Canada: Ontario's FIT Program: Domestic Content Requirements

Introduction

In 2009, the Ontario Power Authority (OPA) established the Feed-in Tariff (FIT) Program, which offers price incentives to renewable energy project developers to encourage the development of renewable energy projects in the province. In order to participate in the FIT Program, prospective suppliers of electricity using wind power or solar facilities must adhere to stringent domestic content requirements that are specified in each FIT contract.

At Gowlings, we regularly receive questions about the Ontario FIT Program's domestic content requirements and are frequently called upon for advice regarding domestic content by equipment manufacturers, project developers, financiers, investors and prospective project acquirers. This article provides a brief overview of the domestic content requirements, their associated reporting obligations and the consequences for participants who fail to meet the requirements.

Domestic Content Level Requirements

The minimum required domestic content level for each project is stated as a percentage on each FIT contract cover page. The specific requirement varies depending on the type of technology employed by the project and the contract capacity.1 For wind power projects with contract capacity greater than 10 kW, the minimum required domestic content level is 50 per cent for FIT contracts that have a milestone date for commercial operation after January 1, 2012. There is no domestic content level for wind power projects with a capacity less than or equal to 10 kW. For any solar project, regardless of contract capacity, the minimum required domestic content level is 60 per cent for FIT contracts that have a milestone date for commercial operation after January 1, 2012.

The domestic content level for a particular project is a percentage based on the performance of "specific designated" activities. These activities are listed in domestic content grids in Exhibit D of each FIT contract; the appropriate grid and corresponding activities for each project are selected by reference to the contract facility's technology and contract capacity. For each designated activity that is performed in relation to the contract facility, that facility is allocated the corresponding qualifying percentage.

The domestic content level for a contract facility is calculated as the sum of the qualifying percentages allocated to that facility. In order to comply with the FIT contract, each electricity generator must develop and construct the contract facility such that the domestic content level is equal to or greater than the minimum required domestic content level.2

As previously mentioned, the designated activities differ depending on the fuel mix. The designated activities in the domestic content grid for wind power can be divided into five overarching categories: turbine assembly; drive and generator; electrical; structural; and construction, labour and consulting costs.

Designated activities in the "turbine" category require the production and assembly of various aspects of the turbine (including the blades, the mechanical components of the pitch system, the yaw system, and the hub and its casing) to occur in Ontario. The maximum qualifying percentage that may be allocated to a complying facility with respect to the turbine category is 28 per cent.3

The designated activities in the "drive and generator" category can be further subdivided; the provisions addressing drives award qualifying percentages for geared drives that use a gearbox that has been produced, assembled and tested in Ontario, and for drive shafts that have been machined entirely in Ontario. Qualifying percentages will be allocated to generators that were largely produced, assembled and wound in the province, as well as for heat exchangers that were assembled and tested in Ontario. The maximum qualifying percentage that can be awarded in the drive and generator category is 16 per cent.4

The "electrical" category of designated activities includes the use of power converters, control panels and electronics where the assembly, final wiring and testing have been completed in Ontario. In addition, pad mounts and grid connection with transformers that have been wound and tested in the province also constitute designated activities. The qualifying percentages will be limited to a maximum of 19 per cent in the electrical category.5

The designated activities in the "structural" category allocate percentages for the completion of towers using concrete that was manufactured and formed, or steel that was formed and shaped, in Ontario. Percentage points are also awarded for cast and non-cast components of the nacelle frame that are entirely manufactured and machined, respectively, in the province. A maximum of 17 per cent may be awarded by completing designated activities in the structural category.6

Designated activities in the final category —construction, labour and consulting costs — incorporate construction costs, on-site labour and consulting services (including legal, technical and accounting services) performed by individuals resident in Ontario. The maximum qualifying percentage that may be allocated under the construction, labour and consulting costs category is 20 per cent. There is an important restriction on these activities: no more than 5 per cent of the services can be provided by non-residents of the province in order for the designated activity to be considered complete and the qualifying percentage to be allocated.7

The calculation of the domestic content level for projects using solar energy is slightly more complex. Designated activities are listed in three domestic content grids: Table 2 contains details for solar projects using crystalline silicon; Table 3 provides the framework for projects using thin-film technology; and Table 4 outlines the structure for solar projects that are smaller than 10 kW. That said, most designated activities share some similarities regardless of the solar technology employed in the project.

Projects involving crystalline silicon and thin-film technology are awarded qualifying percentages of 22 per cent8 and 28 per cent,9 respectively, for construction work and consulting services, which are subject to the same residency limitation described above for wind power projects. The provision of on- and offsite labour and services is a designated activity for smaller solar projects. The qualifying percentage in those scenarios is 27 per cent.10

Wiring and electrical hardware that are not specified under other designated activities are allocated a qualifying percentage of between 9 and 10 per cent for all solar projects.11 Inverters, where the assembly, final wiring and testing have been completed in Ontario, earn a qualifying percentage of 8 to 9 per cent for all projects;12 and mounting systems with structural components that were machined, formed or cast in the province, and were assembled in Ontario, are assigned a percentage of 9 to 11 per cent regardless of project size or technology.13

For projects employing crystalline silicon technology or those with a contract capacity under 10 kW, the remaining designated activities relate to the production of the solar cells and modules. Specifically, qualifying percentages are allocated for: silicon that has been manufactured in Ontario; silicon ingots and wafers that have been cast or cut in the province; silicon cells with active layers that were formed in Ontario; and solar modules where the electrical connections have been made in the province. The maximum qualifying percentage that can be awarded for these activities is 50 per cent.14

Only solar projects using thin-film technology have unique designated activities. The OPA awards qualifying percentage points for thin-film photovoltaic cells where the active photovoltaic layer(s) have been made in Ontario and for solar voltaic modules with electrical connections between cells that were made in the province.15

Prospective FIT Program participants should be cognizant of situations where the qualifying percentage will not be awarded due to deficiencies in performance of the designated activities. If the participant is unable to provide sufficient evidence that the designated activity was actually performed or if only some but not all aspects of the designated activity were performed, the designated activity is considered not to be performed at all, and therefore, no qualifying percentage will be awarded.

Additionally, if the contract facility contains more than one of the components specified in the designated activity, that activity must have been performed in relation to all of the components in the contract facility in order for the activity to have been performed and the qualifying percentage to be awarded. That is, there will be no qualifying percentage allocated for partial performance. Each participant must therefore ensure that the designated activities are performed exactly as specified in the domestic content grids, to every component enumerated in the designated activity and with proper documentation to maximize the likelihood that the qualifying percentage will be allocated to the contract facility.

Non-Compliance Repercussions

The repercussions of not complying with the requisite domestic content levels are severe. A failure by the FIT contract participant to perform a material covenant, which includes the covenant to adhere to the domestic content requirements,16 constitutes a default by the supplier if the failure is not remedied within a specified period of time.17 Upon a default, the OPA may provide written notice to the supplier and terminate the FIT contract.18 The ability to terminate the contract for a failure to meet the domestic content requirements signifies the importance of compliance. All prospective participants in the FIT Program should ensure their projects meet the strict requirements to avoid contract termination.

Finally, all potential participants should be aware of the reporting requirements associated with the minimum domestic content levels in the FIT Program. There are two distinct reporting requirements for a supplier using wind power or solar facilities: a domestic content plan and a domestic content report. Following a participant's acceptance of a FIT contract, the OPA will not issue a notice to proceed (NTP) for that participant without the submission of a complete NTP request, which must include the domestic content plan. The domestic content plan consists of a prescribed form in which the participant outlines how it intends to meet its minimum required domestic content level.19 The entire NTP request, including the aforementioned plan, must be submitted to the OPA no later than six months prior to the milestone date for commercial operation.20

Following the commercial operation date, the supplier must provide the OPA with a domestic content report detailing how the facility met the minimum required domestic content level. This includes providing corresponding evidence to prove its assertions and a statutory declaration that the domestic content level of the contract facility satisfies the domestic content requirements.21

The terms of the FIT contract provide the OPA with broad rights of inspection, allowing it to verify domestic content claims made by suppliers. However, the filing of the domestic content report and the delivery of an acknowledgment by the OPA confirming receipt of the domestic content report cannot be viewed as conclusive evidence that the contents of the domestic content report have been accepted or verified by the OPA in any way, or that the OPA has waived inspection or contract termination rights under the FIT contract.

Preparing your Domestic Content Compliance Plan

The FIT Program provides an excellent opportunity for those who wish to develop a renewable energy project in Ontario. Domestic content requirements are an important aspect of the program, which was launched in 2009 as both an energy program and an economic recovery strategy. Domestic content compliance planning varies by industry sector.

Original equipment manufacturers (OEMs) will wish to closely examine representations received from upstream parts suppliers and obtain access and inspection rights in all supply contracts. They may also wish to disclaim representations and warranties given to customers with respect to domestic content and, if commercially possible, provide product on an "as is/where is" basis. Where specific domestic content representations and warranties are required as part of product sales contracts, OEMs should keep careful documentation and have appropriate document retention and storage strategies in place to enable the provision of evidence with respect to domestic content obligations undertaken at a later date. OEMs that operate at some distance from the FIT Program may have limited knowledge with regard to domestic content requirements and should act with caution before providing specific representation or warranties pertaining to its requirements.

Project developers will have much more direct knowledge and concern with the domestic content requirements under the FIT Program. These participants will seek specific representations from equipment providers in addition to indemnities for breach of the same period, because project developers have a direct interest in the OPA's cancellation rights in the FIT contract. They would be well advised to seek specific representations and indemnities that refer directly to the relevant domestic content schedules of the FIT contract from equipment suppliers. In addition, the relevant covenant strength of the indemnity being provided will also need to be considered. It would be prudent for project developers to obtain broad access and inspection rights allowing later access and inspection with regard to domestic content issues by their company, the OPA and any other parties relevant to the transaction. Developers should also have appropriate documentation and retention policies in place to allow access to evidence with respect to domestic content compliance at a later date.

Prospective project buyers and financiers will have concerns similar in nature to those of project developers. These individuals will seek broad rights of inspection, carefully worded representations and warranties, and enforceable indemnities from project developers, but also potentially from developer sponsors and/or third-party suppliers by means of contract right assignment. A number of third-party consultants specializing in domestic and local content issues have recently arisen in the Canadian market and can provide tailored independent-party opinions on domestic content matters, subject to normal liability limitations and disclaimers.

Footnotes

1 The specific minimum required domestic content figures were extracted from FIT Rules, Version 1.5.1 (July 15, 2011), Article 6.4(a).

2 FIT Contract, Version 1.5.1 (July 15, 2011), Article 2.2(f).

3 Ibid, at Exhibit D, Table 1.

4 Ibid.

5 Ibid.

6 Ibid.

7 Ibid.

8 Ibid at Table 2.

9 Ibid at Table 3.

10 Ibid at Table 4.

11 Ibid at Tables 2, 3 and 4.

12 Ibid.

13 Ibid.

14 Ibid at Tables 2 and 4.

15 Ibid at Table 3.

16 FIT Contract, Version 1.5.1 (July 15, 2011), Article 2.2(f).

17 Ibid at Article 9.1(b).

18 Ibid at Article 9.2(a).

19 Ibid at Article 2.4(b)(iii).

20 Ibid at Article 2.4(c).

21 Ibid at Article 2.11(c).

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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