Over 8 months have passed since the last pieces of Ontario’s landmark Green Energy and Green Economy Act, 2009 (the “Green Energy Act”) fell into place. The past several months have been a flurry of activity, as renewable power developers and their suppliers have scrambled to take advantage of the new lucrative market for green energy generation in the province. With many generation contracts in place, market participants must now shift gears from planning to execution.

This bulletin provides a refresher about the key features of the Green Energy Act, including the following:

  1. The Feed-in Tariff (“FIT”): renewable energy projects receive premium prices for electricity delivered to the grid under 20-year contracts with the Ontario Power Authority (“OPA”);
  2. Guaranteed priority interconnection: renewable projects are guaranteed access to the grid ahead of traditional thermal projects, subject to capacity availability;
  3. Renewable Energy Approval (“REA”): with some exceptions, renewable power projects must obtain a single Renewable Energy Approval, which consolidates requirements from a variety of former provincial and municipal environmental and land use approvals;
  4. Support for aboriginal and community projects: projects with sufficient aboriginal or community investment qualify for a “rate adder” to boost the price paid for the power they generate and may benefit from other government assistance; and
  5. New roles for the Ontario Energy Board (“OEB”): the Green Energy Act revised the mandate of the provincial utility regulator to require it to facilitate the government’s green energy policy.

The bulletin also highlights some of the issues that have arisen as the OPA and the government have put the Green Energy Act into practice.

Feed-in Tariff

Under the FIT, private renewable project developers may receive premium prices for renewable power pursuant to 20-year electricity purchase agreements with the OPA. As shown in the table below, FIT prices vary by renewable power source and project size.

See table.

Most FIT prices are subject to limited inflation indexing whereby only 20% of the price is adjusted (with the remaining 80% of the price remaining fixed over time). The price for solar PV projects, however, is not indexed.

Operators of biomass, biogas, landfill gas and waterpower projects have some control over when power is generated. These types of project are thus eligible for a peak performance factor, which increases the price during peak demand hours.

The OPA has developed standard form contracts for both large scale and small scale projects (the former being marketed under the “microFIT” banner). The contracts deal with a variety of pre- and post-commercial operation date issues, including performance security, design and construction requirements, lender’s rights, force majeure, liability and indemnification, and settlement. Of particular interest to developers is the concept of a Notice to Proceed, which the OPA issues after the contract has been signed and the developers have completed milestones related to the REA, connection and system impact assessments, and financing. Before the Notice to Proceed is issued, the OPA can terminate the contract and benefit from a low limitation of liability.

The OPA also administers the process by which FIT contracts are awarded. In the first two months of the FIT, special “launch phase” rules applied. However, the launch phase is now closed. Some noteworthy aspects of the application process are discussed in the next section of the memo.

To date, the OPA has received several thousand FIT and microFIT applications and has thus far awarded FIT contracts in three tranches:

  • 710 microFIT contracts totalling 8.6 MW of nameplate capacity, announced in December 2009;
  • 510 mid-size FIT contracts for projects ranging from 10 kilowatts to 500 kilowatts totalling 112 MW, announced in March 2010; and
  • 184 large-scale FIT contracts totalling about 2,500 MW of nameplate capacity, announced in April 2010.

The OPA will continue to award contracts to eligible applicants.

A controversial aspect of the FIT concerns domestic content requirements. The Green Energy Act was design to be both an electricity act and a “green collar” job creation initiative. To ensure that jobs are created in Ontario, the government requires that a certain percentage of equipment and services for any FIT project be sourced from suppliers in Ontario. These domestic content requirements have prompted many established and new suppliers to set up shop in the province. However some question whether the rules will prompt similar restrictions in other jurisdictions (shrinking the market Ontario hopes to serve).

Guaranteed priority interconnection, subject to capacity availability

The Green Energy Act modified existing legislation to provide that all qualifying renewable energy projects now have a right to connect to the grid. Furthermore, renewable energy projects have priority over other types of generation, meaning that they are allowed to “jump the connection queue” (in the past, the queue was determined on a first come, first served basis).

While guaranteed priority interconnection is assured at a legislative level, it is not as certain at a practical level. The distribution and transmission grids in Ontario have a finite capacity to accommodate new renewable generation. As a result, projects only benefit from guaranteed priority interconnection in locations that have spare connection capacity.

Capacity allocation is managed by the OPA as part of the FIT program. For all but smaller “capacity allocation exempt” projects, the OPA runs FIT applications through a transmission availability test (“TAT”) and, if applicable, distribution availability test. Where capacity is not available, applications are put into a waiting list. Projects on the waiting list are run through an economic connection test (“ECT”) which is intended to assess whether the project could ever be economically connected, taking into account planned grid expansion and reinforcement projects.

The OPA ran the first TAT after the launch phase and plans to announce the results of the next TAT in early July. Results of the first ECT will not be available until the first quarter of 2011.

Renewable Energy Approvals

The next major innovation of the Green Energy Act was the introduction of the Renewable Energy Approval. In the past, a project developer would have to get several different approvals from a number of provincial ministries and from the municipality in which the project was to be located. Now, renewable power project developers need only get an REA from the Ministry of the Environment (“MOE”).

The change is intended to streamline the approvals process. However, the requirements for an REA, which were developed by the MOE in conjunction with the Ministry of Natural Resources (“MNR”), remain numerous and intensive. It is therefore expected that proponents will still have to invest a significant amount of time and money in obtaining their REAs.

The MOE and MNR have published guides to obtaining the REA as well as six technical guidance documents to assist proponents in preparing their REAs.

A key feature of the REA regime is that it removes approval power from municipalities. Previously, renewable project developers risked running into significant zoning and planning issues in municipalities where local opposition (or “NIMBYism”) to such projects was strong. Projects tended to be delayed by fights before the Ontario Municipal Board (“OMB”). Under the new regime, opponents can no longer delay projects by pressuring local councillors to deny zoning and planning applications or challenging such decision at the OMB.

However, the REA still requires proponents to consult extensively with local stakeholders. It also permits local stakeholders to appeal the grant of an REA to the Environmental Review Tribunal (“ERT”). Appeals are available as of right, meaning it may be easy for local opponents to initiate a challenge of an REA. However, opponents must demonstrate that the project would cause “serious harm to human health or serious and irreversible harm to plant life, animal life, or the natural environment,” a threshold that may be hard for opponents to clear. For example, many opponents of wind turbines allege that the low frequency noise they produce makes people sick. Recent research by Ontario’s Chief Medical Officer suggests otherwise. Ultimately, it is a question that may go to the ERT.

Proponents should note that the REA is a provincial creation. It does not oust federal jurisdiction. Depending on the nature, location and expected impacts of a project, a proponent may still be required to get federal approvals.

Support for aboriginal and community projects

The Green Energy Act is intended to spur renewable project development by communities and aboriginal groups. As described below, it does so in several ways.

Community and aboriginal projects can qualify for rate adders under the FIT. The level of the rate adders is determined on a sliding scale beginning with a minimum economic participation level of 20% and topping out once the participation level reaches 50%. The maximum rate adder depends on the renewable technology, and varies from 0.6 cents/kWh to 1.5 cents/kWh for aboriginal groups and from 0.4 cents/kWh to 1.0 cents/kWh for community groups. Small scale and rooftop mounted solar PV projects are not eligible for these adders.

To provide further incentive to aboriginal groups, the government implemented a Aboriginal Energy Partnerships Program (“AEPP”). The flagship of the AEPP is the Aboriginal Renewable Energy Fund, which will offer grants of up to $500,000 per project to support pre-development, design and development, and regulatory approval work up to the point where a project receives a Notice to Proceed from the OPA. The AEPP also includes an Aboriginal Renewable Energy Network, a web-based resource that is intended to help Aboriginal communities learn about developing renewable energy generation facilities and share knowledge and best practices, as well as a Aboriginal Community Energy Plan program, that will help aboriginal communities develop conservation and demand management plans.  

To assist community groups, the government also launched a Community Energy Partnership Program (“CEPP”). The CEPP is predominantly a source of grants of up to $200,000 for community-based renewable power projects. Unlike grants under the Aboriginal Renewable Energy Fund, CEPP grants will not be available for pre-feasibility work. However, AEPP grants will be available for both design and development work and regulatory approvals.

Both the AEPP and CEPP are administered by the OPA and are subject to eligibility requirements.

New roles for the Ontario Energy Board

The OEB is the economic regulator of Ontario’s electricity and gas markets. Historically, its function has been to ensure that generators and utilities charged fair rates to enable them to recover the costs associated with their used and useful load-serving assets. The Green Energy Act has modified this role somewhat by requiring the OEB to help drive the province’s transition to green energy. The Green Energy Act added the following three objectives to the OEB’s mandate:  

  • The promotion of renewable energy, including the timely connection of renewable energy projects to transmission and distribution systems;  
  • The promotion of conservation and demand management; and  
  • The facilitation of the implementation of a smart grid.  

As a result, the OEB is implementing a variety of green initiatives. In many cases, these initiatives will enable (if not require) utilities to make additional investments in system upgrades and new enabler lines.

Combined with the need to recover the price of electricity under the FIT, the cost of these new investments is already nudging up the price of electricity in the province. Both the OEB and the government will have to search for balance between the costs of green electricity and the economic benefits that the Green Energy Act can create for the province.