OPA Issues hundreds of FIT Contracts

April 27, 2010

Although many kinks and details in the Ontario Power Authority (OPA) Feed-in-Tariff (FIT) program continue to be ironed out, more than six hundred developers of renewable energy generation facilities have been awarded FIT contracts since early March, representing approximately 2600 MW in generation capacity. The impressive uptake of the program seems to have come as a surprise to both the OPA and the provincial government, although the economics of developing renewable-energy generation projects under the FIT program was no secret among developers.

Capacity allocation exempt facilities

The OPA announced the first tranche of FIT contracts on March 10 - more than five hundred FIT contracts were offered to developers of projects with a generation capacity of less than 500 kWs. These "Capacity Allocation Exempt" (CAE) facilities represent a total of 112 MWs of generation capacity and are largely comprised of rooftop solar projects. CAE facilities are not required to provide initial application security upon the submission of an application under the FIT program, and are exempt from the OPA's distribution and transmission capacity testing. Although the OPA had originally intended to offer contracts to CAE project applications immediately after applications had been deemed complete, no further CAE facility FIT contracts will be offered until June, at the earliest.

Large-scale facilities

The OPA announced the second tranche of FIT contracts on April 8 - more than 180 FIT contracts representing almost 2500 MW of generation capacity. This is the first time that large-scale renewable energy projects have been able to access a standard offer contract program offered by the OPA. The Renewable Energy Standard Offer Program (RESOP) was replaced by the FIT program, but was limited to projects of 10 MW or less. Projects offered contracts under FIT range in size from less than 1 MW to 300 MW. Although seventy-six contracts were offered to proposed solar projects (representing 651 MW), the majority of the proposed generation capacity comes from on-shore wind projects, with forty-seven contracts offered to projects totaling more than 1229 MWs of capacity. One FIT contract was offered to a proposed offshore wind project with a proposed capacity of 300 MW. Once the contracts are finalized, project developers have a limited time to bring these projects online - three years from the date of contract for solar and wind projects.

Renewable energy - truly a sustainable resource?

The unprecedented growth of the renewable-energy generation market in Ontario over the first six months of the FIT program has many people questioning whether this rate of growth can be sustained. More than 2600 MW of capacity has been contracted for under FIT, which is double the 1300 MWs of renewable generation that has been developed in Ontario since 2003.

Generation is only one component to the growth of the electricity market in Ontario. Transmission and manufacturing are two other critical keys to ensuring these six-hundred-plus projects can be brought on to the Ontario grid. The FIT contracts granted so far have been assessed in light of the province's current transmission and distribution capacity, and will not require substantial expansion of either grid. But there remain more than 250 projects waiting for the OPA's "Economic Connection Test" (ECT), having been deemed by the OPA not economically viable under current transmission and distribution capacities. The ECT is intended to reassess the viability of proposed projects as new transmission capacity comes online. The completion of the approval process of the Hydro One Networks Inc. (HONI) Bruce-Milton transmission project represents a significant expansion of HONI's transmission grid and will add 1500 MW of transmission capacity to that region. The OPA has planned to run the first ECT in early fall 2010 and expects the Bruce-Milton transmission line will result in new FIT contracts being issued to projects affected by this development. The critical question that remains is "what next?" - HONI has been issued a directive from the provincial government to significantly build out its transmission capacity, and while the OPA and HONI have indicated that work on this expansion has begun, the timeline for the completion of any new transmission work is not clear, even for the Bruce-Milton line. Historically, obtaining all necessary approvals for transmission development projects can take years, and components of the Green Energy Act intended to streamline this process have yet to be tested.

The projects offered FIT contracts so far may not have to worry about transmission but, for the wind and solar projects, the domestic-content rules under the FIT contract continue to represent a significant hurdle to bringing these projects online. Currently, solar projects must meet a 50% domestic-content threshold and wind projects must meet a 25% domestic-content threshold; in 2011 the solar requirement is increased to 60% and in 2012 the wind requirement is increased to 50%. The 2011 and 2012 deadlines have caused many developers to fast-track development and construction plans for facilities granted FIT contracts in order to avoid the significantly more difficult domestic-content obligations. The OPA has been working with FIT program participants to try to clarify developer obligations under this aspect of the FIT contract. In March, the OPA announced that it will review and provide comments on a project's domestic content plan before the "Notice to Proceed" date, a change that will allow developers to get the OPA's feedback on certain equipment prior to entering into supply agreements. Further, the OPA has also indicated that it will provide developers with a non-binding reliance letter confirming that a project will meet the applicable domestic-content obligations under the FIT program. This is aimed at minimizing the significant barrier to financing FIT program projects that many project developers have been facing. Even with the changes to the domestic-content obligations thus far, many developers are hoping that the 2011 and 2012 deadlines will be extended.

The FIT program remains open to new applications; the OPA has received almost one thousand applications to date and more are expected. The announcement of the issuance of FIT contracts is an important step towards realizing the provincial government's goals under the Green Energy Act, but it is just that - a step. There remains considerable work to be done by developers, the OPA, local distribution companies, HONI, and the provincial government before any of the announced 2600 MW of renewable generation capacity starts powering the homes of Ontarians.

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