FIT Program Update — Elimination of OPA’s Right to Terminate

The Ontario Power Authority (OPA) announced a change to its Feed-in-Tariff (FIT) program yesterday that will alleviate a significant amount of uncertainty for project developers. The uncertainty surrounds Section 2.4 of the FIT Contract, which provides the OPA with the right to terminate the FIT Contract in its sole and absolute discretion until it has issued notice to proceed (NTP) to the Supplier (the counterparty to the FIT Contract). Pursuant to Section 2.4, the OPA’s unilateral right to terminate only expires upon issuance of the NTP.

In order to be eligible for an NTP, however, the Supplier is required to meet four pre-requisites (NTP Pre-requisites), which include (i) completion of environmental regulatory permits (for wind and solar, a Renewable Energy Approval or "REA"); (ii) a completed financing plan confirming financing for a minimum of 50 per cent of the expected development costs; (iii) for wind and solar generators, a Domestic Content Plan; and (iv) completion of impact assessments.

Despite the good intentions of the government to streamline the environmental and municipal permitting process, the REA has proven particularly hard to obtain. So much so that the OPA issued a blanket one-year extension for project commercial operation dates in an effort to curb force majeure claims for failure to obtain an REA. Failure to obtain an REA has prevented many Suppliers from applying for an NTP, thereby forcing them to continue to develop their projects under significant uncertainty.

Although the "termination at will" right of the OPA was originally intended to be used by the OPA to terminate badly managed projects, with the election uncertainty industry became much more concerned that Section 2.4 could be used as a political tool by an incoming government to cancel FIT Projects on a discretionary basis (through the OPA as its proxy) at a relatively small cost.

However, the OPA’s recent announcement alters the OPA’s "termination at will" right and, consequently, the ability of an incoming government to cancel FIT projects through the provisions of the FIT Contract alone. Essentially, provided that the Supplier meets the milestones below, the OPA will waive its right to terminate the FIT Contract prior to the NTP.

The new milestones are:

  1. Execute the Waiver by October 14, 2011;
  2. File a Domestic Content Plan with the OPA by October 14, 2011; and
  3. Provide evidence of agreement(s) for the purchase of Generating Equipment by November 30, 2011 (collectively, the "Waiver Requirements").

The Waiver does not alter the NTP requirements under Section 2.4(b). The Supplier is still required to obtain an NTP prior to starting construction, within the timeframes contemplated in the FIT Contract (i.e. a minimum of six months prior to the Milestone Date for Commercial Operation). The REA process is still one to be reckoned with, especially if regulatory changes are contemplated by an incoming government that is not keen on renewable energy (and arguably, jobs in the sector). However, Suppliers with frame agreements for wind turbines or solar panels will be especially well placed to meet the Waiver Requirements.

While this is a positive development in terms of providing contractual certainty to developers, it is by no means an elimination of "sovereign risk" in the development process. Indeed, the provincial government can always enact legislation to cancel FIT Contracts and/or eliminate or restrict the right to sue it or its affiliates/agencies. Changes to municipal permitting under the Planning Act, which was amended by the Green Energy Act to prevent municipalities from restricting renewable power development through zoning by-laws, are perhaps a bigger threat to developers.

Regardless of what the provincial election may bring in October, the OPA’s recent changes put developers in a stronger strategic position and enable them to finance their projects more easily, in that they will have enforceable contracts that the government would need to pass legislation in order to repudiate.