Ontario's Standard Offer

Deck: 

Financial incentives work, but beware potential pitfalls.

Fortnightly Magazine - December 2008

The Province of Ontario instituted the first open renewable-energy standard-offer program1 (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 Authority2 (OPA) froze applications3 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 biomass4 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 the RESOP projects rather than the larger project size for those bidding on the RFP.

This design gives a central role to the local distribution companies (LDCs) in Ontario. Virtually all of the 80+ Ontario LDCs are municipally owned corporations. Rural and small-town areas of the province are served by Hydro One Networks, Inc. (HONI), the transmission and distribution successor to the former Ontario Hydro. When the RESOP program was designed, it was recognized HONI would receive many simultaneous connection-impact assessment requests because much of Ontario’s solar and wind resources are located in its territory.5

RESOP Rationale

RESOP is intended to allow smaller proponents to benefit from participation in the Ontario market and to add to the amount of renewable generation available. New renewable generation is expected to help OPA meet the direction it received from the Ontario Minister of Energy. The open nature of a standard-offer program relieves smaller proponents of cost burdens and uncertainties associated with the RFP processes, which are used by the government and OPA to procure large amounts of electricity.

The Minister of Energy directed OPA and the Ontario regulator, the Ontario Energy Board (OEB), to work together to design a standard-offer program that would remove these barriers for small proponents. Assisted by Navigant Consulting, OPA undertook extensive stakeholder consultation and analysis leading to the program’s ultimate design. Stakeholders gave the OPA two conflicting objectives for the RESOP: Create a program that would allow small participants, such as community groups, First Nations and farmers, to supply electricity to the OPA; and create a program that would enhance the amount of renewable power available to the OPA at a cost reflecting its value.

The resulting program reflects both objectives. The simple eligibility criteria and easy prerequisites allow community participation; and prices are set primarily to reflect value to OPA. The solar PV price reflects the value of both the electricity itself and the opportunity to gain experience with solar PV technology on a small scale.

The program is scheduled for periodic review, with the first ocurring two review years after program start. At program start, the OPA estimated it would produce about 1,000 MW of renewable capacity over a 10-year period. That would contribute to the OPA’s directed goal of 2,700 MW of new renewable capacity in Ontario by 2010 and about 8,000 MW by 2025, but the OPA still would need to procure large-scale renewables.

OPA Overload

The chief surprise to OPA was the size of the response, both in numbers and in size of participants and proposed projects. When applications were frozen on May 13, 2008, the OPA had received 430 applications for a total of about 1,500 MW. That’s 50 percent more capacity than the OPA had estimated it would receive in 10 years. This large response has created several constraint points.

One constraint is the ability of the distribution system to accept the proposed amount of generation. Overall application amounts would exceed the generation capacity of some transformer stations (see Figure 2).

The first proponents to ask for connection-impact assessments at these 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 in part intended to prevent such projects from participating in RESOP.

A program envisioned by stakeholders to provide opportunities for farmers, community organizations, First Nations and other small groups to participate in electricity supply has become a vehicle primarily for well-financed and well-ordered larger organizations. Also, at the time of the program review, over 95 percent of the applications were from wind or solar PV suppliers. That has left very little capacity on the system for biomass projects, and is of particular concern for proponents of farm-based digester gas projects.

The extent of achievement of the program’s goal to increase renewable generation purchased by OPA will not be known until the contracted capacity is due to be in service. The extent to which it achieves the goal of encouraging smaller participants already is compromised by the strong involvement by larger players.

Program Review

Policymakers originally expected that the program would be reviewed after two years. But the large number of contracts and their attendant problems prompted OPA to begin the review after 18 months, and to freeze applications while the review is underway. The review includes three open stakeholder consultation sessions. OPA characterized these sessions as the first phase of the two-year review. The second phase will address pricing and eligibility.

OPA’s proposed changes would allocate capacity more evenly and prevent large developers from locking up the capacity. The major proposed changes include: limiting development to no more than 50 MW of one resource type by one proponent; limiting proponents to one 10 MW-project per transformer station; and increasing the prerequisites for contract eligibility—namely:

Wind projects must have gathered at least six months of wind data;
Biomass projects must hold a letter of intent for fuel supply; and
All project developers must notify local municipalities and show that either no zoning change is needed or that they have applied for the change.

Additionally, the proposed changes would include three contract milestones to be met 12 months after contract signing:

The proponent must have submitted its final environmental screening report;
The municipality must have passed any required zoning amendments; and
Proponents for all projects of 1 MW or more must deposit $10,000 per project MW with the OPA, repayable on project completion.

Failure to meet these milestones would result in loss of the contract with OPA. However, it would not automatically require the proponent to give up its place in the distribution assessment queue, which is controlled by the distribution utilities.

Stakeholder reaction to these proposals is mixed. Proponents of small, community-based projects say no such projects have access to sufficient funds to meet required deposits. Some say these requirements increase risks for proponents, while others say the milestone proposals are not workable.

In September 2008, the new Ontario Minister of Energy directed OPA to reconsider the amount of renewables and conservation in its integrated power-system plan, which then was under review at the OEB. From the context, it’s clear he intends the planned amounts of these resources to increase as a result of this reconsideration.

RESOP in the USA

To date, state programs in the United States to encourage the development of renewable energy have been based largely on renewable portfolio standards (RPS) and renewable-energy credits (REC). These programs have had varying levels of success in encouraging development of renewable-energy projects. A recent report by the International Energy Agency suggests countries that have employed feed-in tariffs have tended to stimulate higher levels of renewable-energy development than those using other approaches.6 The RESOP is similar to a feed-in tariff in that it has a set price for compensating renewable energy, and doesn’t limit the amount of capacity to receive compensation. Therefore, to the extent the United States is interested in examining or pursuing a feed-in tariff model, it need only turn north to Ontario for an example of what such a program might look like.

The experience Ontario has gained provides a useful model for demonstrating the kind of responses such a program might receive in the United States. More important, the lessons learned from the RESOP will prove valuable. First, far more renewable generation was proposed than the province expected. That suggests that setting prices right is critically important to stimulating interest without over-obligating the government or utilities to excessive payments. Second, the behavior of project developers in sizing and queuing projects suggests that better controls on program participation are necessary, perhaps through more onerous project-development prerequisites. Finally, it is clear from the RESOP that developing realistic program targets is necessary to ensure that project proposals don’t drastically exceed the expectations of the program administrator. To the extent that a feed-in tariff approach in the United States is likely, the RESOP could be a very useful and relevant model to study.

The Ontario RESOP experience shows that financial incentives for renewables will attract interest from a wide range of potential providers. Renewable standard-offer programs can be an efficient way to gain interest in development of generation from renewable sources. But response to a program offering an attractive price can create problems if the electrical, technical and administrative infrastructure is not ready to support it. Further, any policy objectives intended to limit responses or participation need to be considered carefully and incorporated into the program design.

 

Endnotes

1. Standard-offer programs also are called standing-offer programs. Feed-in tariffs are similar in that they offer a standard price to participants meeting the criteria, but they do not always offer long-term contracts.

2. OPA is an agency of the Ontario Government, charged with both integrated system planning and with procurement of generation supply. In effect, the contracts are with an agency of the government.

3. OPA still is accepting applications for projects less than 10 kW and for farm-based biogas of less than 250 kW.

4. Fuels derived from municipal solid waste or construction waste are excluded.

5. To September 2008, HONI has completed about 400 connection-impact assessments and has about another 800 in its queue. OPA has signed RESOP contracts with 362 proponents.

6. Deploying Renewables – Principles for Effective Policies, International Energy Agency, 2008.