of time unless this matter of timing is proactively managed.

D. Changes to the microFIT Rules

(i) Changes to the microFIT Rules

1. Transition Rights for Existing Applicants - Under the Proposed microFIT Rules, microFIT applications ("Applications") submitted on September 1, 2011 or later will be required to comply with the Proposed microFIT Rules. Applicants will be provided with a period of time to revise their Application to comply with the Proposed microFIT Rules.
2. Changes to the microFIT Program Process
   
   
   1. Under the Proposed microFIT Rules, the OPA will now limit the number of microFIT Applications that it approves annually according to an "Annual Procurement Limit." An Application that is not approved in the year in which it was submitted will be terminated and the applicant will need to re-apply in the following year.
   2. The term "Conditional Offer" has been replaced under the microFIT Rules with "Application Approval Notice".
   3. Once an Application has been approved, the Applicant must install its microFIT Project and obtain Electricity Safety Authority Connection Authorization within 180 days of the issuance of the Application Approval Notice, failing which the Application will be terminated.
      
      
3. Solar (PV) Minimum Required Domestic Content Level - Pursuant to the Directive, the Proposed microFIT Contract will continue to require that microFIT projects achieve domestic content levels of 60 per cent.
4. Changes to the Basic Eligibility Requirements
   
   
   1. Where more than one entity holds title to or leases the property on which the Facility is proposed to be located, all those entities must qualify as Eligible Participants (a concept introduced during the 2010 revisions to the program) and must collectively submit an Application for the microFIT project.
   2. Individuals (as defined) may now only have one active microFIT project and are not permitted to have multiple Applications active at one time, regardless of whether or not the project or Application is in respect of separate properties.
   3. Proposed microFIT projects may now not be located on the same property that a FIT project using the same renewable fuel is, or is proposed to be, located.
   4. New land-use restrictions preventing the construction of facilities on residential, commercial and industrial lands are proposed to limit development in specific areas of the province.
   5. Non-compliance with Eligibility Requirements - If the OPA determines that a microFIT project described as a Rooftop Solar Facility in an Application is not in fact a Rooftop Solar Facility, the OPA will terminate the Application or microFIT Contract in respect of such project at any time.
      
      

(ii) Changes to the microFIT Contract

1. New Supplier Representations and Warranties -  Two new supplier representations and warranties have been added to the Proposed microFIT Contract:
   
   
   1. The supplier must now represent and warrant to the OPA that the Facility was physically connected to the LDC's distribution system with suitable metering configurations appropriate for the calculation of Generation Payments on or before the Contract Commencement Date.
   2. The supplier must now also represent and warrant to the OPA that the Facility has not been separated or split from other projects that have, or are applying to have, a contract under the microFIT Program or the FIT Program.
      
      
2. New Supplier Covenants -  Two new supplier covenants have been added under the Proposed microFIT Contract:
   
   
   1. In connection with the Facility Characteristics, the supplier will now be required to undertake not to modify the Facility to increase the Nameplate Capacity of the Facility to exceed 10 kW.
   2. In addition, for solar projects, the supplier will now be required to undertake not to modify the inverter rating for the Facility or the solar array rating for the Facility from specified ratings.
      
      

(iii) Restrictions on Assignment of microFIT Contracts

The assignment of microFIT Contracts before or after commercial operation continues to be restricted with the additional restriction now added to the Proposed microFIT Contract that a supplier may not, under any circumstances, assign anything less than all of its rights and obligations relating to a microFIT contact pursuant to the revised Rules.

(iv) Options for Constrained microFIT Projects

As a result of the positive response to the Ontario microFIT Program, many projects are currently unable to connect to the distribution grid, pending review by Hydro One of its engineering specifications with respect to solar projects. In the interim, the OPA has been directed to permit certain microFIT projects to be relocated. Pursuant to the draft documentation published by the OPA with regard to constrained projects, new restrictions with respect to the assignment or relocation of projects have now been added, including: (a) a requirement for zoning certification for constrained microFIT projects (not contemplated in the contracts entered into by microFIT developers), and (b) a proviso that, once microFIT projects have been relocated, the proposed new form of microFIT Contract must be entered into – a form that restricts assignment and changes of control (restrictions that were not included in previous versions of the microFIT contracts). We continue to seek further clarification from the OPA in regard to these changes.

E. Procurement Law Commentary

For existing FIT contracts, the draft Rules confirm that reduced prices will not affect FIT contracts previously executed. Nothing in the new FIT program seeks to override the terms of existing contracts. However, the benefits of those contracts can be lost if suppliers permit an event of default to occur. Upon default, the OPA may terminate the contract. If that occurs, subsequent applications would have to be submitted subject to the reduced prices and greater restrictions required by the draft FIT Rules. 

For pre-existing applications for FIT projects, the new draft Rules provide that all such applications will be terminated, and the OPA will return all fees paid and security posted. Further, the draft Rules state that all terminations are final and conclusive, with no right of appeal or judicial review. A pre-existing applicant may submit a new application, subject, however, to the less attractive pricing and restrictions of the draft Rules.   

These changes have created serious concerns for many pre-existing applicants who face significant financial loss upon termination, particularly where a re-submission under the new draft FIT Rules would be uneconomical, prohibited or unlikely to succeed. 

We expect that the OPA will oppose pre-contract claims by pleading that they are excluded by the provisions of the FIT Rules. That position has not been tested in court.

Similarly, our courts have not addressed whether the OPA is entitled to terminate existing FIT applications without appeals or judicial review. The key question is whether termination exceeds the authority given to the OPA by directive from the Minister of Energy, or whether the Minister has exceeded his own statutory powers. If that has occurred, our courts retain jurisdiction to intervene and will not be bound by provisions in the draft Rules that seek to deny a right of appeal or judicial review.    

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.