The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Ontario's Standard Offer
Financial incentives work, but beware potential pitfalls.
transformer stations could get favorable queue positions. Many proponents are well-financed and organized project developers who broke down larger projects into 10 MW chunks in order to qualify for the RESOP. These large proponents were quicker off the mark than the farmers, First Nations and community organizations, whose RESOP projects would be their first ventures into electricity supply. As a result, the larger proponents were able to get connection-impact assessments early, tying up all the capacity at key transformer stations and crowding out the smaller proponents.
Another constraint occurs because the total size and number of proposed projects has complicated the connection-impact assessment process. Collectively, the amount of RESOP generation proposed for injection at some transformer stations is higher than the minimum load on that transformer, potentially turning it at times from a withdrawal point to an injection point. When injection exceeds 10 MW in aggregate, the change requires a system-impact assessment from the Ontario system operator.
Other factors have kept new proponents from obtaining RESOP contracts:
• HONI is unable to keep up with connection-assessment requests, leading to significant delay from the prescribed 90 days to up to nine months;
• As the municipalities gain more experience with RESOP projects, the permitting process has become more contentious and lengthy; and
• Lack of transmission capacity has led OPA to declare first Orange and then Yellow restricted zones. OPA will not give new contracts to developers located in these zones, which include some of the best wind regimes in the province. The zones also have forestalled some biogas projects, which typically are no larger than 250 kW.
These strains on the system have made proponents hang on to their connection queue positions even if they’re not sure they’ll complete their projects. Current rules let them keep the connection queue position at no cost. In effect, the proponents can treat the standard-offer contract as an option that is free to them. If cost conditions allow them to invest profitably, they can get the RESOP price; but they lose nothing if the right cost conditions don’t come up before their contract lapses in three years. This appears to be particularly true for developers of solar PV projects. They simply can wait to see what happens to the price of solar PV panels and exercise their options if prices fall enough.
Many developers also have broken down larger projects into chunks of 10 MW each. For example, OptiSolar Canada has signed contracts for 150 MW of solar PV at six locations. One site holds six projects of 10 MW each, and four other sites hold two projects of 10 MW each. Another developer possesses contracts for six projects at a single location, each with 9.96-MW of solar PV. Wind developers similarly proposed multiple projects in the same location or connecting to the same distribution system. One developer holds contracts for 10 wind projects with a combined capacity of 99 MW. OPA considers proponents for projects of that aggregate size would be well equipped instead to bid into OPA’s renewable RFPs. The project size limit was