The market for renewable power in Ontario will continue to be busy in 2015, in no small part because of the continuously evolving regulatory landscape. The year was kicked off by the merger of the Ontario Power Authority (“OPA”) and the Independent Electricity System Operator (“IESO”). Sold as a move to reduce cost in the sector, the amalgamation may prove to be about more than just trimming bureaucratic headcount. Renewable project opponents are likely to face more disappointment this year, as many battles in 2014 were resolved in favour of project proponents.  Solar developers enjoyed brief access to Chinese pricing for panels, but will now have to see how anti-dumping claims brought by domestic panel manufacturers are resolved.  Ontario has committed to putting a price on carbon. If implemented, this may help bolster the case for renewables in favour of fossil-fueled generation. Having used the Ontario Power Authority’s Feed-in Tariff (“FIT”) to nurture a renewable energy industry over the past five years, Ontario is now offering assistance to help that industry succeed in other markets.

This bulletin discusses these emerging developments in more detail. A companion bulletin examines how Ontario’s approach to procuring renewable generation is evolving. Together, these bulletins help prepare the sector for another eventful year as project proponents, equity players, lenders and other stakeholders will continue to encounter challenges. Stakeholders who want to have a complete and current understanding of the regulatory forces that shape opportunities in the sector will benefit from this summary of changing political priorities and planning, recent tribunal and court decisions, and the maneuvering of various industry groups and opposition groups.

Stakeholders Must Monitor New IESO to Forecast Policy Direction

The legacy IESO and the OPA amalgamated on January 1, 2015. The amalgamated entity continues under the IESO name and combines the mandates of its two predecessors. It will be responsible for balancing the supply and demand for electricity flow across the province, while also taking on the planning and procurement responsibilities of the late OPA. As discussed below, the amalgamation will have little immediate disruption on the industry, but may herald changes to come in the longer term.

Participants in existing IESO and OPA programs, including FIT and the 2011-2014 saveONenergy program, can rest assured that contracts executed prior to the merger remain binding on the new IESO.  All contracts, approvals and other obligations of the two predecessor entities will remain in effect with the new IESO, as will directions given to the OPA.  Similarly, programs that were in advanced stages of development prior to the amalgamation, in particular the Large Renewable Procurement program and the new Conservation First CDM programs, will continue to be rolled out by the new IESO.

Stakeholders must continue to monitor sentiment at Queen’s Park when planning their activities in the sector. The Minister of Energy will continue to appoint the board, as he did for both organizations previously.  The Minister can also issue directions to the new IESO, including with respect to renewable procurement and conservation programs. The new IESO will therefore be carrying out its responsibilities in a policy context determined by the Minister.

At the high level, that policy context will be about controlling the rising cost of electricity in the province.  In her recent mandate letter to Minister of Energy, Premier Wynne expressed hope that the amalgamation will provide “savings and efficiencies for ratepayers.”  Bruce Campbell, who ran the predecessor IESO, has been given the helm of the amalgamated entity.  He will be under pressure to streamline the IESO and to find ways of controlling the cost of electricity, both by rationalizing the operations of the amalgamated entity and by looking for new approaches to system planning and operations.

Electricity stakeholders, particularly on the generation side of the equation, may take comfort in being able to deal with one entity instead of two.  However, they should not assume that the amalgamation is only about reducing staffing numbers.  Rather, they must continue to pay close attention to the new IESO, and the government to whom it is accountable, to forecast where the policy and regulatory wind will blow in the coming years.

Vocal Opposition Shouting into the Wind

Proponents, particularly of wind projects, will no doubt be pleased with certain rulings and policy developments in 2014.  Wind opponents were generally unsuccessful at the Environmental Review Tribunal (“ERT”) and continued to fail to persuade the ERT and the courts that wind projects harm human health. While opponents had succeeded in 2013 in convincing the ERT to revoke one wind project’s Renewable Energy Approval on the basis that the project would harm a protected species of turtle, the Divisional Court overturned that decision in 2014.  The case was appealed and we await a decision from the Court of Appeal.  In Dixon v. Director, Ministry of Environment, opponents also failed to convince the Ontario Superior Court of Justice that amendments made to the Environmental Protection Act to pave the way for FIT were unconstitutional, although the opponents are seeking leave to appeal that decision.

Two studies undermined key arguments made by wind project opponents.  Health Canada published a report in October 2014 concluding that wind turbines can be annoying, but that there is insufficient evidence that they harm human health. In December 2014, researchers from the University of Guelph published a study in the Canadian Journal of Agricultural Economics that concluded wind turbine developments have no effect on property values of nearby homes and farms.

Despite these developments in 2014, opposition to wind projects remains organized and vocal in Ontario.  We expect that opponents will continue to try to advance their cause in 2015 at the ERT, in the courts, in the legislature and in the public eye. Proponents will therefore have to include genuine community and neighbourhood outreach as part of their development plans and should be prepared to participate in legal proceedings commenced by opponents.

CBSA Investigation Could Impact Cost of Solar Modules

The supply of cheaper Chinese photovoltaic modules and laminates may be disrupted in 2015. After four Ontario photovoltaic module and laminate producers filed a formal complaint, the Canadian Border Services Agency (“CBSA”) has commenced an investigation into allegations China subsidized and dumped photovoltaic modules and laminates. If the CBSA concludes that there has been dumping or subsidizing, the Canadian Trade Tribunal will consider whether there has been material injury to the Canadian industry. If so, a decision imposing anti-dumping and countervailing duties could arrive as soon as summer 2015.

The solar industry faces a difficult division on the benefit of cheaper Chinese panels. The price competition has been detrimental to domestic producers already hard-hit by the removal of the FIT domestic content requirements. On the other hand, developers and other downstream users have benefitted from lower capital costs of solar equipment. There is a relatively tight timeline on the CBSA’s investigation, meaning their progress will be important to watch for. A preliminary determination regarding dumping and subsidizing is due in early March 2015.

Developers who are pursuing projects that have yet to be built (whether under FIT or the Large Renewable Procurement (“LRP”) may need to plan for the potential price impact of additional duties, including building appropriate sensitivity analysis into financial models and carefully negotiating the terms of any supply agreements.

Ontario Suggests Carbon-Pricing on the Way

On January 13, 2015, Glen Murray, Ontario’s Minister of the Environment and Climate Change, announced that the province will introduce some form of carbon-pricing scheme this spring.  The initiative will be part of a larger climate change plan that may benefit the renewable power sector in Ontario.

Ontario passed enabling legislation for carbon pricing in 2009 but has not implemented anything specific since.  By comparison, British Columbia introduced a carbon tax in 2008 of initially $10/tonne of carbon dioxide (now $30/tonne), which is credited with helping the province reduce fuel use by 16 per cent.  There are some indications that Ontario will follow BC’s lead with a carbon tax, though there may be a preference to pursue a more complicated carbon trading scheme if a ‘tax’ is not seen as politically palpable.

In either case, fossil fuel consumption will soon become more expensive in Ontario.  This may help bolster the business cases for conservation, efficiency and fuel-switching to renewable energy.  Whether this tax or trading scheme will be a boost to the province’s renewable energy industry will depend on how high the price on carbon is set and how quickly it rises.  It will also depend on whether any of the revenue generated by the scheme will be redirected back into the renewable sector (as is the case in Alberta’s emissions framework) or if the government will instead opt for “revenue neutral” tax cuts (as is the case in BC).

Ontario Tries to Export its Success

The Ontario market for renewables has been booming in the past years, but that boom cannot continue indefinitely.  As a result, the government is pursuing at least two policies to help participants continue their Ontario-grown success in markets outside of the province.

In her mandate letter to the Minister of Energy, Premier Wynne asked the Minister to collaborate in the promotion of Ontario’s energy expertise abroad. This could pair up nicely with the provincial government’s $250 million three-year innovation funding commitment to support innovative firms in the sector. Though details are limited at this stage, efforts to boost the profile of Ontario’s energy expertise – particularly in renewables – could help companies that have been successful locally grow internationally.

Secondly, the government has reiterated its commitment to the development of a provincially-led Canadian Energy Strategy. Energy Ministers from all 13 provinces and territories have been working on the strategy, which is expected in the summer of 2015. Current indications from the Council of the Federation’s August 29, 2014 “Communique – Canadian Energy Strategy” suggest that the strategy will include a greater emphasis on increasing and diversifying the supply and distribution of clean and low-carbon energy, a welcome benefit for Ontario companies in renewables looking for growth. The strategy should facilitate more interconnected transmission infrastructure to improve inter-provincial electricity trade. This emphasis on transmission infrastructure is consistent with the government’s support for smart grid technology. Better transmission infrastructure will be a boon to the Ontario power system as it will help stabilize Ontario’s supply of electricity and improve capacity for cross-border trade.