FIT 2.0… or FIT New? Ontario proposes new rules for Province's Feed-in Tariff Program
Volume 3 - Special Issue

The Ontario Power Authority ("OPA") has issued draft new program rules ("FIT 2.0 Rules") for the Province's Feed-in Tariff Program ("FIT Program") on the heels of the review recently completed by the Ontario Government. Developers can expect it to be significantly more difficult to secure a FIT 2.0 Contract under the new rules, which provide for application windows, procurement limits and a complicated priority ranking system.

Price Degression for Wind and Solar

The draft FIT 2.0 Rules introduce a new price schedule which reduces the prices paid for wind and solar. The pricing for other technologies remains unchanged. Price adders for Aboriginal and community projects have been maintained where the economic interest of Aboriginal and community participants exceed 15% (formerly the minimum was 10%). Price schedules and inflation escalators will now be reviewed and updated annually.

Price degression and reductions are not likely a surprise to most industry participants and observers. Indeed, many feed-in tariff programs around the world, including Germany, Spain and France, incorporate price degression or have reduced tariffs in succeeding years of a program.

That said, an applicant offered a FIT 2.0 Contract will be offered the pricing in effect when the contract offer is made, not the price in effect when the application was filed. This is considered a marked difference from the original FIT Program, potentially detracting from its transparency.

The New Queue

The proposed FIT 2.0 Rules include a system of priority rankings based on the significant involvement of groups not historically in the business of generating electricity – community, Aboriginal and public sector groups. A new priority points system clearly assigns priority to projects that have a community, Aboriginal or municipal, education or health ("MUSH" sector) component, whether as a direct participant in the project or as supporting entity. The rules, by design, make it very challenging for a developer to obtain points in these categories.

The new system includes seven categories of priority points, only two of which do not require some type of community, Aboriginal or MUSH sector involvement. A "system benefit" point may be awarded for fuel type, but is unavailable to wind and solar projects. Two points may be awarded for "project readiness", which is narrowly defined in relation to access rights. As most serious applicants should be able to meet this requirement, it is unlikely that an applicant will gain significant competitive advantage through this category.

Project Eligibility

While domestic content is not part of the priority points system, it remains part of the "eligibility" basket. As with the original FIT Program, FIT 2.0 projects must satisfy domestic content requirements, set at 50% for wind and 60% for solar facilities.

The priority points system clearly reflects the Government's policy emphasis on renewable energy projects involving specific community groups. The eligibility rules continue to emphasize economic development. Certainly the use of a feed-in tariff program is increasingly being used as a mechanism by which to encourage policy objectives beyond the development of renewable energy, such as community ownership, localized economic development and distributed generation. Nova Scotia's Community Feed-in Tariff Program is another prime example of this.

Connection Capacity Reigns Supreme

The FIT 2.0 Rules no longer include an economic connection test, which places applicants for which there is insufficient connection capacity into a holding queue until such capacity may be economically developed. What this means is that a developer needs to work within existing (or near developed) connection capacity. Practically speaking, applications will receive their priority ranking in accordance with the priority points system. Ties are broken by time stamp. Then, applications will be assessed, in order of rank, as to whether there is available transmission and/or distribution capacity, as applicable. The FIT 2.0 Rules urge applicants to consult with the applicable transmitter or distributor prior to submitting an application but the OPA reserves its discretion to determine whether an application can pass the applicable transmission or distribution availability test.

A key amendment requires a proposed project to be located within a certain distance from the facility's contemplated connection point. The FIT 2.0 Rules do not yet specify this connection distance, but the expected early emphasis on small FIT Projects may leave those interested in larger projects a bit nervous of the outcome. Large FIT projects are more likely to be affected adversely by an unduly short connection distance.

No Longer Open-Ended

Unlike the initial open-endedness of the FIT Program, the issuance of contracts will now be subject to periodic procurement limits set by the OPA in its discretion. In addition, the OPA intends to announce application periods during which applications may be submitted. The OPA may also determine the type of FIT Project that may be the subject of a particular application submitted during an application period, again in its discretion.

In some respects, it should not come as a surprise that FIT 2.0 will have caps on volume given that the Province is moving towards achievement of its renewable energy targets more quickly than anticipated. And while contraction of a FIT program might be somewhat expected generally (e.g. Spain), it could actually move in the opposite direction. Japan's recently proposed new FIT would attract significant more activity than its previous FIT. It is scheduled to come into effect in 2012.

When will it start?

The comment period on the draft rules and contract closed on April 27, 2012. Finalized versions were expected on May 7 but as at the time of writing, FIT 2.0 is not yet open for business.

Bernadette Corpuz is a Senior Associate in the Electricity Markets Group of the law firm Borden Ladner Gervais LLP (BLG). As a member of the Electricity Markets Group, Bernadette advises a wide range of energy market participants, including distributors, transmitters, generators, and commercial users with respect to a variety of commercial and corporate transactions related matters, including mergers and acquisitions, financing and energy markets. Bernadette can be reached at bcorpuz@blg.com or 416-367-6747.

May 28, 2012