Canada: FITs And Starts: Ontario FIT Contract Termination Rights Reviewed

The Current Political Landscape in Ontario

The provincial election taking place in Ontario on June 12, 2014, is creating some uncertainty as to what the future may hold for the Ontario Power Authority (OPA) Feed-in Tariff (FIT) Program and, more specifically, what could happen to existing FIT and microFIT contracts held by renewable energy suppliers developing or operating wind, solar, waterpower, biomass, biogas and landfill gas projects. More than a few media outlets have reported various political candidate pronouncements regarding Ontario's FIT and microFIT programs, which, in some cases, imply that existing FIT contracts are to be scrutinized and possibly revised and/or terminated.

Status of the FIT and microFIT Programs and Potential Cancellation

The FIT Program is currently only open for applications to construct "small" FIT projects that generate 250 kW or less of electricity, as well as solar rooftop projects under the OPA's Unconstructed Rooftop Solar Pilot program, which is part of the FIT Program. The microFIT Program remains open for applications for a total procurement target of 65.3 MW for 2014. Of the 10.6 GW of renewable energy generation capacity currently under contract with the OPA, approximately 5.4 GW has achieved commercial operation and 5.3 GW is contracted but still under development. 

Of the more than 20,000 FIT and microFIT contract holders located in Ontario, it is the owners of the "pre-COD"/"still-under-development" projects who will be watching Ontario's pre- and post-election news coverage most keenly in the coming weeks and months.

The Minister's Directive Power

As readers will know, the Electricity Act, 1998 authorizes Ontario's Minister of Energy to direct the OPA on certain energy matters to reflect government policy. It is in part because of the directive power of the Minister that the OPA must be seen as a politically-directed governmental agency entity – rather than the independent contracting agency that it was initially designed to be. Utilizing this directive power, Ontario's various successive energy ministers launched the development of North America's first feed-in tariff program for renewable energy resources and then subsequently made modifications to the program.

The energy minister's directive power under the Electricity Act includes, among other things, the authority to promulgate, modify and cancel programs such as the FIT Program – as industry watchers have seen done with some frequency over the course of the development of the FIT Program since 2009. In other words, and for the sake of clarity, there is no need for a change in government in order for changes to occur in Ontario's FIT Program. The existing FIT and microFIT procurement programs can, and are, continuously modified, tweaked, refined and, occasionally, cancelled by direction from the minister.   

Termination of Existing FIT and microFIT Contracts

There may be a general misperception that FIT contracts are long-term agreements that cannot be cancelled or terminated once they are executed. The reality is more nuanced. The FIT contract contains provisions governing termination rights, which in certain circumstances arise well before the expiry of the term of the agreement. Certain termination rights will depend on whether a supplier requests (and the OPA issues) a Notice-to-Proceed (NTP) with the construction of a given project in accordance with the terms of a FIT contract. NTP is a submission from the supplier to the OPA, in prescribed form, that certain conditions set forth in the FIT contract have been completed or satisfied.

The Pre-NTP Contracts

FIT contracts, by their express terms, can be unilaterally terminated by the OPA or the supplier prior to NTP – unless the OPA has waived its right to terminate prior to NTP, as it did for certain FIT contract holders who opted to make certain concessions with regard to domestic content compliance pursuant to the Ministerial Directive of August 2, 2011. These discretionary pre-NTP termination rights result in certain financial consequences to the non-terminating party, which are set forth as exclusive remedies: (i) in the case of the OPA, it is entitled to liquidated damages equal to the security that the supplier was required to provide as of date of such termination (subject to a defined exception for a wind facility where the wind resource is ultimately determined to be insufficient for the purposes of the project), and (ii) in the case of the supplier, it is entitled to recover certain development costs incurred prior to the termination date up to a pre-determined cap (currently set in version 3 of the form of FIT Contract at $250,000 per facility plus $10.00 per kW of contract capacity).     

The Post-NTP Contracts

FIT contracts cannot, by their express terms, be unilaterally terminated by the OPA or the supplier following NTP unless either one of them is subject to an event of default, the terms of which are expressly set out in the form of FIT Contract. Even if the FIT Contract is terminated post-NTP as a result of an event of default neither the OPA nor the supplier are restricted from pursuing any other remedies available to each of them in connection with such termination. The unilateral termination of a post-NTP FIT contract pertaining to a sizeable FIT project early into a twenty-year term for something other than an event of default (such as a repudiation of the agreement) would likely be a very costly adventure for the government, which undertook it. In such an event contract damages alone could be significant, as the general rule of contracts is to put the non-breaching party in the position they would have been in had the breach not occurred or the contract been performed.  

Discriminatory Action

A perhaps somewhat overlooked section of the form of FIT Contract deals with the consequences of "discriminatory actions" by the Legislative Assembly of Ontario. Non-discriminatory action clauses, developed and refined over the past three decades by project sponsors working on projects reliant upon concessions from government counterparties somewhat less reputable than Ontario, seek to provide project sponsors with some form of protection should the government take action to unilaterally amend the terms of the concession contract or affect an increase to the taxes, regulatory burden or other costs associated with the project in a way that could not have been reasonably expected under the terms of the original concession. 

Ontario's FIT contracts all contain a short-form version of a non-discriminatory action clause which, though protective of the supplier, is subject to key exceptions, including the passage of laws that are of "general application" and new regulations created under the Green Energy and Green Economy Act, 2009. It is also worth noting that, unlike project finance concession agreements designed for use in emerging markets, which might provide for dispute resolution outside of the jurisdiction, the FIT contract is subject to dispute resolution provisions contemplating arbitration in Toronto. 

The non-discriminatory action clause contained in Ontario's FIT contracts is less than perfect from a sponsor's viewpoint; however, it does provide some basic protection.

The possibility exists of new laws or regulations coming into force after the election that would have an adverse effect on suppliers who are in a post-NTP or post-commercial operation position under an existing FIT Contract. Given Ontario's long history of carefully honouring electricity sector concession holder's contractual rights, it seems unlikely that a new government would seek to use regulatory or legislative change to indirectly penalize electricity sector investors – particularly given the clear pre-NTP cancellation rights already existing in the FIT contracts. If unilateral legislative or regulatory change is promulgated, the challenge for suppliers will be to demonstrate that a specific law is not of general application or to challenge the scope of a regulation under the Green Energy and Green Economy Act, 2009. A government seeking to table unilateral changes of a material nature to the FIT program would presumably be made cognizant of the potential impact that such changes would have on the province's reputation, as a contracting party and its credit rating by the Ministry of Finance.

In summary, we see parties holding FIT contracts which are pre-NTP as being most at risk from a possible change in government in Ontario and view post-NTP and, particularly, currently operating projects as being less at risk.

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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