Abstract

A new Standard Offer Contract or SOC requested by the Ministry of Energy to be implemented by the Ontario Power Authority (OPA) is the result of a Joint Report to the Minister containing recommendations written jointly

Dr. David Suzuki along with Premier Dalton McGuinty announcing the SOC

Overview

This overview shall follow a similar structure to the Standard Offer Contract report to the Ministry of Energy, covering the areas of eligibility, pricing for the SOC and a brief description on the terms and conditions. The new SOC sets certain criteria for participation and makes a commitment that any potential electrical energy generation project which meets the criteria specified in the SOC, will receive the terms as set out in the SOC.

Eligibility

The elements of eligibility setout in the OPA discussion paper listed below highlights the criteria for eligibility, which will have a major impact on the structure of the program. These critier will determine what technologies and fuels will be prevalent in the projects and will also determine what kinds of entities will have ownership.

• ownership,
• fuel source,
• size,
• location,
• connection,
• in-service date,
• phased projections, additions, rehabilitation and upgrading.

Ownership:

The report defines acceptable ownership of renewable energy power projects as "farmers and rural landowners, community-based organizations, co-operatives, First Nations, non-governmental organizations, municipal entities, private individuals, small business and combinations thereof." The report favours the preventing of Ontario Power Generation, Inc. from owning projects in the Standard Offer Contract. The report also recommends that there be no restrictions on the nature or location of the entities that can own standard offer projects. (Recommendation 2.1)

Fuel source:

The Ministry of Energy's request for RFPs stipulated that the program address "clean or renewable resources". The report recommends that "only renewable generating facility [2] types that qualify as renewable resources in the Renewable Energy Supply II RFP [3] should be eligible for the Standard Offer Contract." (Recommendation 2.2) However, the report also includes a recommendation with respect to any generation resource type that qualifies as a clean resource in the Clean Energy Supply RFP. The recommendation states "that any generation resource type that qualifies as a clean resource in the Clean Energy Supply RFP not be eligible for the Standard Offer Contract." (Recommendation 2.3)

Maximum project size:

The Minister's request was directed at small renewable energy generating facilities embedded in a distribution system (grid), and therefore, the report recommends that "the max size of projects eligible for the Standard Offer Contract be 10MW, and that there be no minimum size threshold for projects eligible for the Standard Offer Contract." (Recommendations 2.5 & 2.6).

Location:

"The OPA recommends that the Standard Offer Contract should not place restrictions on the location of standard offer projects." (Recommendation 2.8)

Connection:

Non-discriminatory access to the energy distribution network is an essential component of a Standard Offer Contract. It is clear that ease of connection to sell power is crucial to the success of the Standard Offer Contract. The rules and procedures for connection fall under the Distribution System Code (DSC), which will undergo some amendments to facilitate the connection. "The OPA recommends that the max voltage for connecting standard offer projects should be 50kV" [4] (Recommendation 2.9). To add, "the OPA recommends that only projects that are connecting directly to a distribution system be eligible for inclusion in the Standard Offer Contract." (Recommendation 2.10)

In-service date:

It is clear that existing projects cannot increase the amount of renewable energy in Ontario. Some existing projects may have been built in anticipation of market or other conditions which did not arise due to the Ontario Goverment policy changes. "The OPA recommends that projects brought into service after January 1, 2000 which would otherwise qualify for the Standard Offer Contract, be eligible for the program." (Recommendation 2.11)

Phased projections, additions, rehabilitation and upgrading:

To address conditions covering new generation to an existing connection such as a) subsequent phases of a phased project; b) incremental additions to existing projects; c) rehabilitation of an existing facility, or; d) upgrading of an existing facility: "the OPA recommends that phased projects should be able to connect in phases subject to limitations of system connection capacity and provided all phases are completed and in-serve within three years of the contract signing date. Once the first phase of the project is in service, the project is eligible to generate revenue." (Recommendation 2.12)

"The OPA recommends that projects which connect through a generation project which has, or has had, a contract with an agency of the Ontario Goverment shold not be eligible for the Standard Offer Contract, except for projects which are subsequent phases of an existing standard offer contract and which otherwise are eligible for Standard Offer Contract participation." (Recommendation 2.13)

"The OPA recommends that projects which represent an incremental addition to capacity of an existing project that does not raise the total project size above the limit for the Standard Offer Contract, and which would otherwise be eligible, should be eligible for participation in the Standard Offer Contract." (Recommendation 2.14)

"The OPA recommends that projects which rehabilitate and return to service a facility that has not produced electricity for two consecutive years prior to August 18, 2005, the date the Minister requested the OPA and OEB to make recommendations on a Standard Offer Contract, and which would otherwise be eligible for the Standard Offer Contract, should be eligible for participation in the Standard Offer Contract." (Recommendation 2.15)

Pricing for the Standard Offer

Numerous discussions surrounded how prices should be set for renewables, such as "should prices be based on the cost of the renewables or their market value, or on some mix of these prices?", or "should the pricing be a fixed price for energy, or should it be a variable price?", or "should there be tiered prices for wind projects with different wind regimes?".

"The OPA recommends that the price paid for renewable generation under the Standard Offer Contract be market-based and include adders for the value of distributed generation and lost economies of scale." (Recommendation 3.1)

The rationale behind this recommendation is that the basis for pricing is simple and readily understood, meaning easily administered. However, expanding on this recommendation to cover those renewable energy generating facilities that demonstrate control over output to meet peak energy demands, the following recommendation is made:

"The OPA recommends that the basis for pricing for renewable resources in the Standard Offer Contract be a fixed base price per unit of energy plus a performance incentive for projects that can demonstrate control over output to meet peak demand requirements." (Recommendation 3.2)

However, the report goes on to make a distinction between renewable energy generation by wind, solar and water facilities which are considered to have no or low fuel costs [5] whereas biomass facilities may be fuelled by waste products. The OSEA Report recommended differentiated prices only for solar PV, which in their minds, is clearly a much higher cost per unit of installed capacity than the other renewable energy fuels. Therefore, the recommendation proposed is as follows:

"The OPA recommends that the base price under the Standard Offer Contract be the same for all electricity from renewable resources except solar PV." (Recommendation 3.3)

Based on the calculations included in the report, taking into account the estimate of the marginal accepted Renewables II RFP project price, a 10% scale bonus per kWh and avoided transmission losses credit, the base price was then calculated as being $0.11 / kWh. Interestingly, the report also recommends that a premium of approximately 35% be added to the pricing when the output is generated during the hours defined as "on-peak", which amounts to an addition or "incentive" of $0.352 / kWh.

"The OPA recommends that generators under the Standard Offer Contract that are not intermittent and are able to demonstrate control of generation putput receive an incentive payment of $0.352 / kWh for all output they produce in hours defined as on-peak for the purposes of the OEB's Regulated Price Plan." (Recommendation 3.5)

The rationale clearly focuses on energy generation facilities which can control the time of their output to focus it on hours of peak demand. Unfortunately, for most individual installations, the RETS user will have little control on when energy is transmitted to the grid to take advantage of the incentive pricing.

The report indicates that the solar PV technologies are not mature, and therefore, will not be as economic as the other renewable energy sources and technologies on the market. Given the Government's objective is to recognize the intrinsic value of solar PV, and to use the Standard Offer Contract to support the growth and development of PV technology, it is for this reason that an appropriate cost-based pricing model is considered, differentiating solar PV energy generation from the other renewables. For this reason, the report recommends:

"The OPA recommends that in order to undertake price discovery, solar PV should be included in the Standard Offer Contract, at an initial price of $0.42 / kWh with no escalation. The OPA will revisit this price, as well as the escalation stipulation, if price discovery reveals the need to do so." (Recommendation 3.7)

The report also touches on the variations of power generation from wind turbines dependent upon the turbine's location in terms of wind regime, and therefore, a discussion surrounding the possibility of tiered pricing for wind generation. However, due to the possibility of overly complex administration, the recommendation proposed as follows:

"The OPA recommends that the price for all wind turbine generation be the same, regardless of wind regime, as set out in Recommendation 3.3." (Recommendation 3.8)

Further discussion in terms of production incentives offered by the federal government for new generation from renewable resources such as the Wind Power Production Incentive (WPPI) and Renewable Power Production Incentive programs. It was concluded that small projects, if eligible for these federal programs cannot expect to benefit from these programs with any high degree of confidence. Individual RETS deployments cannot take advantage of these federal programs. Therefore, the recommendation in this regard is as follows:

"The OPA recommends that any incentive payments available to standard offer projects from other government initiatives shold accrue to the benefits of Ontario consumers through the OPA." (Recommendation 3.9)

The final discussion pertaining to the pricing, is the possibility of changing prices over time due to the changing cost and market value for renewable generation. It was suggested that reviews of the Standard Offer Contract in terms of pricing and terms and conditions of contracts might need to change in response to changing conditions. These future proposed changes would only affect new projects. The recommendation made in this regard is as follows:

"The OPA recommends that prices offered under new contracts in the Standard Offer Contract should be reviewed regularly and adjusted in response to changing market circumstances. The first review is intended to take place no earlier than two years after the start of the program." (Recommendation 3.10)

Standard Offer Contract Terms and Conditions

A discussion raised the question of whether a reverse tariff, which would pay the participants a guarranteed rate would be preferable to a contract. However, it was determined that a reverse tariff is perceived as more risky and therefore, could present an unnecessary barrier to development of some projects. As a result of this discussion, the recommendation made follows:

"The OPA recommends that the basic relationship for standard offer projects be established under a written contract between a supplier and a counterparty." (Recommendation 4.1)

Despite the perceived simplicity of a reverse tariff, the disadvantage is that proponents and financial institutions may be less likely to accept it as a basis for financing.

The term of the contract must be long enough for the supplier to recover the capital cost plus profit within the lifetime of the asset, i.e. the technologies deployed in a renewable energy generating facility (RETS). Different generation assets will have different lifetimes. However, the recommendation that in general, the lifetime for generation assets consider 20 years as the standard term. The recommendation in this regard is as follows:

"The OPA recommends that the term for standard offer contracts be 20 years. Shorter terms should be considered based on technology constraints." (Recommendation 4.3)

Under the standard offer contract, participants must need signed contracts before they can obtain the financing and begin construction of a RETS deployment. The program states a number of preconditions that must be satisfied before a participant is awarded a contract. This ensures that the projects proposed will actually be viable, and be able to contribute power to the power distribution network as indicated in the project's proposal, which protects not only the financial viability of the power distribution network, but the consumers drawing from the same network. The recommendations are as follows:

"The OPA recommends that, before a standard offer contract is awarded, the supplier must meet the following pre-conditions:

• Demonstrated site control (e.g. ownership, long-term lease, or firm option);
• Completed Connection Impact Assessment [6] with the distributor (to be futher reviewed during implementation phase);
• Evidence of local support (e.g. community ownership, or resolution or letter from local council);
• Environmental assessment underway (as may be required);
• Evidence of a commitment to fund the project by the lending institutions/investors; and
• Demonstrated access to fuel sources, where appropriate.

Other conditions presented in the report include project schedule in which the recommendation that the standard offer contract requires a project to be in service within three years from the contract execution date. Other conditions discussed included the requirement for a security deposit to protect the buyer (energy distribution network) is considered one of the barriers for small embedded generation. The proposl recommends that project proponents not be required to provide a security deposit. Other conditions include the GHG emmissions avoidance credits which are sold to emitters. In the case of standard offer contracts, the buyer would retain, for the benefit of Ontario consumers, the rights to any emissions credits generated throught the Standard Offer Contract.

Conclusions

The Standard Offer Contract proposed by the OPA and OEB removes the many obstacles to the implementation of renewable energy generating facilities and creates a more positive economic climate for the deployment of renewable energy technologies solutions or RETS. The overall structure proposed in the Report to the Minister clearly simplifies the process involved, and the criteria required for proponents of renewable energy generation, which could become a model for other provinces and/or states to emulate.

The author offers only a single recommendation with respect to the pricing of the energy produced by small renewable generating facilities, that is, to harmonize the pricing of kWh, preferably at $0.42 / kWh, across the board of any and all small renewable energy generating facilities rated at or less than 50 - 100 kW. This would greatly increase the financial attractiveness of individual-oriented "small" renewable energy generating facilities and therefore, increase the interest in small wind & solar energy production from a residential, rural and small business perspective, and reduce the administrative complexity and overhead when dealing with small individual renewable energy generating facilities. At this time, for the individual consumer, there are little financial incentives encouraging the average consumer to outlay the relatively large capital investment in such systems, and therefore, should interest in such systems and number of installations increase, this would translate in reducing the consumption burden on the existing energy distribution network and thereby, reducing the need to incur the cost of public utility's expensive enhancements or the construction of new commercial generating facilities.

The second rationale is that the segregation of pricing with respect to solar PV systems from the other renewable energy sources, in particular to small hybrid energy generating facilities may cause difficulties with repect to monitoring the energy produced from one or the other in hybrid solutions which include both solar and wind energy generating technologies and therefore, difficulties in determining how much energy was generated by the wind turbine and how much by the solar PV. By virtue of this segregation in the proposal, and the lack of addressing hybrid renewable energy generating facilities may create confusion in the deployment of such solutions, possibly requiring the proponent of the renewable energy generating facility is forced to implement more than one standard DSC four-quadrant metering devices. This will increase the capital cost of implementation of hybrid solutions, which will lengthen the cost recovery of renewable energy generating facilities and further reduce the financial attractiveness of individual-oriented renewable energy generating facilities.

This recommendation with respect to small energy generating facilities has been forwarded to the OPA for their consideration (Request Number: SOP63540P, May 8, 2006), and should any developments or responses become available in this regard, it will be appended to this overview.

SOLAR WIND Canada Inc.
May 6, 2006

Footnotes

1. clean energy supply - defined in the Clean Energy Supply (CES) RFP as energy from resources that do not burn coal, oil or municipal solid waste.
    
2. renewable generating facility - means a facility that generates electricity from one or more of the following sources: wind, solar, renewable biomass, bio-gas, bio-fuel, landfill gas or water.
    
3. Renewable Energy Supply II RFP - on April 19, 2005, the Government announced two new Renewables RFPs. The first ('Renewables II') calls for up to 1,000 MW of new renewable energy supply from generation facilities between 20 MW and 200 MW. An announcement of the results of the RFP are expected later this fall. Details on this RFP can be found by clicking here.
    
4. 50kV - in Ontario legislation, the stated demarcation separating distribution from transmission lines is 50kV.
    
5. fuel cost - wind developers pay a rental to the land owners, hydro developers pay a water rental fee to the province after their first ten years of operation. These payments are considered to be like fuel costs, but are based not on a fuel market but on the value of the electricity generated.
    
6. Connection Impact Assessment - more information available from the Hydro One guide entitled: "Connecting New Generation to Hydro One's Electricity System".
    

References

1. David Suzuki Foundation. David Suzuki lauds Ontario government for its "visionary" alternative energy policy. March 21, 2006.
2. Ministry of Energy. Backgrounder - Ontario's Standard Offer Contract. March 21, 2006.
3. Ontario Power Authority. Joint Report to the Ministry of Energy: Recommendations on a Standard Offer Contract for Small Generators Connected to a Distribution System. March 17, 2006.
4. Ontario Sustainable Energy Association. Q&A on Community Power and Standard Offer Contracts. March 21, 2006.