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Critics assail domestic-content rules under FIT

|Written By Julius Melnitzer

{mosinfo by=(Julius Melnitzer) divider=(default) date=(Nov. 22, 2010) class=(default)}Timminco Ltd. is a Toronto-based silicon processor. But because its operations are in Quebec, its silicon doesn’t qualify as domestic content for solar energy projects under Ontario’s feed-in tariff program.

All solar energy project applications submitted after Oct. 8 must meet a 60-per-cent domestic-content requirement. Earlier applications that are in commercial operation by April 30 have a 50-per-cent threshold.

“Developers who fall short lose their contracts, meaning that the price they will receive for solar power can drop by over 90 per cent,” says Aaron Atcheson of Miller Thomson LLP’s London, Ont., office. “There’s quite a bit of scrambling to get projects onto rooftops, but it’s difficult because there is a shortage of contractors. Demand is far outstripping supply, and project prices are going up.”

The issue stems from the fact that developing new clean power wasn’t the only goal of the feed-in tariff program. “The program was also designed to transform the economy and create green jobs and green manufacturing,” says Jason Kroft of Stikeman Elliott LLP’s Toronto office.

But critics say the domestic-content rules are counterproductive. Indeed, a coalition of foreign and Canadian solar-power manufacturers, led by Japan’s Mitsubishi Electric Corp. and including Timminco and SANYO Electric Co. Ltd., has produced a study that claims the rules would result in increased costs, 9,000 fewer jobs, and $2 billion less in investment than without them. They also say Ontario won’t meet its solar-power targets because locally produced components are in short supply.

If the Canadian situation is anything like the American one, there may be considerable truth to those arguments. In mid-October, The New York Times reported that Chinese solar-panel companies, which have been first to the market, are driving down prices and margins even as U.S. companies struggle to compete.

Still, Energy Minister Brad Duguid has pointed to several announcements that foreign companies are locating manufacturing facilities here. But that has left critics unsatisfied. They maintain that the degree of economic activity attributable to the domestic-content rules is disproportionate to the subsidy costs Ontario consumers and businesses will have to pay for the feed-in tariff program.

Interestingly, domestic content isn’t measured by cost. Rather, a points system governs the designation. That makes meeting the April deadline even more important for project proponents, but it does nothing for applicants who come along after Oct. 8. “There are ways of getting to 50-per-cent domestic content without buying Ontario panels,” Atcheson says. “But at 60 per cent, some of the panel has to come from Ontario.”

Two factors contributed to the scramble that earlier applicants are now facing and to the four-month deadline extension to April 30 from Dec. 31 that the government recently granted.

“Firstly, there were an insane number of applications, which resulted in processing delays,” Atcheson says. “And secondly, there was a problem with Measurement Canada.”

In May, the Ontario Energy Board sent a letter to distribution companies instructing them to stop certain types of connections for feed-in tariff projects because Measurement Canada wouldn’t recognize or support the metering configuration they were using. This required contract holders and applicants to pursue other options for connecting their projects to the distribution system.

“The issue cost people months and months of time,” Atcheson says.

Still, the picture isn’t necessarily grim. “Sophisticated players who have been on similar projects in other jurisdictions know the key construction and manufacturing partners and are having the necessary discussions about domestic content with them,” Kroft says. “What we don’t know is what percentage of applicants will struggle with implementation.”

So far, the feed-in tariff program has attracted 700 developments generating 2,500 megawatts of power. But observers expect some consolidation of the contracts. “The challenges of getting solar projects running could produce significant changes over time in the ownership of some of the developments,” says Adam Chamberlain of Borden Ladner Gervais LLP’s Toronto office.

Meanwhile, Japan has challenged the domestic-content rules at the World Trade Organization. The European Union and the United States have now joined in the complaint.

“The provincial government must have done some work on this question because when it first announced the content requirement, Buy America was a big issue,” Atcheson says. “It may be that no one expected that the domestic content of [the program] was something the Americans would complain about, but if the province didn’t work on the problem earlier, they’re working seriously on it right now.”

Still, it’s worth pointing out that Quebec has had both provincial and regional content in its wind-farm projects for years. “Perhaps the Quebec projects weren’t of the same magnitude” as the Ontario program, Atcheson says.

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