A New Era for Renewable Energy in Ontario

Torys Quarterly: Sector Influences

Renewable energy and electricity prices were a hot topic in the 2018 Ontario election, and Doug Ford’s government wasted no time in making a splash in this area after taking office.

The new government has taken a number of significant steps in the renewable energy sector. To date, it has: cancelled the White Pines Wind Project (Project); directed the cancellation of 758 power purchase agreements for renewable energy projects in early stages of development; and proposed Bill 34, which would repeal the Green Energy Act and reintroduce municipal planning requirements for renewable energy projects. While many specifics of Bill 34 have been left to yet-to-be enacted regulations, the provisions of the proposed legislation create added uncertainty for contracted projects. Although the Ontario government has provided some compensation to the developers of cancelled projects, the measures described in this article will make it challenging to develop large-scale renewable energy projects in Ontario over the next four years.

Cancellation of White Pines Wind Project

One of the new provincial government’s first moves in office was to enact the White Pines Cancellation Act (Act), cancelling the Project’s feed-in tariff contract (White Pines’ FIT Contract) and regulatory approvals, and requiring White Pines to decommission the Project. The Act also limited the compensation payable to White Pines to an amount calculated in accordance with the provisions of the Act. Importantly, the Act extinguished any cause of action that White Pines might have against the Crown (or anyone else) in connection with the termination. Unlike the 758 cancelled power purchase agreements described below, the Project was under construction when it was cancelled.

White Pines’ FIT Contract was awarded as part of the feed-in tariff program (FIT Program). Later, in the Large Renewables Procurement I (LRP I), the Independent Electricity System Operator (IESO) (i.e., the contract counterparty) gave itself the right to terminate contracts after key project development milestones were met, but before commercial operation. The LRP I contracts set out a formula for calculating compensation for any such termination. 

Industry participants should closely monitor ongoing developments to determine whether their projects may be impacted.

White Pines’ FIT Contract contained no similar termination right or compensation formula. However, the Act effectively imposed that compensation formula on White Pines (with modifications) by providing that compensation shall be payable for: (1) reasonably incurred development, acquisition, leasing and construction costs; (2) debt amounts and debt make whole amounts; and (3) reasonably incurred employee termination payments, subcontractor losses, landowner losses and decommissioning costs (among other things), minus certain amounts such as accounts receivable and insurance proceeds.

This compensation formula appears intended to make White Pines whole for expenses incurred in the development and decommissioning of the Project. However, it does not provide any compensation for foregone revenues. Unlike feed-in tariff contracts from later rounds, it also does not provide any return on equity capital; however, it does leave the door open for further compensation to White Pines by giving the Ontario government power to make regulations prescribing compensation.

Cancellation of 758 Renewable Energy Contracts

Soon after taking office, the Minister of Energy, Northern Development and Mines Greg Rickford directed the IESO to “immediately take all steps necessary to wind down” (1) all contracts issued in phases two to five of the FIT Program where the IESO had not issued Notice to Proceed (NTP) and (2) all LRP I contracts where the IESO had not notified the developer that all Key Development Milestones (KDM) have been met. NTP and KDM are milestones in project development after which project construction generally begins.

The Minister’s directive resulted in the IESO taking steps to cancel 758 renewable energy contracts. Although the IESO had the contractual right to terminate these pre-NTP and KDM contracts, the cancellation of renewable energy contracts on this scale was unprecedented.

In providing notices of contract termination to suppliers, the IESO appears to be offering the minimum compensation required by the FIT and LRP contracts. Under both contracts, the IESO is required to pay to the developer an amount equal to the developer’s Pre-Construction Development Costs (up to a limit of $400,000 plus $2 per kW of contract capacity for each cancelled contract) for pre-NTP or KDM cancellation.

Initial Reactions and Added Uncertainty

Despite these actions by the Ontario government, credit rating agency DBRS explained in an August 10 report it “continues to believe that Ontario has a stable institutional framework, under which government has historically upheld its contractual obligations.”

However, about a month after DBRS released its report, the Ontario government added further uncertainty into the mix by introducing Bill 34 (Green Energy Repeal Act, 2018) on September 20. Although Bill 34 leaves many details to future regulations, key provisions include proposed changes to the Planning Act, which removes Planning Act exemptions that previously benefited renewable energy projects.

In practice, this will give municipalities greater control over the development of renewable energy projects in their jurisdiction. It is not yet clear whether those amendments will be applied retroactively to renewable energy projects that are currently under development. Bill 34 would also authorize regulations prohibiting the issuance or renewal of renewable energy approvals, except where proponents can demonstrate a need for the electricity expected to be demonstrated by the project. Public consultation periods are currently open in respect of these proposed regulations, as well as Bill 34 generally.

The Future Remains Uncertain

It is clear the new Ontario government has already had a major impact on the renewable energy sector in the province. With the exception of White Pines, the Ontario government has not yet taken steps that would impact projects currently under development. However, industry participants should closely monitor ongoing developments in this sector, in particular the repeal of the Green Energy Act, to determine whether their projects may be impacted.

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