Canada: Clean Energy Standard Offer Program, The Second Phase Of The Combined Heat And Power Initiative And The Northern Ontario Water Power Initiative

On June 14, 2007, Dwight Duncan, the Minister of Energy, announced the Clean Energy Standard Offer Program (the "CESOP") and the second phase of the Combined Heat and Power initiative. In addition, the Minister of Energy has issued a press release announcing the Northern Ontario Water Power Initiative to expand the Renewable Energy Standard Offer Program (the "RESOP") to include water power projects in Northern Ontario. All of these initiatives will be implemented by the Ontario Power Authority ("OPA").

The CESOP is an innovative Ontario initiative intended to facilitate and promote the development of small electricity generating projects using clean energy sources.

In November 2006, the OPA launched the RESOP which offers a standard pricing regime and simplified eligibility and contracting rules to small renewable energy projects. Eligible projects under the RESOP include only sources of renewable energy such as wind, solar and bio-fuel. The Ontario Government has set a target of 2,700 MW of renewable energy generation by 2010 and the RESOP is intended to assist in achieving this objective.

Natural gas-fired generation is not an eligible project under the RESOP. To complement the RESOP, the OPA has developed the CESOP which is a distinct standard offer program for "clean" fuels intended to promote greater use of clean sources of energy to generate electricity in Ontario.

Eligible projects must be located in Ontario, be no more than 10 MW in capacity, and be either a natural gas fuel-fired combined heat and power project, a by-product fuel-fired generation project or an under-utilized energy generation project (including thermal and mechanical). Project eligibility involves a number of additional policy and technical factors further detailed in the CESOP.

It is expected that typical generators under the CESOP will include commercial or industrial facilities such as greenhouses, hospitals, universities and industrial facilities that require both heat and power or which produce any source of under-utilized energy.

The price paid under the CESOP contract is an incremental amount to be paid in addition to the Hourly Ontario Energy Price ("HOEP"), the spot market price paid to Ontario electricity generators. The CESOP will supplement the HOEP payment received by the generator with an additional payment of 8.10¢ per kWh during weekday prime peak periods and 4.32¢ per kWh during weekday mid peak periods and only during specified months and times. As currently proposed, the additional CESOP payment would is not available during the months of April, May, October and November meaning that generators would only be paid the HOEP for their output. Details regarding the contract pricing under the CESOP are further described in the CESOP rate schedule which is on the OPA website (www.powerauthority.on.ca).

In contrast, the RESOP pays a base rate of 11¢ per kWh for all renewable sources except photovoltaic solar systems, which are eligible for a base rate of 42¢ per kWh. Under the RESOP contract, 20% of the base rate may be increased each year by changes in the Consumer Price Index.

In addition, the OPA will offer an optional spark spread hedge which covers a percentage of the generator's gas price risk for eligible natural gas fuel-fired combined heat and power projects in an effort to encourage project efficiency while providing operating margin protection.

The contract term for CESOP clean energy projects will be 20 years. Projects are required to achieve commercial operation within three years from the date that the contract is executed.

CESOP projects must connect to a distribution system at no more than 50 kV. The CESOP will require generators to work closely with their local electricity distribution company on a number of technical issues including connection requirements and metering configuration.

The OPA will not consider CESOP projects located in areas of constrained transmission. More information regarding constrained transmission areas is available on the OPA's website.

• A working group comprised of the OPA and energy industry members will be formed immediately to resolve implementation details.

• The OPA will host a webinar on June 27 at 10:00 am to provide interested parties with an opportunity to ask questions regarding the CESOP.

• Draft CESOP Program Rules are excepted to be issued by September 2007 for stakeholder review.

• The OPA currently anticipates that a draft CESOP Contract will be issued for review by October 2007.

• Based on this schedule, the OPA expects that the CESOP will be launched in the of fall of 2007 and be implemented by the end of 2007.

Many issues regarding the CESOP Program Rules and CESOP Contract still have to be clarified. A key issue of interest to a number of industry participants will be whether existing generation facilities that do not currently have an OPA contract will be eligible to apply for a CESOP contract. Also, the OPA's proposal that generators not be paid the supplemental CESOP amount during the months of April, May, October and November and receive only the HOEP is expected to be a topic of discussion during the stakeholder process.

On June 15, 2005, the Minister of Energy directed the OPA to commence a procurement process for up to 1,000 MW of high efficiency Combined Heat and Power ("CHP") generation projects across Ontario, including industrial cogeneration and district energy projects. In October 2006, the OPA successfully awarded seven contracts as a result of this procurement process with a total capacity of 414 MW.

The OPA will launch a Request for Expressions of Interest (the "CHP II RFEI") as the next phase towards combined heat and power procurements for larger co-generation projects in Ontario. The launch of the CHP II RFEI is intended to assist the OPA in determining whether, and how, it will structure a second CHP procurement process in order to achieve some or all of the remaining 1,000 MW target capacity as directed by the Minister of Energy.

In an effort to encourage the development of clean hydro projects, the Minister of Energy has announced that it will be expanding the RESOP to include water power projects in Northern Ontario. This initiative is intended to reduce barriers to small hydro projects of 10 MW or less by creating an opportunity for them to connect to Ontario's transmission system. Eligible hydro projects will be offered 20 year contracts through the RESOP.

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