A World Trade Organization panel appears poised to rule that the local-content requirements included in the feed-in tariff regime in Ontario, Canada violate international trade law. Although parties are given an opportunity to comment, it is rare that final rulings materially depart from the initial findings of a panel.

A final ruling, which may be appealed, is expected in late November 2012.

This is important because a ruling of this nature could have a significant impact on the global renewable energy sector, including Saudi Arabia’s recently announced renewables program.

Ontario requires developers that participate in its feed-in tariff program to source at least 60% of their equipment for solar PV projects, and at least 25% for wind projects, in Ontario.

According to the Geneva-based think tank that leaked the interim ruling, the WTO panel supports claims made by the European Union and Japan that the local-content requirement embedded in the feed-in tariff regime violates a non-discrimination principle enshrined in the General Agreement on Tariffs and Trade and the WTO Agreement on Trade-Related Investment Measures. The WTO panel is nonetheless reported to have rejected the argument that the scheme amounts to an illegal subsidy under the Agreement on Subsidies and Countervailing Measures.

A judgment of this nature against Canada may embolden critics of other schemes bearing local-content requirements, thereby paving the way toward the dismantlement of local-content schemes in other countries. A number of local-content schemes are already under WTO scrutiny, including local-content requirements for oil and gas sector projects in Indonesia and for solar energy projects in India.

A planned procurement program for renewable energy in Saudi Arabia could also come under scrutiny. Under the stewardship of the King Abdullah City for Atomic and Renewable Energy, otherwise known as K.A.CARE, Saudi Arabia recently unveiled a program to add 55,000 megawatts of capacity in renewable energy over the next 20 years. K.A.CARE’s renewables program, which is underpinned by a desire to create jobs in Saudi Arabia, envisages a local-content requirement. K.A.CARE plans to issue requests for proposals to develop up to 600 megawatts in capacity from solar and 100 megawatts from wind during the second quarter of 2013.

Although, according to current plans, there is no local-content requirement for either the introductory or the first full-scale procurement round, developers bidding in each of these rounds are incentivised to use local content. If a bidding developer opts to incur “allowable local expenses” (to be defined in the relevant request for proposals) in the context of either of these procurement rounds, then the developer will be awarded extra bid points. The number of points awarded will depend on how much the “allowable local expenses” represent as a percentage of the total project cost.

Upon the launch of the second full-scale procurement round, K.A.CARE envisages that the existence of local content will become a mandatory requirement. In this context, the bidding developer would have the option of either incurring “allowable local expenses” in return for bid points or devising an offset scheme. Offset schemes are already in place, for instance, for procurements in the Saudi defense sector. Pursuant to these schemes, non-Saudi entities winning a defense contract are made to enter into an economic offset agreement whereby they commit to invest an amount equal to a defined proportion of the contract value in “innovative industrial and service projects” in Saudi Arabia, in collaboration with Saudi private sector companies.

If the WTO rules that Ontario’s feed-in tariff regime violates international trade law, then K.A.CARE’s local-content provisions, and in particular the mandatory requirement that is set to be implemented in the second full-scale procurement round, would come under scrutiny.

Saudi Arabia became a full member of the WTO on December 11, 2005.