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Ontario's Feed-In Tariff

Can a European-style renewable model work in the Americas?

Fortnightly Magazine - October 2009

a change in the program. Spain had no cap and no adjustment for the FIT rate as photovoltaic costs declined (see “Spain’s Solar Market Crash Offers a Cautionary Tale About Feed-in Tariffs,” New York Times, Aug. 18, 2009). The balance on pricing must be maintained for all of the forms and sizes of generation to be included in the FIT program.

To balance the risks associated with setting such a price, the costs and operating performance of renewable resour-ces must be well understood and subject to limited variation. For example, for technologies where there is limited construction or operating experience, establishing a reasonable FIT rate is challeng- ing. The renewables to be evaluated were chosen based on the known resources in Ontario and on the kinds of generation that were offered to the RESOP program. The chosen technologies were on-shore wind, off-shore wind, several sizes of ground and roof-mounted solar PV, waterpower, biomass, biogas and landfill gas. All the technologies included plants of more than one size except for on- and off-shore wind. The prices were based on an analysis of cost for each renewable resource with the best available public information. The analysis used a discounted cash-flow model. Financial assumptions included a debt-to-equity ratio of 70 to 30 and an after-tax return on equity of 11 percent.

Projects that had a previous contract with the OPA, including RESOP contracts, aren’t eligible to participate in the FIT. This prevents developers from abandoning contracted RESOP projects in order to receive the higher prices offered by the FIT.

Consistent with the objectives of the GEGEA, community-based and aboriginal groups receive higher prices for their projects. The premiums compensate for these groups’ higher costs due to such factors as their likely higher borrowing costs and their need to borrow for the equity portion of their investment; their need for more extensive consultation within their own groups and consequently longer lead times; and their different financing structures, including an inability to take advantage of favorable tax treatments.

Unlike the practice in many European FITs, the Ontario prices do not decline over time. However, FIT pricing will be reviewed every two years and adjusted based on the market response and changes in technology costs (see Figures 1 and 2).

Program Rules

The FIT rules address the lack of a financial commitment by RESOP developers. The FIT has a non-refundable application fee of $500 per MW, plus application security requirements totaling $20,000 per MW of solar PV, $10,000 per MW for other technologies, and $5,000 per MW for projects proposed by aboriginal or community groups. This security is forfeit if the proponent accepts a FIT contract and doesn’t build the facility, unless excused by force majeure .

At the time of signing the FIT contract, the applicant must post additional security totaling half the amount of the application security. This security is returned to the applicant after the commercial operation date.

Contract terms (except for water power) are 20 years. Given the longer life of hydroelectric facilities, water power contracts are for 40 years.

To avoid the problem