Canada: The OPA’s Domestic Content Requirements: Do They Apply To Warranties For Goods And Services?

Last Updated: September 30 2013
Article by Sven Walker

The domestic content requirements are rules established by the Ontario Power Authority ("OPA") in its Feed-in-Tariff (FIT) program in order to ensure that a certain percentage of the services performed and goods supplied to Ontario's renewable energy sector originate from Ontario.

"Domestic Content" is described in Section 8.4 (a) of the FIT Program Rules as follows: 

"The FIT Contract will require that Facilities utilizing On-Shore Wind, or Facilities utilizing Solar (PV) (Rooftop) or Solar (PV) (Non-Rooftop), achieve a minimum percentage for their Domestic Content Level, which will be set out on the FIT Contract Cover Page (the "Minimum Required Domestic Content Level")."

The domestic content requirements actually represent an industrial and protectionist policy designed by the Liberal government of Ontario to strengthen the economy of the Province of Ontario as it struggles to cope with the competitive realities of today's global economy. This policy was deemed to be in violation of Canada's WTO free trade obligations. The OPA is now reducing the minimum required domestic content level (MRDCL) to 28% or less from a previous MRCDL high of 60% for solar PV in order to comply with the recent World Trade Organization ruling dated May 24, 2013 (link to my blog ).

There are some questions with respect to domestic content compliance which remain unanswered. One of these questions is whether the domestic content requirements apply to warranties for products and services after commercial operation is achieved. Do you know the answer? I bet most readers did not before reading this article.

There will be instances after a project achieves commercial operation under the FIT program where under the terms of a warranty work must be re-performed due poor workmanship or a product or component must be replaced in order to remedy a product defect or deficiency. In this context, the question arises whether the corrective work or replacement products or components must be domestic content compliant. Understanding the answer to this question will help shape the decision-making and behaviour of many companies in terms where they source goods and services during the warranty period. If a product or service can be sourced on a more cost effective basis from outside of Ontario and doing so is legal, it is likely that many companies will strongly consider this option.

Pursuant to Section 9.1(b) of version 1.5.1 of the FIT Contract, the failure by the FIT Contract holder to perform any material covenant or obligation in the FIT Contract, including complying with the domestic content requirements, constitutes an event of default by the FIT Contract holder. The OPA may terminate the FIT Contract under Section 9.2(a) where there is an uncured event of default. Version 2.1 of the FIT Contract contains identical provisions.

If we compare the different versions of the FIT Contract, it is possible to ascertain the intention of OPA. Notably, Section 2.2(f) of the FIT Contract differs as described below between version 1.5.1 and 2.1 of the FIT Contract.

Section 2.2(f) of version 1.5.1 of the FIT Contract (Additional Development and Construction Covenants) provides as follows:

"Where the FIT Contract Cover Page identifies the Renewable Fuel of the Contract Facility as [...] solar (PV), the Supplier shall develop and construct the Contract Facility such that the Domestic Content Level is equal to or greater than the Minimum Required Domestic Content Level."

Conversely, Section 2.2(f) of version 2.1 of the FIT Contract (Additional Development and Construction Covenants) has expanded the domestic content obligations and reads as follows:

"Where the FIT Contract Cover Page identifies the Renewable Fuel of the Facility as [...] Solar (PV) (Rooftop) or solar (PV) (Non-Rooftop), the Supplier shall develop, construct, operate and maintain the Facility such that the Domestic Content Level is equal to or greater than the Minimum Required Domestic Content Level."

According to the changed wording, in addition to being developed and constructed in order to meet the MRDCL, each of those projects is also required to operate and maintain the project in accordance with the MRDCL.

The clear distinction between the wording of versions 1.0 and 2.1 of the FIT Contract supports the analysis that post-commercial operation warranties for goods and services are not subject to the domestic content requirements under version 1.0 of the FIT Contract. The opposite is true under version 2.1 of the FIT Contract.

Senior officials at the OPA have confirmed that requirement to comply with the domestic content requirements under version 1.0 of the FIT Contract does not apply to work performed or equipment installed following the commercial operation date of the renewable energy power generation facility for bona fide reasons not intended to evade the domestic content requirements. For example, if replacement equipment is required due to equipment malfunction following the commercial operation date, the replacement equipment would not need to meet the domestic content requirements. However, the OPA will always reserve its rights under the FIT Contract, at law and in equity with respect to activities that are designed to evade the domestic content requirements.  In addition, the OPA reserves its right to enforce the domestic content requirements post-commercial operation if subsequent to the commercial operation date the OPA determines that the domestic content requirements were not met at the commercial operation date.

It is worth noting that more than 4600 MW have been awarded under version 1.0 of the FIT Contract. Meanwhile, only 146.6 MW of contracts have been awarded under version 2.1 of the FIT Contract and the FIT program is being changed yet again. It is possible that the domestic content requirements will be eliminated altogether by the time FIT contracts under version 3.0 are actually awarded.

It is important to retain that warranties given under version 2.1 of the FIT contract must comply with the domestic content requirements after commercial operation is achieved if the action is to remedy a manufacturing defect, replace a product or re-perform a service that was not performed in a good and workmanlike manner. In order to avoid being in default of the FIT Contract and risk its termination, the FIT Contract holder must maintain the MRDCL even after the facilities subject to the FIT Contract achieve commercial operation and until the expiry of the 20-year term of the FIT Contract. The same is not true for version 1.0 FIT Contracts. It will be possible to respond to warranty claims after commercial operation is achieved for a project with services, parts and equipment sourced from outside of Ontario for such contracts.

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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Sven Walker
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