Change is in the wind, again: Ontario PC party to cancel feed-in tariff program and samsung contract if elected 

publication 

May 2011

Energy Bulletin

The upcoming Ontario provincial election on October 6, 2011 may lead to yet another major upheaval in the province's electricity sector. Tim Hudak, leader of the Progressive Conservative Party of Ontario, announced on May 10 that if his Party is elected, he will cancel both Ontario's Feed-In Tariff Program ("FIT") and the generation and manufacturing arrangement reached with the Samsung-led Korean consortium (the "Samsung Transaction").

Feed-In tariff

FIT was introduced by the Ontario Power Authority in October 2009 pursuant to a directive from the Liberal government's Minister of Energy. At the time, FIT was widely acknowledged to be the leading program of its kind in North America, and a model for other jurisdictions wishing to attract significant renewable energy development.

To date, FIT has attracted almost 6,000 applications representing 17,200 MW of supply. Of those, only 27 FIT projects representing 13 MW are in commercial operation, leaving over 5,900 FIT applicants, representing over 17,000 MW, at risk of cancellation due to this announcement.

The PC Party has vowed to "integrate renewable energy into Ontario's supply mix…at prices families can afford." However, with an average spot market price last year of 3.79¢/kWh, compared to FIT prices of 13.5¢/kWh for wind power and up to 80.2¢/kWh for small rooftop solar, their challenge will be to convince private developers and investors to incur the higher costs inherent in building renewable generation, without offering to pay the higher prices offered under FIT.

On the other hand, over 1,200 FIT Contracts representing 3,000 MW have already been awarded under FIT, with another 400 MW of offers outstanding. Given the conventional wisdom that Ontario is best served by a diverse supply mix, that 3,400 MW of new renewable generation, when combined with over 8,000 MW of renewable capacity already in operation, may be a sufficient renewable component in a system that peaks at 27,000 MW.

Samsung transaction

In 2010, the Liberal government struck an agreement with Samsung C&T Corporation and Korea Electrical Power Corporation, reportedly worth $6.7 billion, pursuant to which the Korean consortium would develop 2,500 MW of renewable generation, and would in addition construct at least four green energy-related manufacturing plants in Ontario, generating an estimated 16,000 direct and indirect jobs. In exchange, the Ontario Power Authority would purchase the power output for an undisclosed price and term, and would grant priority access to connect Samsung's projects to the distribution and transmission system, ahead of all FIT participants.

Because the details of the Samsung Transaction have never been disclosed by the Liberals, despite intense political pressure to do so, it is not known what, if any, damages, fees and penalties would be payable by Ontario taxpayers or electricity consumers if the agreement were to be cancelled, as pledged by the PC Party. It may be in time be revealed, and is probably fair to assume, that the costs of pursuing this agreement will lead to significant rate increases for Ontario customers. However, it may also be revealed in time that cancelling the agreement could lead to the same or larger rate hikes.

market uncertainty

If the PC Party is elected and follows through on this commitment, this will be the latest in a long list of major changes in Ontario's energy policy since 1998, when the Energy Competition Act was introduced.

The introduction of competitive electricity and retail markets by the PC Party in 2002, and the introduction of RFPs, RESOP and FIT by the Liberal Party from 2005-10, have all been positive developments in attracting private investment, jobs, and power supply to Ontario's economy. Conversely, the closing of the market by the PC Party, and the cancellation of RESOP and prioritization of the Samsung Transaction by the Liberal Party, have collectively given Ontario a reputation for uncertainty which has fostered significant skepticism among the international energy and investment communities. This latest pledge to terminate the FIT program and cancel the Samsung Transaction may solidify that reputation and continue to keep truly large-scale energy investors, both local and foreign, from placing Ontario at the top of their priority lists.

Even if the PC Party is not elected in October, the Liberal Party has vowed to review FIT pricing in any event. Thus regardless of which Party forms the next government, the result could be the same: either a dramatic about-face in policy in which the FIT program and Samsung Transaction are formally cancelled, or a FIT Program continued in name only with reduced prices that effectively eliminate or drastically reduce future projects and investments.

what does this mean for renewable market participants

It should be noted that the PC Party has committed to honour existing FIT Contracts for "those who have invested in FIT projects under current rules". While it is not clear on its face whether "investment in FIT projects" includes soft costs such as engineering, legal, land acquisition, and equipment deposits (in which case most developers with a FIT Contract in hand will be protected whether or not they have achieved Notice to Proceed), or would only include hard construction and equipment purchase costs (in which case every project is at risk prior to Notice to Proceed), Mr. Hudak's office has advised McMillan LLP that all executed FIT Contracts will be preserved, regardless of whether Notice to Proceed has been issued. Nonetheless, developers with FIT Contracts in hand may be well advised to proceed to NTP, secure equipment supply and commence construction as quickly as possible prior to the October 6 election date, while at the same time revisiting the termination, force majeure and liquidated damages provisions of their various contracts in the event that their FIT Contract is revoked, their FIT Contract is preserved but Notice to Proceed is withheld, or their domestic suppliers disappear.

Renewable energy service providers and equipment manufacturers who are considering locating in Ontario with a view to selling their services or products to FIT projects in accordance with FIT's domestic content requirements should consider whether they have sufficient orders in hand to justify relocating or expanding to Ontario, and then use their best efforts to assist their customers to achieve Notice to Proceed and commence construction prior to October 6. If those orders include supply to FIT projects, they too should review the termination, force majeure and liquidated damages provisions of their contracts. If those orders include supply to Samsung projects, a more rigorous review of all legal remedies may be in order as well.

by Mike Richmond

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2011