Edited by Paul H. Harricks

A Step Forward on Solar: Ontario Government Publishes FIT 2.0 Recommendations

On March 22, Ontario's Ministry of Energy announced its recommendations, developed after the completion of the comprehensive review of the Ontario Feed-in Tariff (FIT) Program. It ended a long period of uncertainty in Ontario's renewable energy industry which began in 2011 when the province's commitment to environmentally sustainable forms of electricity generation became one of the key issues in the provincial elections.  The formal review process began last October.

FIT Program Background

In 2009, the Ontario government enacted the Green Energy and Green Economy Act, 2009 (Green Energy Act) with the dual objectives of sponsoring the development of quite substantial renewable energy generating capacity within the province and simultaneously facilitating Ontario's economic recovery from the recession of 2008/2009.  Under the Green Energy Act, the Feed-in Tariff Program was promulgated.

As part of the initial FIT Program, attractive pricing was given for solar (rooftop, ground mount, commercial scale and residential scale), wind, hydro and bioenergy projects.  With stable power purchase contract terms of 20 to 40 years, price inflation escalation, community input price adders, and a highly credit-worthy offtake partner (the OPA, solely owned by the Ontario government), Ontario's FIT Program attracted substantial interest and participation from investors around the world.  

(Unlike other jurisdictions around the world, there are relatively few grants, incentives or initiatives that exist to encourage Canadian businesses to focus on creating "green" jobs or generating renewable energy.  In particular, there are no existing grant structures in place at the federal level for renewable energy generation.)

In addition to the contract arrangements under the FIT Program, the Green Energy Act also contained major changes to Ontario's electricity sector and governing laws.  In particular, the Green Energy Act:

  • Required that renewable generation be given priority access to the transmission and distribution systems;
  • Changed Ontario's Planning Act to permit long-term leases and land rights arrangements exceeding 21 years;
  • Modified Ontario's environmental review process in order to consolidate processes and hearings; and
  • Uploaded a substantial amount of the authority normally held by municipalities in relation to the approvals required for projects being developed to the province.

In October, 2011, Ontario's Ministry of Energy commenced the FIT review process wherein interested parties were offered the opportunity to meet informally with Ministry of Energy staff, including Deputy Minister Fareed Amin, or make direct written or online submissions.  During the consultation process, the Ministry of Energy received over 2,800 responses and informal deputations.

FIT Program Highlights

The FIT 2.0 Changes

The mandate announced by the Ministry during the FIT Review was to consider a number of issues including:

  • FIT off-take Tariff rates ('price regression');
  • Long-term program viability;
  • Continued renewable energy industry growth;
  • Improving local (i.e. municipal level) consultation processes; and
  • Sparking the development of new renewable energy technologies.

As the outcome of review process, yesterday the Ministry issued six high-level strategic recommendations, as follows:

  • To continue the Government of Ontario's commitment to clean energy;
  • To endeavour to 'streamline' the development approval processes;
  • To encourage even greater levels of community and Aboriginal participation;
  • To improve municipal engagement;
  • To reduce off-take prices to better reflect lowered market costs; and
  • To continue efforts to develop Ontario's nescient clean energy economy.

Although the actual program details have yet to be released, we believe that the adoption of several key high level strategic recommendations will have a positive impact on Ontario's renewable energy sector.  In particular:

  • The commitment to procure 10,700 MW of non-hydro renewable projects within the province by 2015, as well as 9,000 MW of hydro projects by 2030, sends a clear market signal to companies developing and serving these industries in the province.
  • The suggestion made in the proposals to have exempt and self-screening FIT applicant segments, along with full Renewable Energy Approval (REA) process requirements for substantial projects, should streamline the approval process, reduce the burden on Ministry of Environment resources and permit the Province to improve its performance in this area.
  • The commitment to improve municipal engagement, though unclear at this stage, sends a clear signal to developers regarding the critical importance of local stakeholder engagement.
  • The suggestion that smart grid technologies, energy storage solutions and electric vehicle integration should now be contemplated as part of the FIT Program renewal process, whether implemented directly or indirectly through the Ministry of Energy or the Ministry of Economic Development and Innovation, will come as a welcome change. This will likely result in greater technological innovation and, potentially, the roll-out of existing smart grid power management technologies within local distribution grids, possibly permitting high penetration rates for intermittent energy. 
  • The reduction of FIT prices (see Appendix 4 to the Report) was a largely anticipated change and, in conjunction with the suggestion that future price reductions be scheduled in advance, will likely be seen as a positive change by OEMs and EPC service providers seeking certainty in the evolving market over the longer term.

There is a recommendation that parties forming part of the substantial FIT application backlog, which existed at the time that the FIT review was announced, should be permitted to voluntarily withdraw from the FIT Program. This will be well received by parties who have incurred significant costs entering into the program. Unfortunately, at this juncture it remains unclear how the proposed withdrawal would be orchestrated and what the precise reimbursement mechanisms for a withdrawal will be.

Conclusion

Although the over-all signal to the marketplace is quite positive – the FIT Program will continue; anticipated price reductions are now better understood; future price reductions will be signaled in advance; efforts will be made to improve municipal engagement and the REA process – the finer details regarding the renewal of Ontario's FIT Program remain to be seen in the coming months.  Gowlings will publish its analysis of significant implementation steps as they are announced.

See the report here: http://www.energy.gov.on.ca/en/fit-and-microfit-program/2-year-fit-review/


Production vs. Storage Rights: ERCB Balances Competing Interests

Alberta's Energy Resources Conservation Board ("ERCB") operates as an independent, quasi-judicial agency of the Government of Alberta to ensure that the "discovery, development and delivery of Alberta's energy resources take place in a manner that is fair, responsible and in the public interest."1

Recently in Kallisto Energy Corp.[2], the ERCB was charged with balancing the competing interests of an oil producer and the operator of a natural gas storage project.

The Facts:

Kallisto Energy Corp. ("Kallisto") applied to the ERCB for a licence to drill a vertical well from a surface location at 27-1 W5M: Lsd. 11 of Sec. 26 (the "11-26 well"), to produce oil from the subsurface area known as the Basal Quartz "A" formation.

CrossAlta Gas Storage & Services Ltd., BP Canada Energy, BP Canada Energy Company and TransCanada Pipelines Limited (collectively referred to as "CrossAlta") objected to the application.  As the owner and operator of a gas storage facility injecting gas into a depleted field, situated below the Basal Quartz formation, known as the Crossfield East Elkton A and D pools (the "Elkton Storage Reservoir"), CrossAlta was concerned about the possibility of inter-pool "communication" which would allow liquids to migrate between the two pools.  If there was effective communication, changes in reservoir pressure caused by production through the 11-26 well could result in gas that CrossAlta was storing on behalf of its customers to migrate into the Basal Quartz and to be produced through the well.

The Issues:

The Board considered three sets of issues in rendering its decision:

  1. the risk of communication with the Elkton Storage Reservoir;
  2. the rights of the parties and the public interest; and
  3. the mitigation of risks.

(1) The Risk of Communication:

At the hearing, Kallisto and CrossAlta agreed that the Basal Quartz "A" pool and the Elkton Storage Reservoir were in communication, but they disagreed with respect to the cause of this communication. Kallisto argued that the communication was naturally occurring, while CrossAlta maintained that it had been induced by hydraulic fracturing conducted at an earlier well at 7-25-27-1 W5M (the "7-25 well") in 2001.

Both parties submitted evidence designed to establish how or when communication first occurred, but the Board did not find this evidence to be conclusive one way or the other. Ultimately the Board was not persuaded that the hydraulic fracture stimulation conducted at the 7-25 well was the only reasonable explanation for the communication and found that it was likely that the fracture stimulation merely enhanced a pre-existing communication. The Board went on to analyze the different geometry of the 7-25 well and the proposed 11-26 well location and determined that the spatial relationship between the 11-26 well and the Elkton Storage Reservoir was substantially different from that of the 7-25 well and the Elkton Storage Reservoir.  Specifically, it found that the proposed well, even if hydraulically fractured, would probably not create communication with the Elkton Storage Reservoir.

(2) The Rights of the Parties and the Public Interest:

CrossAlta submitted that it had a legal responsibility on behalf of its customers and shareholders to prevent interference with its proprietary rights. Having operated the gas storage facility since 1994, long before Kallisto had acquired any rights to produce the minerals located on the adjacent lands, CrossAlta effectively argued that its rights were more "established" than those of Kallisto.  CrossAlta further argued that Kallisto did not have any right to apply for or hold a licence for a gas well on Section 26 given that Kallisto did not have rights to a complete drilling spacing unit (DSU).  Board regulations require a gas well operator to hold one full section of land, whereas Kallisto only held the rights to a quarter section, the DSU for an oil well.

CrossAlta raised financial loss concerns, arguing that it and its clients could suffer economically if its clients lost confidence in its ability to inject and withdraw gas from the storage facility when required to meet its customers' needs. Moreover, on the public interest side, CrossAlta maintained that storage gas has the following recognized public benefits: "(1) market balancing, (2) security of supply regardless of demand, (3) price stability and protection against extreme price shocks, (4) production efficiency, and (5) prevention of the shut in of wells and facilities due to price instability."3

Kallisto acknowledged that it did not have the right to remove or convert storage gas from the Elkton Storage Reservoir and also indicated that its intention was to drill an oil well and not a gas well. Kallisto further recognized that should a gas formation be encountered and determined to be economically producible it would need to secure the DSU by voluntary agreement or via a compulsory pooling order. However, Kallisto argued that CrossAlta was shrewdly trying to create a buffer zone around the Elkton Storage Reservoir and was effectively sterilizing Kallisto's right to develop its mineral interest and the interest of the freehold owners.

The Board noted that it must "address and balance the public interest in the areas of public health and safety, the protection of the environment, resource conservation, and economics while facilitating the efficient, effective and orderly development of Alberta's resources."4 While the Board accepted that the ability to store natural gas performs and important function, the Board was of the opinion that "most, if not all, CrossAlta's arguments relate primarily to adverse impacts on its commercial interests and its customers, rather than to the broader public interests of Albertans."5

(3) Mitigation of Risks:

Given the evidence surrounding the geology of the area, the Board held that the risk of communication between the 11-26 well and the Elkton Storage Reservoir was low and that the magnitude of potential risk was not sufficient to deny the approval of Kallisto's application. The Board however, set out the following three conditions to reduce the possibility of potential communication and harm: "(1) The Licensee must obtain and immediately submit stabilized initial pressure data to the ERCB and CrossAlta. (2) The Licensee must not use fracture stimulation on the well that exceeds 40 tonnes unless consent has been given by the Board. (3) The Licensee must obtain and submit stabilized pre- and post-frac pressure data to the ERCB and Cross Alta."6

What does this mean?

The ERCB can and frequently will use the terms and conditions of a licence it is granting to balance competing interests.  In cases involving conflicts between a party wishing to drill a well and the operator of a neighbouring gas storage unit, the Board's decision in Kallisto indicates that in the absence of clear evidence of communication between the relevant areas, the Board is likely to permit the well to be drilled but to impose terms and conditions on the licensee of the well in order to mitigate, and hopefully eliminate, the risk of harm to the storage operator and its customers as a result of inadvertent communication.

Footnotes

1. "Mission Statement", 6 March 2012, online, Energy Resources Conservation Board  < http://www.ercb.ca >

2. Kallisto Energy Corp., Decision 2012 ABERCB 005, online, Energy Resources Conservation Board < http://www.ercb.ca >

3. Supra at para. 66.

4. Supra at para. 73.

5. Supra at para. 73.

6. Supra, Appendix 1 – Summary of Conditions.

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