Investors see contracts unilaterally 'wound down' or renegotiated
On 5 July 2018, Ontario's Minister of Energy, Greg Rickford, issued an
Executive Order to the Independent Electricity System Operator (
IESO) directing it to "
wind down" certain renewable energy contracts, which had been awarded under the Feed-in-Tariff (
FIT) and the Large Renewable Procurement (
LRP) programmes.
A few days later, on 13 July 2018, the IESO published the list of projects that will be affected by the Government's decision.
These include ten LRP projects and hundreds of FIT projects (mostly photovoltaic).
With this measure, Ontario's new government, which took office on 29 June 2018, has begun to follow through on its campaign promise to "cancel energy contracts that are in the pre-construction phase and re-negotiate other energy contracts". The stated purpose of the measure is to cut electricity rates for families, farmers and small businesses by 12%.
Background to Ontario's renewable-energy investment programmes
Ontario's FIT programme was a standardised way to contract for renewable energy generation, introduced in 2009 to encourage and promote greater use of renewable energy sources in Ontario. Selected applicants signed a standard FIT contract with a 20-year term with the IESO. Under the FIT programme, participants were paid a guaranteed price for the entire term of the contract for all the electricity generated and delivered to the Ontario grid.
Each year, the Ontario Power Authority opened applications for the FIT programme. The IESO reviewed the prices offered to new projects under the FIT programme "to reflect the current cost of developing projects while allowing a reasonable rate of return for project developers". Price revisions could not affect FIT contracts previously executed. The FIT programme was discontinued on 16 December 2016 by order of the Minister of Energy.
The LRP programme was a competitive process introduced in 2013 in Ontario for procuring large renewable energy projects larger than 500 kilowatts. As with the FIT programme, selected applicants signed a contract with the IESO according to which they were paid a guaranteed price for the entire term of the contract for all the electricity delivered to the Ontario grid. The LRP programme set out the maximum prices that would be accepted for each technology, so that only efficient proposals that could be economical below those price caps would be considered for contracts.
The LRP process began in 2014 and resulted in the award of 16 LRP contracts with successful applicants. A second round of the LRP process was launched in July 2016 (LRP II). However, on 27 September 2016, the Minister of Energy announced the suspension of the LRP II.
Both the FIT and LRP contracts contemplate that any dispute as to the rights under the respective contracts may be decided by arbitration.
Government termination of renewable energy projects
The Ministry's Executive Order of 5 July 'winds down' projects that are in the pre-construction phase and will trigger the termination provisions contained in the FIT and LRP standardised contracts. The Government has also announced that it will seek to renegotiate those renewable energy contracts that cannot be terminated through the termination clauses contained in the contracts.
Canada is one of a number of countries in recent years to establish ambitious programmes to encourage renewable energy investment, only to then change these renewable energy support schemes.
In some cases foreign investors have commenced arbitral proceedings against States where they consider these changes to have violated their rights under applicable investment treaties.
For example, Spain is currently facing dozens of claims relating to the repeal of its renewable energy support scheme between 2012 and 2014.
To date, tribunals have ordered Spain to pay damages to investors in four cases, with Allen & Overy successfully representing the investors in
three of these cases.
In 2016, Canada itself was ordered to pay damages to a renewable energy investor for violating the investment protection provisions of the North American Free Trade Agreement (
NAFTA).
In addition to NAFTA, which gives U.S. and Mexican nationals the right to bring a claim against Canada in arbitral proceedings, Canada has entered into numerous bilateral investment treaties. In 2013, Canada also ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (commonly referred to as the ICSID Convention).
Time will tell what, if any, recourse international investors affected by Ontario's actions will take.
