Canada: Energy @ Gowlings December 5, 2011 - Volume 9, Number 8

Last Updated: December 8 2011
Article by Ethan Sinclair, Amanda Cohen, Neeta Sahadev and Thomas J. Timmins

Edited by Paul Harricks

TRANSCANADA'S KEYSTONE XL PIPELINE: AN UPDATE

By: Ethan Sinclair

BACKGROUND

The Keystone XL Project (the "Project") proposed by TransCanada Corporation ("TransCanada") is centre- stage in the effort of Canada's oil and gas industry to expand export access to foreign markets.  The Project would have the capacity to deliver up to 830,000 barrels per day ("bpd") of diluted bitumen from Hardisty, Alberta through Cushing, Oklahoma to Houston and Port Arthur, Texas. TransCanada has received the necessary approvals for the Project from Canada's National Energy Board, but approval from the U.S. Department of State ("DOS"), in the form of a Presidential Permit, to build and operate the Project has been significantly delayed, in large part due to public concerns relating to potential environmental impacts of the Project. To date, the response to the Project in Washington is mixed, with various American lawmakers voicing strong support on economic grounds, and others voicing vociferous opposition to the project primarily on environmental grounds. 

On August 26, 2011, after 36 months of regulatory review and consultation with eight federal agencies and the public, the DOS released its Final Environmental Impact Statement ("EIS") on the Project. It  was 9 volumes and over 1000 pages in length. The DOS, in consultation with the Pipeline and Hazardous Materials Safety Administration, determined that (a) incorporation of the 57 special conditions with which TransCanada has agreed to conform would result in a project with "a degree of safety greater than any typically constructed U.S. domestic oil pipeline system," and (b) the pipeline would have no significant impact on most natural resources along the proposed route.

The EIS also considered the need to secure sources of crude for refineries in the Gulf of Mexico, and determined that the Project was a preferable option to either (i) alternative transportation methods to move bitumen from Northern Alberta to the Gulf Coast, or (ii) sourcing hydrocarbon feedstock from other jurisdictions that are less secure, less reliable, and which are generally experiencing declining production, including the Middle East, Africa, Mexico and South America.  The EIS states that "As a result of these considerations, DOS does not regard the No Action Alternative (i.e. that the Project not be built) to be preferable to the proposed Project." 

Although the EIS clearly favoured development of the Project, that alone is not a final determination of the issue. The DOS was required to decide whether the Project is in the public interest by late November, following which a decision on issuance of a Presidential Permit was expected by year-end.  However, early in November, in response to public concern that a  Project pipeline breach could seriously damage the vast Ogallala aquifer in Nebraska, and apparently to delay the contentious decision on the issuance of a Presidential Permit until after the 2012 presidential election, the DOS requested that TransCanada propose an alternate route around the aquifer. The EIS had already considered five alternative routes for the Project and found that all five would have worse or similar environmental impacts. TransCanada responded quickly and within days had secured an agreement with the Nebraska state government, which has since passed legislation approving the rerouting of the Project around the Ogallala aquifer, and approving funding for a further environmental study of the proposed alternate route.

LATEST DEVELOPMENTS

TransCanada remains confident that the Project will ultimately be developed.  All pipeline and pump station materials have been procured, and TransCanada has completed 99% of the necessary easement acquisitions in Canada and 92% of the easement acquisitions required in the U.S.

ENBRIDGE INITIATIVES

In addition to TransCanada's Keystone initiative, Enbridge Inc. ("Enbridge") is forging ahead with its own plans to transport Canadian hydrocarbons through the current bottleneck at Cushing, Oklahoma to the Gulf Coast.  In September, Enbridge announced plans to develop its Wrangler pipeline (800,000 bpd) which would run from Cushing to the Gulf Coast.  While Enbridge has yet to file a regulatory application for this project, it is currently assessing market interest and suggests that the project could be operational by mid-2013.  Enbridge also announced in November that it has purchased from ConocoPhillips a 50% interest in the Seaway Pipeline currently running from the Gulf Coast to Cushing.  Enbridge and its partner, Enterprise Products Partners, have stated their intention to reverse the flow of the Seaway Pipeline to carry a capacity of up to 400,000 bpd of diluted bitumen from Cushing to the Gulf Coast.

CONCLUSION

There is little doubt that Canada's oil sands will play an increasingly important role in U.S. energy security. To effectively undertake that role will require improved access of Canadian bitumen and heavy crude to U.S. refineries on the Gulf Coast.  It is uncertain how quickly the DOS will undertake further assessment of a proposed alternate Project route.  Should TransCanada be denied a Presidential Permit, the Enbridge initiatives, together with initiatives to expand Canadian hydrocarbon access to Asian markets via Canada's west coast, will become increasingly important to the continued expansion of Canada's oil sands industry.

GOWLINGS UPDATE ON ONTARIO'S FEED-IN TARIFF (DECEMBER 2011)
By: Thomas J. Timmins, Amanda Cohen and Neeta Sahadev

In the fall of 2009, the government of Ontario enacted the Green Energy and Green Economy Act, 2009 (the "Green Energy Act") with the dual objectives of sponsoring the development of renewable energy generating capacity within the Province and simultaneously facilitating the development of Ontario's "green" economy.

Ontario's Feed-in Tariff program (the "FIT") was ground-breaking for Canada, representing a rare suite of new business opportunities for companies to become involved in the development of Ontario's generation, transmission and distribution systems at the ground level. 

Since 2009, the FIT Program has evolved –undergoing substantial changes as regulators have assessed market response, worked through operational challenges and improved the legal wording of the original program document set.  

FIT Program Highlights

In 2009, the Ontario Power Authority (the "OPA") was granted the authority to create the FIT program.  Since the program began, over 2,500 FIT projects and 11,000 microFIT projects have been offered contracts.

To be eligible to participate in the FIT program, proposed generating facilities must (i) be generating electricity from one or more renewable sources and delivering that electricity through a meter, (ii) be located in the Province of Ontario, (iii) in the case of solar (PV) projects that are not rooftop facilities and have a contract capacity greater than 100 kW, not be located on certain agricultural classes of land, (iv) in the case of  capacity allocation exempt facilities, be deemed by the OPA to be capable of connecting at the proposed connection point, (v) not be an existing generating facility (although some limited exceptions apply for upgrades and expansions), and (vi) not have had a power purchase agreement in respect of the facility.  

Grid Capacity and the Economic Connection Test

Upon acceptance of a FIT application, the OPA will determine whether the applicable transmission or distribution system has, or will have, sufficient connection resources to accommodate the connection.  If there are sufficient system resources to accommodate the connection, a FIT Contract will be awarded.  If there are approved plans to accommodate the connection of the project, but such resources will not be in service prior to the milestone date for commercial operation, the project applicant will be added to the production line.  If there are no such distribution resources, actual or planned, the applicant will be subjected to an economic connection test and added to the "ECT pool".  The economic connection tests were to be run at least every six months for each region of the province but there have been substantial delays.

The FIT Contract

Under the terms of the FIT Contract, project developers are required to provide evidence that they own or hold sufficient lease or easement rights to the lands on which generating facilities are located for at least the term of the FIT Contract itself (20-40 years depending on the type of project).  In many cases this evidence takes the form of a fully developed lease or easement agreement.  In other instances, site-acquisition options are proffered. 

Domestic Content Obligations

In addition to establishing project construction timelines, detailed power delivery obligations and pricing models, the FIT Contract also requires solar facilities and certain wind facilities to achieve a minimum percentage of domestic content.  The percentages are as follows:

Wind Projects over 10 kW

Minimum Domestic Content Level

Year of Commercial Operation

25%

2009 – 2011

50%

2012 and later

Solar PV Projects over 10 kW and less than or equal to 10,000 kW

Minimum Domestic Content Level

Year of Commercial Operation

40%

2009 – 2010

60%

2011 and later



Where 10% or more of the equity in a project is held by an aboriginal community, that project may be eligible to have an amount added to the price payable by the OPA pursuant to the terms of the FIT Contract.  Similarly, projects with substantial ownership by individuals resident in Ontario, a registered charity, a not-for-profit organization or a co-operative corporation may also be eligible to receive the $0.01/KWh Community Price Adder for wind and solar projects. 

There are no residency requirements for applicants (other than with respect to the price-adder for aboriginal and the Community Price Adder discussed above). 

Opportunities with Government Entities

The Green Energy Act requires the Environmental Commissioner to provide yearly reports on both energy conservation and greenhouse gas emission reductions in Ontario.  The report on energy conservation is required to cover Ontario's initiatives over the last year and describe the progress made to meet targets, reduce consumption, and increase efficiency. The Environmental Commissioner is also charged with identifying barriers to the development and implementation of conservation measures.  It is worth noting that the Green Energy Act mandates that the government of Ontario be guided by certain principles in the construction, acquisition, operation and management of government facilities.  Government will be required to have knowledge of greenhouse gas emissions associated with its facilities and  ensure energy efficiency, environmentally and financially sound investments, and use of renewable energy sources. As a result of these requirements, substantial new opportunities will exist to provide products and services to the Ontario government and its various agencies. 

Recent Changes Made to the FIT and microFIT Programs (December 2011)

Waiver of Termination Rights – August 2, 2011

Unless waived, the OPA's unilateral right to terminate the FIT Contract expires upon the issuance of a notice to proceed with project construction. 

In August of 2011, FIT contract holders were given an opportunity to have the OPA's termination rights under section 2.3(a) of the FIT Contract waived.  If the Supplier's renewable fuel was solar or wind power, the waiver would have terminated if a Supplier failed to submit a Domestic Content Plan (specifying local content obligations under the FIT Program) to the OPA by November 30, 2011.

Extension for Commercial Operation Dates – February 9, 2011

The difficulty in obtaining a renewable energy approval also led to the OPA offering to amend contracts of all FIT counterparties who have yet to reach commercial operation.  Throughout February and March of 2011, the OPA contacted FIT suppliers regarding the execution of an amending agreement to extend their milestone date for commercial operation by up to one year.  Suppliers were required to surrender certain Force Majeure claims and rights in order to benefit from the extension.

Rule Change for Capacity Allocation Exempt Applications – February 9, 2011

On February 9, 2011, the OPA indicated that FIT Applicants who submitted their capacity-allocation exempt FIT applications on or after December 8, 2010, would be required to obtain a Connection Impact Assessment from their local distribution company ("LDC") once a contract is issued.  The assessment will determine the impact of the project on the electricity system and provide details on the cost and time involved in connecting the project. 

microFIT – Requirement for Grid Capacity – February 9, 2011

In February of 2011, the OPA made a rule change requiring  all microFIT Applicants who submitted their applications on or after December 8, 2010, to request and receive an offer to connect from the applicable LDC before a conditional offer is issued.  Under the amended microFIT Rules, the OPA is required to notify the applicant of this obligation after completing  its review of eligibility requirements. 

Constrained microFIT Applicants – August 19, 2011

Pursuant to a direction by the Minister of Energy on August 19, 2011, upon written notice to the OPA, microFIT Applicants that have been unable to connect their project ("Constrained Applicants") will be given an option to relocate their project to another location in Ontario.  The directive also applies to Constrained Applicants with up to 50 constrained projects with a combined nameplate generation capacity of no more than 500 kW. 

Constrained Applicants will also be given the option to assign their conditional offers to other Constrained Applicants so long as those parties are Eligible Participants under the microFIT Eligible Participant Schedule. MicroFIT industry participants await the issuance of detailed rules and guidelines by the OPA at this time.

FIT and microFIT Program Review – October 31, 2011

The FIT and microFIT programs are currently undergoing their two-year review pursuant to the FIT and microFIT Rules.  This review will consider the following:

  • FIT and microFIT price reduction;
  • ensuring the long-term sustainability of clean energy procurement;
  • continuing to build on the success of Ontario-based manufacturing and clean energy job creation;
  • consideration of new technologies and fuel sources; and
  • local consultations and the renewable approval process.

The review period began on October 31, 2011, and will run until December 14, 2011.

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.

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