Canada: The OPA Releases Draft Renewable Energy Feed-In Tariff ("FIT") Program Rules

INTRODUCTION

The Ontario Power Authority (OPA) is developing a new program to encourage and promote greater use of renewable energy sources, including wind, waterpower, biomass, landfill gas and solar electricity generating projects. This initiative is called the Renewable Energy Feed-In Tariff (FIT) Program. The program will replace the Renewable Energy Standard Offer Program (RESOP) for projects of less than 10 megawatts (MWs) in size. However, the program will also extend the "standard offer" concept to larger projects. This means that the FIT Program could also replace OPA-issued requests for proposals and contracts under the Renewable Energy Supply ("RES") programs.

The OPA issued draft FIT Program Rules on March 13, 2009, along with a chart showing pricing for different types and sizes of renewable generation (attached). The draft FIT Program Rules are subject to stakeholder input through the beginning of May. Program launch is scheduled for early June.

ELIGIBILITY REQUIREMENTS

The FIT Program will be available for a maximum capacity of 10 MWs for solar projects, 50 MWs for waterpower projects and unlimited capacity for other renewable projects, such as wind, biomass and landfill gas.

Homeowners wishing to develop projects smaller than 10 kilowatts in capacity will be able to apply under separate rules for a program referred to as the "Home REFIT."

The proposed generating facility must also:

1. be located in the Province of Ontario;
2. not be an existing generating facility, unless it is an incremental project which expands or upgrades an existing facility (in which case only the expansion or upgrade is eligible under the program);
3. connect to the distribution or transmission system or a host facility;
4. have separate metering; and
5. not be subject to an existing physical or financial power or capacity purchase contract or contract relating to emissions credits, ancillary services or other related products.

The FIT Program may also require a certain percentage of what is referred to as "Provincial Content" (so far undefined). Presumably, the OPA will need to assess compliance of such a requirement with domestic and international trade and procurement obligations, as well as the effect of such a provision on pricing and supply of components and services.

FEES AND SECURITY REQUIREMENTS

An applicant under the FIT Programs will be required to provide with its application an application fee in an amount that is the greater of (i) 50 cents per kilowatt (kW) of proposed contract capacity, subject to a maximum of $5,000 and (ii) $500. This amount will be nonrefundable regardless of whether the application is accepted by the OPA.

Security deposit requirements under the FIT Program are considerably beefed-up from those applicable under the RESOP. For projects other than certain community-owned and aboriginal projects, the security required will be in the amount of $20 per kW of contract capacity for photovoltaic projects and $10 per kW of contract capacity for other types of projects. For specified community-owned and aboriginal projects, the security is reduced to $5 per kW, regardless of the type of project. These requirements do not apply to certain small embedded facilities (see "Queue Exempt Facilities" below).

OTHER APPLICATION REQUIREMENTS

In addition to the application fee and security requirements, an applicant will need to submit to the OPA an authorization letter from the relevant LDC, in the case of connection to a distributor, or from the IESO in the case of a Registered Facility under the IESO Market Rules. Details regarding the project, including contract capacity, fuel, connection point and technical details regarding connection must also be submitted.

A Connection Impact Assessment, System Impact Assessment or Customer Impact Assessment need not be applied for until following execution of a FIT Contract.

The applicant must also provide evidence of site access, governmental "Renewable Energy Approval" (currently being developed), and resource data or supply plan (e.g. meteorological data for wind power, hydrology data for waterpower, thermal properties for other fuels).

THE ECONOMIC CONNECTION TEST, FIT "PRODUCTION LINE" AND FIT RESERVE

Applicants will be subject to an "Economic Connection Test" to "ensure that connection costs of a Project that would be ultimately borne by rate-payers are reasonable...." Details regarding this test are not yet available in the draft Program Rules nor is a definition provided.

Upon completion of this test, the applicant will receive one of the following: (a) an Offer Notice, comprising an offer to enter into a contract under the FIT Program; (b) a proposal by the OPA for an alternative connection point or smaller contract capacity (referred to as a "Connection Alteration Proposal"); (c) entry into the "FIT Production Line"; or (d) entry into the "FIT Reserve."

Entry into the FIT Production Line is for projects for which there is insufficient connection capacity but for which connection costs are acceptable (under the Economic Connection Test).

Entry into the FIT Reserve is for projects for which there is insufficient connection capacity and for which connection costs are not acceptable (under the Economic Connection Test).

Periodically, Economic Connection Tests will be run and connection capacity will be assessed to determine whether a project may progress from the FIT Reserve to the FIT Production Line, or from the FIT Production Line to acceptance of a project application.

In the event that a project has remained in the FIT Production Line and/or FIT Reserve for a specified period (which may be up to ten years), either the applicant or the OPA may terminate the application and security will be returned to the applicant.

QUEUE EXEMPT FACILITIES

Completed applications that meet eligibility requirements in respect of "Queue Exempt Facilities" will receive an Offer Notice and not be subject to security requirements, a Connection Alteration Proposal or entry into the FIT Production Line. A Queue Exempt Facility is an embedded generation facility with a capacity of 250 kW or less where connected to a less than 15 kV line and 500 kW or less where connected to a 15 kV or greater line. Note that in a March 17, 2009, presentation, the OPA appeared to define any facilities less than or equal to 500 kW as exempt from the Economic Connection Test requirement.

PRICE SCHEDULE

The FIT Program establishes long-term pricing based on type of fuel, size and, in certain cases, category of applicant (see attachment). The prices are intended to cover development costs plus a reasonable rate of return for projects, using certain assumptions relating to cost and efficiency. Projects that use biomass, bio-gas, bio-fuel, landfill gas or waterpower will receive a time differentiated price to encourage on-peak production.

SETTLEMENT MECHANISMS

For facilities that are directly connected to the transmission grid or are otherwise Registered Facilities under the Independent Electricity System Operator (IESO) Market Rules, payments to the supplier under the FIT Contract will be adjusted by subtracting the Hourly Ontario Energy Price in respect of delivered electricity to account for revenues from the electricity market (as is the case under the RES contracts). The OPA will pay the Supplier or the Supplier will pay the OPA, as applicable, any amounts owing after such adjustment.

For suppliers that are not Registered Facilities, the OPA will settle through the applicable local electricity distribution company (as is the case under the RESOP contracts).

FORM OF FIT CONTRACT

The contract under the FIT Program is a power purchase agreement style, as was the case under the RESOP and RES programs.

The form of the FIT Contract will be composed of one of two sets of terms and conditions, the Long Form Terms and Conditions or the Short Form Terms and Conditions. The Long Form is intended to provide additional contractual features that would be of benefit mainly to larger projects and participants in the IESO-Administered Markets, while the Short Form provides an option of a simplified contract for smaller projects.

Proposed Feed-In Tariff Prices for Renewable Energy Projects in Ontario

* On/off peak pricing applies: 35% higher from 11 a.m. to 7 p.m. on business days, and a 10% lower price during off-peak hours.

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.