THE OPA'S COMBINED HEAT AND POWER STANDARD OFFER PROGRAM (CHPSOP) AND ENERGY RECOVERY STANDARD OFFER PROGRAM (ERSOP)

On January 31, 2011 the Ontario Power Authority (OPA) released additional details around its much anticipated Clean Energy Standard Offer Program (CESOP), in the form of draft Program Rules, Contracts and Standard Definitions. It is a promising development in Ontario's clean energy procurement strategy for small cogeneration and combined heat and power projects that has been in process since 2007.

The newly proposed CESOP differs in material respects from the program that was under development in 2008, which was limited to projects with a nameplate capacity of 10MW or less (it's now 20 MW) and did not have upfront locational eligibility requirements (although there were green, yellow and orange zones). This bulletin summarizes some of the features, questions and issues we have identified with the new CESOP, based on our initial review.

With the posting of the draft documents, the OPA has commenced a stakeholder consultations process that will include formal stakeholder sessions and provide the opportunity for questions and comments. Consultations are expected to continue until March 31, 2011 with formal launch expected in Q2 2011.

1. CHPSOP AND ERSOP

Certain elements of the newly proposed CESOP are clearly modeled after comparable elements of the OPA's Feed-in Tariff Program. New CESOP Applicants must (i) pay a $1000 non-refundable Application Fee, (ii) provide Application Security in the amount of $20,000 per MW of Annual Average Contract Capacity; and (iii) include evidence that the Applicant has the Access Rights sufficient to build, operate and maintain the Project, enforceable by contract for the term of the Contract.

The proposed CESOP has two distinct streams, as detailed below.

Combined Heat and Power Standard Offer Program (CHPSOP)

Energy Recovery Standard Offer Program (ERSOP)

The CHPSOP is intended to support efficient use of natural gas-fired electricity generating facilities that use CHP technology up to a maximum capacity of 20 MW, connected to a distribution system in an "eligible area" of the Province.

To be eligible to participate in CHPSOP, a proposed generating facility must constitute a CHP Facility that utilizes natural gas for the production of 95% or more of the electricity generated by the Facility as averaged over a Contract Year, and may only supplement natural gas with "Eligible Alternative Fuels", being Renewable Biomass, Biogas, and any "Eligible Primary Energy Source".

The CHP Facility must generate Electricity and Useful Heat Output, deliver the Electricity through a meter to a Distribution System or an Electrical Host Facility, and deliver the Useful Heat Output through a meter to one or more Host Facilities.

Useful Heat Output

To be eligible to participate in CHPSOP, a proposed generating facility must be capable of providing a minimum Useful Heat Output requirement. An applicant must provide a plan in the prescribed form that is satisfactory to the OPA, for the Project to provide a 10 year average Useful Heat Output, and after the 3rd year, an annual average Useful Heat Output (UHO), of no less than 15% of the total energy output of the Facility.

The ERSOP is intended to support efficient generation of electricity from recovery of otherwise wasted energy sources, such as unutilized by-products that can be used as fuels, up to a maximum capacity of 20MW, connected to a distribution system in an "eligible area" of the Province.

To be eligible to participate in ERSOP, a proposed generating facility must utilize an "Eligible Primary Energy Source" for the Production of Electricity, and only supplement it with natural gas.

An "Eligible Primary Energy Source" means either: (i) "By-Product Fuel", which is derived from an industrial, commercial or manufacturing activity (excluding mining); or (ii) "Under-Utilized Energy", which is a source of thermal or mechanical energy that is the by-product of some other industrial, commercial or institutional activity or process that would not, but for its use in the Project, be utilized to generate electricity. An "Eligible Primary Energy Source" must be approved by the OPA in its sole discretion, and it does not include any Renewable Fuel, Municipal Solid Waste, Fossil Fuel, peat or peat-derived products, or hazardous waste.

2. ELIGIBLE AREAS

MUNICIPALITY

GREATER TORONTO AREA

KWCG

HAMILTON

KINGSTON

Ajax, Town of

Mississauga, City of

Cambridge, City of

Brant, County of

Kingston, City of

Aurora, Town of

Newmarket, Town of

Erin, Town of

Brantford, City of

  

Brampton, City of

Oakville, Town of

Guelph, City of

Hamilton, City of

  

Brock, Township of

Oshawa, City of

Guelph/Eramosa, Township of

    

Burlington, City of

Pickering, City of

Kitchener, City of

    

Caledon, Town of

Richmond Hill, Town of

North Dumfries, Township of

    

Clarington, Municipality of

Scugog, Township of

Puslinch, Township of

    

East Gwillimbury, Town of

Toronto, City of

Waterloo, City of

    

Georgina, Town of

Uxbridge, Township of

Wellesley, Township of

    

Halton Hills, Town of

Vaughan, City of

Wilmot, Township of

    

King, Township of

Whitby, Town of

Woolwich, Township of

    

Woolwich, Township of

Whitchurch-Stouffville, Town of

      

Milton, Town of

        

The CESOP includes up-front, locational eligibility requirements, which exclude projects located in certain areas of the province from applying to the program. To be eligible to participate in CESOP, a proposed generating facility must be located in an area of the Province that has been designated on the OPA's website as eligible for CESOP Projects (subject to two limited exceptions).

The OPA has released a draft list outlining the locational eligibility for CESOP dated January 31, 2011 (see Table 1 above). The list consists of 25 municipalities in or around the GTA, 11 municipalities in or around the Kitchener/Waterloo/Cambridge/Guelph centre, 3 municipalities in or around Hamilton, and the City of Kingston. There are some notable regions missing from this list, including Northern Ontario, Ottawa, and London and surrounding area.

The OPA explains that CESOP is "limited to cost-effective projects located in areas of the province where they can be accommodated in the local distribution system and where there are local benefits." However, CESOP requires, as part of the application review process and regardless of locational eligibility, that applications are subjected to connection availability screening tests to assess whether the project can be accommodated by the distribution and transmission systems.

3. AVAILABLE CAPACITY OF 200 MW

In accordance with the limits set out in the November 23, 2010 CESOP directive, 200 MW of capacity has been allocated for a combination of CHPSOP Projects and ERSOP Projects (the Available Capacity).

In order to ensure an equitable allocation of Available Capacity between CHPSOP Projects and ERSOP Projects, during the Launch Period a minimum of 150 MW of the Available Capacity will be available to CHPSOP Projects and a minimum of 50 MW of Available Capacity will be available to ERSOP Projects.

If either program does not use its entire allocation of Available Capacity during the Launch Period, then the remaining Available Capacity shall become available to either CHPSOP Projects or ERSOP Projects.

4. CONNECTION AVAILABILITY AND FIT PRIORITY

The OPA will work together with the IESO and any applicable transmitter and LDC to determine if there is sufficient transmission and distribution system connection resources to accommodate the project, taking into account: (i) all prior CESOP Applications, (ii) prior applications under the FIT Program, and (iii) any other generation that is existing, committed or subject to ministerial directive.

The relative prioritization of prior applications under the FIT Program could be problematic for CESOP applicants. The FIT Program has been accepting applications since October 2009, and has garnered a tidal wave of interest which is reflected in the nearly 4,400 FIT and 25,250 microFIT applications received to-date.1 As well, any FIT applications submitted prior to the formal launch will also place potential CESOP projects at a further disadvantage. CESOP proponents will want to closely scrutinize the OPA's December 21, 2010 listing of the priority ranking for 242 first-round FIT projects awaiting ECT to at least start determining what, if any, connection availability might exist in light of these prioritized FIT applications.

5. RESTRICTIONS ON BEHIND-THE-METER CONFIGURATIONS

Projects that are in respect of Behind-the-Meter Facilities will only be permitted to participate in the CESOP Program if (i) the OPA is satisfied that there is a sufficient technical rationale to justify such configuration and (ii) the Supplier agrees to enter into an amendment to the contract so that any financial benefit to the Facility or the Electrical Host Facility that accrues by virtue of the Facility delivering electricity as a Behind-the-Meter Facility is returned to the OPA. For greater certainty, any such amendment will provide for a reduction in the Monthly Payment by the amount of "Global Adjustment" and other variable charges that are saved as a result of the Behind-the-Meter Facility configuration. While it may be understandable why the OPA is addressing behind-the-meter financial aspects, it currently remains unclear why the OPA feels it is necessary to determine whether there is a sufficient technical rationale.

6. ELIGIBLE EXISTING FACILITIES

In addition to encouraging new projects, "Eligible Existing" combined heat and power or energy recovery facilities that generated electricity on or before November 23, 2010, but not prior to August 18, 2005 can qualify for the CESOP by providing the OPA with additional evidence of the actual in-service date. If an Eligible Existing facility is awarded a contract, the term of that contract is calculated as 20 years minus the number of days between the date of the in-service date and the date of the CESOP application.

Notably, Eligible Existing facilities are not subject to the locational eligibility requirements to qualify for the CESOP. In addition, any capacity allocated to Eligible Existing facilities will be included as part of the Available Capacity limit of 200 MW.

7. LAUNCH PERIOD AND TIME STAMP ALLOCATION

Except for Applications submitted during the Launch Period, Applicants are issued a Time Stamp at the time they submit their Application electronically. Applications will be assessed in order of Time Stamp so that, to the extent that multiple Projects require the same connection resource or allocation of remaining Available Capacity, Projects with an earlier Time Stamp will be assessed in priority to Projects with a later Time Stamp.

All Applicants submitting a Launch Application must include a "Minimum UHO Requirement" (to one decimal place) of no less than 15.0%. Any Applicant that submits a Minimum UHO Requirement greater than 15.0% (an "Increased UHO Commitment") must provide a Useful Heat Output Plan that demonstrates to the satisfaction of the OPA that the Project will be capable of satisfying such Increased UHO Commitment, otherwise the Launch Application will be rejected in accordance with Section 4.2.

All Launch Applications that meet all of the eligibility requirements will be assigned a Time Stamp in relative priority to one another so that Launch Applications with a higher Minimum UHO Requirement as a result of any Increased UHO Commitment shall be assigned earlier Time Stamps than those Launch Applications with lower Minimum UHO Requirement.

Where two or more Launch Applications propose the same Minimum UHO Requirement, their Time Stamps will be assigned in relative priority to one another by random draw.

8. THE CHPSOP AND ERSOP CONTRACTS

A. CHPSOP Contract

The CHPSOP Contract is primarily a financial agreement that is intended to provide Suppliers with the benefit of a financial contract based on Net Revenue Support Level (NRSL) in $/MW-month for the 20-year term of CHPSOP Contract. The NRSL is equal to $28,900/MW-month, with 30% of NRSL escalated annually based on increases in CPI starting on the first January following the Term Commencement Date.

The Imputed Net Revenue (INR) per MW resulting from the imputed operation of a hypothetical Virtual Power Plant (VPP) is independent of each Facility, and depends only on the classification as a seasonal (UHO demand that varies seasonally) or non-seasonal (UHO demand that is relatively consistent year-round) UHO Facility and the imputed dispatch. The VPP parameters are intended to reflect equivalent overall economics.

B. ERSOP Contract

The ERSOP Contract requires the Supplier to own or lease the Facility and to design, build, operate and maintain the Facility. The OPA's payment obligations under the ERSOP Contract will be, commencing on the Term Commencement Date, to pay for Hourly Delivered Electricity at the Contract Price for non-IESO market participants for the Term, subject to earlier termination in accordance with the ERSOP Contract's terms. The ERSOP Contract Price is set at $90/MWh, with 30% of this price annually escalated based on increases in CPI.

This Contract Price will be subject to a Peak Performance Factor for the corresponding hour. The application of the Peak Performance Factor will result in higher payments during On-Peak Hours and lower payments during Off-Peak Hours to encourage such Projects to schedule their production during On-Peak Hours to the extent practicable.

The ERSOP Contract requires the Supplier to maintain a rolling two-year average Primary Energy Source Percentage of at least 50% and to use Commercially Reasonable Efforts to comply with the Fuel Supply Plan. Starting at the end of the second Contract Year and at the end of each Contract Year thereafter, if the Facility fails to achieve a rolling two-year average Primary Energy Source Percentage of at least 90%, the Contract Price for the next Contract Year shall be reduced by $1/MWh for each percentage point that the rolling two-year average Primary Energy Source Percentage is below 90%.

9. EXPANSION AMENDMENTS

Provided there is sufficient Available Capacity, after the start of the third Contract Year if the Actual UHO Percentage in respect of a Contract Facility for the preceding Contract Year is greater than 50% the Supplier may apply to the OPA to increase the Contract Capacity to a maximum of two times the original Contract Capacity subject to a maximum of 20 MW. Any such application must include proposed amendments to the Useful Heat Output Plan to demonstrate that the Contract Facility will be capable of producing an Actual UHO Percentage of at least 10% in excess of the Minimum UHO Requirement. The increased Contract Capacity will take effect on the date all of the requirements to achieve Commercial Operation are satisfied in relation to the expanded Contract Facility and the Supplier has increased the amount of Completion and Performance Security provided to the OPA.

10. ASSIGNMENT AND CHANGE OF CONTROL

An Applicant cannot assign its Application to a person other than an Applicant Related Person without the prior written consent of the OPA, which consent may not be unreasonably withheld. An Applicant cannot permit a change of Control of the Applicant, except with the prior written consent of the OPA, which consent may not be unreasonably withheld.

If an Applicant violates these rules, the OPA is entitled to reject the Application and to draw on the full amount of the Application Security as liquidated damages.

11. PROGRAM REVIEW

If there is any remaining Available Capacity, the OPA intends to review and amend as necessary the CHPSOP Program two years after the launch of the CHPSOP Program, or earlier in other circumstances as required.

Footnote

1. The Ontario Power Authority's Bi-Weekly FIT and microFIT Report dated as of February 4th, 2011.

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