The Fitness Director is in Town: Two new directives in two months’ time for ONTARIO’S Feed-in Tariff Program
On June 12, 2013, Ontario’s Minister of Energy issued a directive to the Ontario Power Authority (“OPA”) pursuant to the Electricity Act, 1998 to amend the Feed-in-Tariff (“FIT”) program. The directive expands upon the announcements made in a speech by the Ontario Minister of Energy to an energy industry association less than a month prior.

Green revenue opportunities for the Province’s public sector
Under the directive, the OPA was tasked with revising the FIT program for renewable projects between 10 and 500 kW (“Small FIT”) to give priority to projects partnered or led by municipalities and public sector entities, including publicly funded schools, colleges and universities, hospitals and publicly-owned long-term care facilities, and public transit. These incentives include the provision of a ‘price adder’ to the standard FIT pricing, the provision of priority points during the application process and the creation of capacity set-asides.

The OPA has also been tasked with addressing two areas which have been particularly problematic from a public sector perspective. Firstly, the OPA will be required to ensure that site access requirements for municipalities and public sector entities are compatible with applicable public sector procurement legislation and directives. Secondly, the OPA will be required to provide municipalities and public sector entities with access to funding for costs associated with design and development of their Small FIT projects. This funding will be similar to the funding that is already available for community co-op and aboriginal sponsored projects.

These announcements and directives clearly signal Ontario’s strong commitment to small renewable energy projects by making a total of 900 MW of new capacity available between now and 2018 for the Small FIT and microFIT (10 kW and under) programs. The OPA will open a new procurement window for Small FIT and microFIT starting in the fall of 2013. The fall 2013 procurement target will be 70 MW for Small FIT and 30 MW for microFIT, with annual procurement targets being set thereafter at 150 MW for Small FIT and 50 MW for microFIT. The OPA will also be launching a pilot program for rooftop solar projects on unconstructed buildings during the new procurement window for Small FIT.

Testing Fitness – Large FIT Players to Compete
The Minister also directed the OPA to develop a competitive procurement process for renewable energy projects over 500 kW, which will replace the existing large project stream of the FIT program. Under the new competitive procurement process, the OPA will be required to engage with municipalities to help identify appropriate locations and siting requirements for future large renewable energy projects. The Government has also asked the Independent Electricity System Operator and the OPA to consult on the development of regional energy plans to ensure that the right siting decisions are made the first time. The OPA will be providing the Minister with interim recommendations by September 1, and will continue consultations throughout the fall of 2013.

The Playing Field is still Global
By now the global renewable sector has seen the rulings adopted by the World Trade Organization over the challenges made to Ontario’s Feed-in Tariff program. The Ontario Government intends to amend the FIT Program for compliance with these rulings. While the Province works towards a full implementation plan for compliance, the Government has directed an interim plan. On August 16, 2013, the Minister of Energy issued a directive to the OPA to reduce the domestic content requirements for new FIT procurement. The directive provides that new FIT contracts will require facilities to achieve the following minimum domestic content:

• For on-shore wind facilities, the minimum domestic content level shall be 20 percent.
• For solar photovoltaic, (PV) facilities utilizing crystalline silicon PV technology, the minimum domestic content levels shall be 22 percent.
• For solar photovoltaic, (PV) facilities utilizing thin-film PV technology, the minimum required domestic content level shall be 28 percent.
• For solar photovoltaic, (PV) facilities utilizing concentrated PV technology the minimum required domestic content level shall be 19 percent.

These required levels will be in effect until the Minister issues another directive to the OPA for final implementation requirements in relation to the WTO rulings.

LDC Business Enhancements
Folks not intimately familiar with local distribution in Ontario are often surprised to discover there are almost 80 electricity distributors (local distribution companies, or LDCs) in the Province. The audible gasp often reflects disbelief that such a high number cannot possibly be an efficient model for the sector. Indeed, the sector has been the subject of significant study in the Province over the past few years. Substantial reviews have reached similar conclusions that regional consolidation of LDCs would provide beneficial synergies and cost savings to Ontario’s electricity consumers. But despite the number of industry experts recommending consolidation, it is by no means an uncontroversial issue rooted in the duelling argument that what is good for the sector may not be good for a particular LDC.

Other voices have suggested that there are other ways to obtain the cost savings and synergies, was that are more appropriately tailored to a specific LDC. Expanded business or revenue opportunities are bandied about, such as the multi-utility model that includes water services and amendments to regulatory decisions to enable LDCs to perform street lighting. LDCs in Ontario are statutorily required to engage only in approved businesses so the typical strategic thinking on seeking out business opportunities is inherently dampened. The challenge, of course, is that the demands placed on LDCs continue to increase, whether rooted in pressures to replace aging infrastructure and enhance infrastructure to accommodate renewables.

As a result, a recent proposal made by the Ministry of Energy is a hopeful source of new revenue for LDCs.

Expanded revenue
On July 2, 2013, the Ministry of Energy posted a proposal to the Environmental Registry to amend Ontario Regulation 161/99 to allow distributors to provide street lighting and sentinel lighting services, maintenance, and repairs (EBR Registry Number: 011-9501).

The proposal was posted for a 45 day public review and comment period starting July 2, 2013. Interested parties had until August 16, 2013, to submit comments.

The Ministry of Energy describes the purpose of the proposal as follows:

“Section 71 of the Ontario Energy Board Act (OEBA) 1998 currently restricts licensed electricity distributors from directly undertaking most business activities, including activities related to street lighting and sentinel lighting, a legacy of the 1998 electricity sector restructuring that encouraged competition.

Section 71 of the OEBA originally intended that competitive work, such as street lighting, be done by an LDC affiliate or independent third party. As such, LDCs are restricted to undertaking distribution activities such as repairing lines and poles. This original policy intent is reflected in Section 71(1) of the OEBA which prohibits an electricity distributor from carrying on any business activity other than distributing electricity, except through one or more affiliates.

However, over the past decade, the policy landscape has evolved. Electricity distributors have been allowed to expand their business into competitive conservation and renewable generation activities.

For instance, as part of OEBA amendments in 2004, Section 71(2) was added which allowed electricity distributors to provide services related to the promotion of electricity conservation and the efficient use of electricity. This included energy efficiency improvements to street lighting. In practical terms, this amendment meant that electricity distributors could provide street lighting and sentinel lighting services, maintenance or repairs themselves (rather than through affiliates) to improve energy efficiency (e.g. install new efficient bulb), but not for other purposes (e.g. replace existing bulb).

The current approach to providing street lighting and sentinel lighting services, repairs, and maintenance lacks regulatory consistency and is overly restrictive. It permits LDCs to replace incandescent bulbs with more energy efficient bulbs. However, LDCs are not allowed to replace a broken bulb with another identical bulb because that would not be considered ‘distributing’ electricity or promoting electricity conservation or efficient electricity use.

This approach also limits choices for owners of street lighting and sentinel lighting assets, particularly those in some smaller towns and rural communities in Northern Ontario where there is a lack of competitive alternatives to the local LDC.

In order to allow the full-servicing of street lighting and sentinel lighting, the Ministry of Energy is proposing to amend Ontario Regulation 161/99. This regulation prescribes exemptions from various sections of the OEBA. The proposed amendment would exempt licensed electricity distributors from section 71(1) of the OEBA, with respect to providing street lighting and sentinel lighting services, maintenance or repairs in their licensed distribution territory.

Both LDC affiliates and independent third party contractors would still be able to bid for and undertake this work. It would also not affect the flexibility and choice of municipalities to directly undertake this work.

This proposed amendment would expand the scope of business activities that LDCs could undertake. This is consistent with recent amendments giving LDCs the authority to provide services that promote energy conservation and efficiency without using an affiliate.
 
However, LDCs would be restricted to providing these services in their own service territory (defined in their OEB licence), and at the fully allocated cost, to ensure a fair competitive tendering process and protect ratepayers from any potential cross-subsidization of municipal shareholders or taxpayers.”

The proposal is viewed by the LDC sector as a win – a win to conduct business activities that LDCs have long argued are a natural extension of their assets.

About the authors

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.
 

John Vellone is an associate in the Electricity Markets and IT Groups of the law firm Borden Ladner Gervais LLP (BLG). John practises corporate/ commercial and regulatory law with a focus on energy law and matters relating to the Ontario electricity sector and specializes in the corporate/commercial and regulatory components of electricity markets and infrastructure revitalization. John can be reached at jvellone@blg.com or 416-367-6730.