Looking Back: 5 Years under Ontario’s Green Energy Act

On December 16, 2013, Ontario’s Minister of Energy, Bob Chiarelli, directed the Ontario Power Authority (OPA) to develop a competitive procurement process for new large-scale renewable projects focusing on bid price, proponent experience, financial capability and site due diligence.  The direction followed on directions earlier in 2013 not to procure any new large-scale renewable generation projects under Ontario’s Feed-in Tariff (FIT) Program.

These recent changes make it clear that the Ontario Government is changing its approach to large scale renewable generation procurement through the FIT Program, a core feature of the Green Energy and Green Economy Act, 2009 (the “GEA”).

This provides an opportunity to review and consider Ontario’s experience with the GEA, including the FIT Program, and to draw some timely insights and lessons learned concerning the policy objectives inherent in this legislation.

The primary focus of the GEA was the promotion of new renewable energy generation from on and off-shore wind, solar, water, biomass, biogas, biofuel, geothermal, and tidal sources; encouraging conservation and the smart grid; increasing ministerial directive powers; and accommodating First Nation and Métis interests.  The GEA can be seen as one implementation mechanism associated with Ontario’s broader policy to close all coal-fired generation facilities in the province.

The GEA was and remains, in part, an industrial policy aimed at securing new investment and creating new jobs in Ontario’s green economy while establishing Ontario as the North American leader in renewable energy.  The GEA represented a bold initiative made at a time of considerable economic uncertainty in Ontario and, more broadly, throughout North America.  Consistent with the intent to use the electricity sector as an instrument of industrial policy, over the past five years the ministry used its increased directive powers to issue numerous directives to the OPA and the Ontario Energy Board.  With an average of over five directives a year, the implementation of the GEA has been, in a word, turbulent.  This was largely due, in our view, to the rapid pace of change in permitting, pricing and sourcing of equipment under the GEA.  The practical insight would be to: slow down, consult broadly, have a clear understanding of the technical and system operation requirements associated with adding a large amount of renewable generation to the existing transmission and distribution networks in Ontario, and implementing significant new policies in a way that maintains stability in the sector.

The Government’s approach to promoting the implementation of the smart grid in Ontario has taken a more consultative, measured and pragmatic approach. The Ontario Smart Grid Forum produced a visioning report in 2009, an implementation report in 2011, and a report on access to consumer data in 2012. Electricity distributors (LDCs) are now required to file plans focused on smart grid development and implementation as part of their rate applications, and the province’s $50 million Smart Grid Fund focuses on supporting high-value demonstration projects that are partnered with LDCs to advance energy innovation in Ontario.  Major investments are not supported unless and until their value is demonstrably justified.

The prime objective of the GEA was to be achieved through a much more intensive approach with the new FIT Program launched October 1, 2009, the establishment of a new renewable energy facilitation office in the Ministry of Energy, the removal of local Planning Act control over renewable facilities, the streamlining of environmental approvals for all renewable fuels except waterpower into a single Renewable Energy Approval, and the creation of a mandatory obligation on utilities to connect new renewables, as well as the signing of a major green energy investment agreement by the Ontario government with a Korean consortium including Samsung C&T.

Looking back after five years, while the GEA succeeded in the rapid promotion of new renewable energy generation (although not without some hiccups, most notably the February 2011 suspension of offshore wind projects, stranding at least one FIT Contract holder in limbo), it has done so at significant cost – both financial and political. The OPA reports in its last available quarterly update dated March 31, 2013 that since 2009 it has entered into 1,706 FIT Contracts for large renewables constituting 4.54 TW of new renewable generation in Ontario. New wind accounts for the lion’s share (68.5 per cent) of total contracted capacity and new solar accounts for most of what remains (26 per cent).

These results have alternately been argued to be a success or a burden depending on your point of view. Generators received a guaranteed price, buyer, and long-term revenue stream without incurring the costs involved with participating in a standard RFP process.  Environmentalists and other advocates of renewable energy argue that Ontario has made progress towards a cleaner and greener electricity system with lower carbon output (in fact some suggest that the GEA constitutes a de facto carbon tax). Electricity system planners and operators had the challenging task to manage and incorporate a large wave of new non-dispatchable generation capacity (at least until the SE-91 market rule amendments become effective) arriving online when Ontario is recovering from a large drop in demand due to the economic downturn.  Consumers may perceive a greener and cleaner electricity grid but at a significant cost at least in part due to the generous subsidies paid to wind and solar developers.

First Nation and Métis communities have been strongly encouraged to participate in new renewable projects, through the Aboriginal Energy Partnerships Program, the Aboriginal Loan Guarantee Program, and through the design of the FIT program which provided a contract price adder, reduced security obligations, and later priority points and capacity set-asides.  The increased participation of First Nation and Métis communities in new projects has largely been viewed as a win-win and a necessary prerequisite to obtain the social licence to build new generation (and transmission) which impact upon Aboriginal lands and their traditional territories.

The core challenge faced by the FIT program was that it required the OPA to estimate in advance the right price for each renewable technology, not an easy job with ever changing market conditions, technology developments and costs.  As a standard-offer program, the OPA could not, through the FIT program, match the timing of new generation procurement with ever changing demand needs.  Moreover, the loss of local planning control over new projects added to the considerable local resistance to new projects, particularly wind power projects, driven by loosely organized grass roots individuals and organizations, particularly across rural Ontario.   The anti-wind generation concerns that have arisen across Ontario continue to represent a serious political risk which no party can ignore.

In this context, the Government’s plan to replace the large FIT program with planned, competitive procurements for large scale renewable generation projects with a focus on price, proponent experience, financial capability, site due diligence, and local considerations and interests, is a common sense approach aimed directly at addressing these concerns.

Conservation remains a core provincial objective under the GEA.  The primary focus for conservation and demand management programs remains on province-wide OPA programs implemented by LDCs, which are now required as a term of their distribution licences to meet an allocated portion of the Province’s 6,000 GWh consumption and 1,330 MW peak demand conservation and demand management targets between 2011-2014.  On December 5, 2013 the OPA reported 2012 results, with the OPA reporting that LDCs have succeeded in achieving a cumulative 65 per cent of the GWh savings and 20 per cent of the MW savings in the second of the four year program.  It remains to be seen if all LDCs will successfully achieve their mandated CDM targets, and what will happen if an LDC or multiple LDC(s) fail to meet that target.

From an electricity system perspective, the impact of the GEA is measureable and quantifiable. To a large extent it has been successful at promoting new renewable generation, advancing the smart grid, promoting conservation and First Nation and Métis interests. However, whether the benefits of the FIT program outweigh the costs over the long term remains to be seen.

From an industrial policy perspective of securing new jobs and new investments, some new jobs and investments have been made to advance these FIT projects with built-in domestic content requirements.  However, with Canada’s recent loss of its appeal of the WTO rulings finding the domestic content obligations not in compliance with GATT and the shift of the large scale FIT program to a competitive procurement, the question remains whether those jobs will remain for the long term.

As Ontario moves onward to its next chapter of electricity sector reform, policy makers can reflect on some important lessons emerging from the GEA’s implementation over the past five years:

  • The difficulties and risks associated with setting a standard offer price given the rapidly changing nature of underlying global markets. The shift to a competitive procurement for large renewables which factors in bid price will address many of these difficulties and risks, although new questions will no doubt arise.
  • The challenges associated with implementing sweeping electricity-related policy initiatives with broad scope and application.  The electricity sector is simply too important for all Ontarians not to have policy stability and certainty. The shift to address local considerations and interests represents a positive development to ensure continued stability and certainty.
  • The technical, physical connection and electricity system operator issues associated with incorporating significant quantities of new renewable generation into distribution and transmission networks cannot be ignored.
  • In addition to typical consultations, the increasing importance and influence of online and social media communications as a means of facilitating both opponents of and proponents for renewable generation should not be ignored.

J. Mark Rodger is a senior partner and co-chair of the Electricity Markets Group at Borden Ladner Gervais LLP in Toronto.

Leave a Reply