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Ontario's Standard Offer

Financial incentives work, but beware potential pitfalls.

Fortnightly Magazine - December 2008

The Province of Ontario instituted the first open renewable-energy standard-offer program 1 (RESOP) in North America in November 2006. RESOP offers 20-year power-purchase agreements to all proponents meeting the eligibility criteria and prerequisites. By measure of contracts signed, the program has succeeded beyond expectations. But by measure of capacity actually in place, the ultimate verdict on program success still is out.

The much-greater-than-expected response to the RESOP spotlighted some program design features that led to unintended consequences. The responsible agency, the Ontario Power Authority 2 (OPA) froze applications 3 on May 13, 2008 and began a comprehensive program review. By the end of the second quarter of 2008, OPA had signed contracts with 347 participants for 1,491 MW of renewable capacity. The rate of contracting slowed dramatically in the third quarter of 2008 due to the freeze on new megawatt-scale applications.

The most recent data show that OPA, by the end of August 2008, had signed contracts with 362 proponents for 1,497 MW of renewable power capacity (see Figure 1) . At that time, 114 projects with total capacity of 58.7 MW had reached commercial operation. So far, the contracted capacity is about 15 times the in-service capacity. Just over half of the capacity in service is wind, with a very small amount of solar photovoltaic (PV), while more than one-third of the signed contracts are for solar PV.

Program Design

In Ontario, generation eligible for the RESOP must be no more than 10 MW, connect to the system of a distributor, and run on hydroelectric, wind, solar PV, solar thermal, or biofuels, biogas, renewable biomass 4 or landfill gas.

As prerequisites for a contract, a project proponent must demonstrate control of the proposed site, have a completed connection-impact assessment from the distribution utility where the electricity will be injected, and have applied for any necessary environmental approvals.

The 20-year contracts pay C$110 per MWh for all generation except solar PV, which receives C$420 per MWh. Projects that can shape their output can be compensated an additional C$35.20 for energy delivered on-peak. To account for increases in operating costs, 20 percent of the contract price is escalated by the rate of inflation. Projects must be in service by three years from date of contract signing, but the only penalty for missing the deadline is loss of the OPA contract. OPA sets no cap on the total amount of energy to be purchased under the RESOP and no cap on the amount that any proponent can contract.

The $110 per MWh represents a significant premium over the estimated maximum of $95 per MWh that OPA paid to successful bidders in its request for proposal (RFP) process for renewable supplies. The premium is calculated as a credit for avoided transmission losses, plus compensation to make up for the smaller scale of

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