Canada: FIT 2.0 Draft Contract Released

Following the issuance of the Minister's Directive to the Ontario Power Authority on April 5, the OPA released a draft of version 2.0 of the FIT contract, "FIT 2.0".  The new FIT contract is intended to implement the recommendations made following the 2-year review of the program and is open for public comment until April 27, 2012.  See here for copies of the draft contract and for more information on how to provide feedback.

Some of the changes from the original FIT contract include:

Contract Changes

The OPA will no longer have any obligation to consent to reasonable changes in the facility features or specifications.  This may limit a supplier's ability to change the connection point, feeder, transformer, site location, design or layout of the project after the application is made.

Pre-NTP Termination

The new FIT contract maintains the OPA and seller's respective rights to terminate a FIT contract before Notice to Proceed is issued.  Current contract holders will recall the OPA offered to waive its pre-NTP termination right under version 1 of the FIT contract in the fall of 2011.

Like in past versions of the FIT contract, if the OPA exercises its termination right, the supplier will be entitled to claim its development costs incurred prior to the termination date, up to a predetermined limit (which for example is $250,000 per facility plus $10.00 per kW of contract capacity in the case of solar and $400,000 per facility plus $2.00 per kW of contract capacity in the case of wind).

The new FIT contract also introduces a new right in favour of the OPA whereby the OPA can issue a "Stop Work Direction" pursuant to which the Supplier will permanently cease development and construction of the Facility.  As currently drafted, it is not clear whether the supplier is entitled to any compensation if it receives a Stop Work Direction.

Post-NTP Termination

In addition to maintaining the OPA's right to terminate before Notice to Proceed, the new FIT contract introduces a right for the OPA to terminate the FIT contract for convenience following the issuance of Notice to Proceed and on 20 days' notice.  In the event that the OPA exercises this termination right, the supplier is entitled to its "Sunk Costs" (being the reasonably incurred costs to develop, construct and commission the facility) and to the net present value of the supplier's anticipated profits during the term.

The OPA is also entitled to issue a Stop Work Direction following Notice to Proceed.  As with the OPA's right to issue a Stop Work Direction prior to NTP, it is unclear whether the supplier is entitled to any compensation if it receives a Stop Work Direction based on the current drafting of the new FIT contract.

Penalties for failing to achieve the Milestone Date for Commercial Operation (MCOD)

The new FIT Contract requires all suppliers to pay $0.25 per kW multiplied by the contract capacity of the facility for each day of delay in achieving commercial operation beyond the MCOD.  In the existing FIT contract such penalty only applied to first-mover projects that elected to advance their MCOD. 

The new FIT Contract also specifies that the twenty-year term (or forty-year term in the case of waterpower) will commence on the MCOD even if the facility has not yet achieved commercial operation (as does the existing FIT contract); however, unlike the existing FIT contract, there is no longer an opportunity to buy-back the term for a penalty of $0.15 per kW multiplied by the contract capacity of the facility for each day of delay in achieving commercial operation beyond the MCOD. 

As a result, the supplier will face monetary penalty and a loss of term as a result of a failure to achieve commercial operation by its MCOD.  These changes should be noted by rooftop solar developers, in particular, as such projects will have a MCOD eighteen months following the contract date in contrast to three years under the existing FIT contract.

Contract Capacity

While the old contracts allowed a facility to be built at 90% of its contract capacity, the new draft, as a condition to achieving commercial operation, requires the facility to be built at 100% of the contract capacity and requires the seller to deliver an independent engineer's certificate certifying same.  Prior to delivering this certificate, the Supplier may elect to reduce the contract capacity to a lower amount, provided that such amount is no less than 75 percent of the original contract capacity.

Force Majeure

The new FIT contract has tightened the force majeure provisions.  In particular, a party will now not be able to invoke force majeure to the extent that the event was within the reasonably control of such party or if it was as a result of the failure or performance of a third party (unless the failure of performance of such third party was itself caused by a force majeure event).  Further, upon the OPA's request, the supplier must provide documentation or information evidencing the commercially reasonable efforts undertaken by the supplier to remove or remedy the force majeure and must represent and warrant that such documentation or information is complete and not misleading.

Domestic Content

The timing for the post-COD domestic content report has been removed.  While the original draft required the OPA to respond within 60 days of its receipt of a domestic content report, the new draft proposes only a "reasonable" time period.  Further, while it was unclear in the existing FIT contract what the effect would be if the seller repeatedly submitted a deficient domestic content report to the OPA, the current draft provides only that the 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. Given that lenders are already concerned with the post-COD nature of the domestic content report, the removal of a firm time line is unlikely to make lenders more comfortable.

REA Representation

A supplier is required in the new contract to represent that it is not aware of any reason, and that there are no reasons of which the supplier ought to have been aware, for which the supplier would not obtain a Renewable Energy Approval (where applicable).  The supplier will not be entitled to make a force majeure claim with respect to any delay in obtaining a REA where those representations prove untrue; however if this representation is not true it will not constitute an event of default

Secured Lender Provisions

Unlike the existing FIT contract that prohibited a secured lender's security agreement from securing indebtedness that is not related to the facility (except in relation to one or more renewable generating facilities in Ontario that are owned by the seller),  the new FIT Contract allows a secured lender's security agreement to secure indebtedness related to other facilities (other than a facility under a microFIT contract) in Ontario that are also the subject of a contract with the OPA and that are owned by the Supplier or its affiliates.

Participation Projects

As with the existing FIT contracts, there are special provisions for Aboriginal and Community Participation Projects.

Price adders will only apply if the projects retain status as participation projects as at the commercial operation date. If during the term, the applicable participation level decreases, the seller must provide written notice to the OPA and the price adder may be recalculated. If the participation project no longer qualifies as a participation project at any time prior to or during the term (1) and such project is not a rooftop solar facility, such failure will constitute an event of default; or (2) and such project is a rooftop solar project, then the supplier will no longer be entitled to a price adder.  If a rooftop solar participation project fails to qualify as a participation project on or at any time during the term prior to the fifth anniversary of commercial operation, such failure will constitute an event of default.

For Community Participation Projects, the supplier will be obligated to certify on the commercial operation date and each anniversary of such date that it has the requisite number of "Qualifying Members" and to update its list of Qualifying Members" to reflect any changes to the participating co-op property owners.  We note that a Qualifying Member must be a co-op member and property owner; however, the definition of property owner requires such person to be a registered owner of real property two years prior to the date of a FIT application, which creates an impractical result over a twenty-year or forty-year contract.

Stikeman Elliott's Energy Group will be discussing the changes to the Feed-in Tariff Program and the operational and commercial implications it may have on renewable power generators and others at a seminar on Wednesday, April 18 (8:00 am – 9:30 am).

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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