The Ontario regulatory environment for waterpower.

The regulatory environment in Ontario is such that it increases the risk of development and significantly adds to total costs and these costs are higher than in other jurisdictions globally.

This statement is based on our attempts over the last several years to get 30 waterpower sites ready for the next FIT application window in Ontario, and based on our experience with the environment in the USA and based on our knowledge of the UK where we have no projects but follow the waterpower development environment closely and collect information from industry colleagues actively engaged in waterpower development in the UK.

With these costs being significant, it is therefore difficult to assess and compare the adequacy of pricing across jurisdictions based on capital cost assessments alone.

Each jurisdiction has associated regulatory environment costs and pricing should reflect these costs also.

Collecting data on costs relating to the regulatory environment is difficult but as we have become aware of their significance we have been trying to put in place activity based costing systems to collect better information, but in the end the nature of it is “death by a thousand cuts” of many shapes and sizes and not all add dollar costs directly at the time, but can increase costs and risk as the development progresses.

Therefore, to give a better sense of the nature of this problem we have listed just a few of the regulatory “burdens” broken down into the three main sources.

Regulatory burdens related to The Independent Electricity System Operator (IESO) administration of the Feed in Tariff System (FIT) – examples

  1. The IESO has a connection rule that >15kV distribution lines are required to connect over 250kW systems. There is no real electrical constraint driving this rule based on our conversations with the utilities. We can do a Pre-FIT consultation with the utility in relation to connecting a system greater than 250kW in size on less than 15kV lines and get a “PASS” many times. Therefore the utility indicates connection is possible. And we have confirmation directly from the utilities that it is not a constraint on their end. However, we would not be allowed by IESO to submit a FIT application for a system over 250kW in size using the less than 15kV distribution lines. However, there are in fact older systems bigger than 250kW connected on less than 15kV distribution lines in Ontario. And we are connecting our 360kW system in Rhode Island on 12.47 kV distribution lines. Both of which further indicate it is possible from an electrical standpoint. This not only has created great confusion for many people but it has the effect of many times limiting the size of a waterpower system we can install. Sites can be rated higher than 250kW in size but are artificially limited in size due to this rule. This is because it’s almost never the case that >15kV distribution lines can be found within an economical distance because over 15kV, the lines that may possibly be available are 27kV lines and these are rarely seen in practice, or 44kV lines and if these were available transfer trip is required on these lines which adds additional costs to the project starting at roughly $200,000. In the very rare event that 27kV lines were reasonably close by small projects cannot bear the $230/meter charge to run new 3 phase electrical lines >15kV to the site in order to connect the larger system. And we can’t move the project to where there are >15kV distribution lines are like solar possibly could because this is waterpower. This is a prime example where the rule itself has no direct cost, but indirectly increases costs / kW later due to the lower system size of 250kW allowed. It also makes it difficult dealing with site owners as now the site is not being fully utilized, and it reduces the financial benefit to site owners, many of them municipalities or public entities, which quite frankly have a minimum threshold site lease amount before they consider it worth their while to hold a meeting and consider participation in a project. The $230/meter charge from the utility for running new 3 phase lines is based on our electrical engineering firm’s over 200 renewable generation connections. And by the way, the charge of upgrading the same lines is only one third of that amount if you want to be a load customer and use power instead of generate it. The result is that the FIT system artificially has a 250kW limit for waterpower projects in most cases.
  2. Getting a FIT contract in Ontario is not a certainty even if you can meet electrical connection and environmental approvals. Only one out of thirty (30) waterpower applications in the last FIT round received a contract offer. For solar it was close to one in four projects was offered a FIT contract. One thing is certain in each case, the projects that do get FIT contracts have to bear the upfront costs of all the projects that don’t get FIT contracts. If they don’t bear these costs, we would be out of business. Therefore the whole premise of the FIT system awarding contracts to only a fraction of the applications leads to increased costs per kW of installed capacity. These costs can be significant as we have to locate sites, do preliminary engineering work to size and assess the sites feasibility for FIT and to get a sizing for FIT application purposes, we have to negotiate site access and compensations with site owners, incur legal fees to establishing site lease agreements and Limited Partnership agreements necessary to meet FIT application requirements, we have to make trips to make presentations to local municipalities to request support resolutions, we have to pay the fees municipalities charge to provide municipal support resolutions, we have to file the FIT applications themselves and pay FIT application fees, etc. These costs are approximately $30,000 per site. Contrast this with the situation in the UK where as long as you meet the requirements regarding electrical and environmental approvals you can connect your system and earn the FIT rates at any time. Contrast this with the situation in the USA, where in Rhode Island while they do have application windows, they have multiple windows a year, and waterpower has a specific procurement target. The greater certainty of getting a FIT contract provided by these regulatory environments administering the renewable energy programs means less risk involved in considering renewable energy for a site in these other jurisdictions because you can spend the upfront money required with a greater certainty of obtaining a contract to sell power. It also means less costs that have to be borne by a system once installed. This lowers the required FIT pricing in these other jurisdictions relative to the Ontario system. Everything else being static, this regulatory structure burden increases the required FIT pricing in Ontario.
  3. In Ontario, FIT applications are ranked on the basis of points. While we understand the point system is part of the existing FIT program structure in Ontario, the point system awarding of two points for obtaining a municipal council support resolutions does increase the costs of preparing sites for FIT applications. The two points awarded, combined with the relative few applications successfully receiving contracts hardly makes not obtaining a support resolution a viable alternative. Approximately 10-25% of the above mentioned $30,000 cost to get a site ready for a FIT application relates to engaging the municipalities depending upon the difficulty and requirements of the individual municipality. In addition to these costs, some municipalities are trying to devise ways they can extort money from renewable generators in return for granting municipal council support resolutions. We strongly object to some Municipalities such as this employing these tactics but they do so because of the power given to them by the IESO by virtue of their support resolutions commanding 2 points. In fact most other new businesses entering a municipality would likely receive incentives of some kind. Contrast this with the other jurisdictions of the UK and USA which have no requirement or incentive for obtaining special municipal support and this means costs are higher in Ontario than in other jurisdictions. This current regulatory structure and burden in Ontario increases the required FIT pricing.
  4. “Uncertainties” surrounding FIT prices, FIT rules, the timing of FIT application windows are increasing risk for renewable investors and increasing renewable costs in Ontario. Having one FIT application window per year or so of one month in duration and not knowing when that window will be, what the prices will be, what the rules will be, is like having a store that supplies you only open one month a year or year and half and you never quite know when that month will be, what the prices will be like for the goods, or whether you’ll even be able to buy them. It just doesn’t work. Business either goes on hold or shuts down when facing this type of uncertainty, moves to another supplier (jurisdiction in this case) or a decision to continue is made in an increased risk climate, which requires greater investment returns to compensate for the increased risk. Contrast this with the continuous nature of the UK FIT system where there are no application windows and everyone can connect their system as long you pass the environmental and connection tests. The UK FIT system “store” is essentially open all the time. Businesses can therefore keep moving, this lessens risk and lowers costs versus sporadic cyclical cycles. Contrast this also with the USA in Rhode Island, where there are 2 open enrollment windows in 2015, each two weeks in length, and three windows for all future years. But it’s not just better to have the store open more often, it’s critical that there be rule stability during the period of time it takes to bring a project to FIT. This ideally means we need to know what pricing and program rules will apply to projects at least a year in advance of the actual FIT application window. Policy Stability is a well known concept but it continues to plague the renewables sector in Ontario. Having the worst of all these conditions in Ontario increases the required FIT pricing.
  5. A good example of some of the small items comprising the “death by a thousand cuts” analogy we gave earlier is that the physical form for the Municipal council support resolution changed in between FIT 3.1 and FIT 4.0 and this required us to ask that they be redone by all municipalities. This is difficult to do and requires follow up after follow up to get it done. We need things like this much further in advance to match the actual timelines we have that are required in order to get a site ready to submit a FIT application. Another good example, is that only the original inked signature original copy of the Municipal Council support resolution is accepted for FIT purposes. The municipalities almost never provide this even though it’s requested and it requires follow up to get the original, which must be mailed. In a time of increasing electronic communications, and when agreements are now being executed with electronic copies, these rules add additional burden. These multitude of things increase the required FIT pricing in Ontario because they increase costs.
  6. The IESO’s connection tests available to prospective FIT or Micro-FIT applicants are inadequate leading prospective applicants to believe there is grid capacity for their project when in fact there is not. The issue is that a site can pass both the DAT and TAT (Distribution availability test and the Transmission availability test) at the time of a FIT application, which are the only two tests available, and yet the application may get rejected by the IESO because it doesn’t pass IESO’s internal connection tests. This is because the IESO does not “guarantee” the accuracy of these tests. Yet these are the only two connection tests available to prospective FIT applicants. Whatever the IESO looks at only takes a small amount of time because we’ve received a net metering application rejection only several hours after submitting it. It’s frustrating because one of the very first things we do for a site before even visiting it is to check the connection availability with these tests. This is because we have a do a fair amount of work to even size a system for an application.

Regulatory burdens related to electrical connections – examples

  1. The technical interconnection requirements are a burden on Micro-FIT (less than 10kW) waterpower projects. For example, we were going to use an electrical panel used in the USA on over 50 renewable installations to connect a 7.2kW system in Ontario, but ran into roadblocks related to a micro controller due to connection requirements. The control panel we had to design to meet the requirements in Ontario cost 7 times what the original electrical panel did and increased the cost / kW by close to $1000 dollars on this small project. While not a big deal on large projects, excessively rigid and non-flexible requirements have devastating effects on small projects. A single line diagram stamped by a professional engineer is required to connect, as well as ESA (Electrical Safety Authority) inspections on this less than 10kW size system. Contrast this with the UK where you can apparently connect up to a 5kW system tomorrow as long as you call today and notify the authorities you’ll be connecting and you have a licensed electrician make the connection. This has allowed the proliferation of net-metered small systems in the UK. Differences like this increase the required FIT pricing in Ontario.
  2. While the above might simply lead to the conclusion to focus on larger projects, as soon as you have a project over 10kW, there is approximately $25,000 in connection impact assessment (CIA) costs that have to occur under current regulatory requirements, whereas for under 10kW only a single line diagram is required from an engineer. This means you’ll never see an 11 or 12 or 15kW system installed in any situation. If a 20kW system could have been installed it’s likely a 10kW system will be installed because it simply takes a big enough system with larger revenues to overcome this regulatory cost burden. This distorting effect is why the UK has numerous price tranches. In fact even the USA in Rhode Island has 2 price tranches.
  3. Assuming we ever could connect a greater than 250kW size system because >15kV lines are available (the problem described above in the first bullet of IESO examples), we would be required to have SCADA controls because SCADA controls are required on all systems over 250kW, whereas in Rhode Island it’s only required on systems over 500kW in size and therefore not required on our 360kW system we are working on there. SCADA controls allow the utility to take control of your generating system remotely and costs approximately an additional $60,000 to install. This would increase the cost / kW on the 360kW system by $166, but it increases the cost per kW on the incremental size above 250kW by $545/kW ($60,000 divided by 110kW). Therefore over this 250kW size, when cost/kW should be declining it may actually be increasing because of this extra cost, and at the same time likely utilization is decreasing as system size increases leading to a possible decision not to install the greater capacity. Distorting effects like this is also why additional price tranches are needed.

Regulatory burdens related to environmental approvals – examples

  1. In Ontario all waterpower projects up to 200 MW or 200,000kW in size must engage in a Class Environmental Assessment for Waterpower Projects. A 10kW or 50kW or 100kW project is subject to the same processes and assessments that a 200,000kW project gets. Even though all projects should be subject to the same legislation related to environmental protection (we all want to make sure the environment is protected regardless of system size) there is no acknowledgement in this requirement of the lower overall risk posed by any small project because of the smaller zone of influence and because small projects always use existing infrastructure ( i.e. the existing dam or weir). Even if this wasn’t acknowledged, what should at least be acknowledged is a small project’s reduced ability to pay for these processes which should trigger alternative ways of meeting the same requirements. Why? Because looking at the larger holistic view, these small renewable energy projects at existing infrastructure are good for the environment, and help pay for and maintain the existing infrastructure. While micro waterpower is new to Ontario, the UK and other jurisdictions know this and they are finding ways of still meeting environmental concerns when working with micro hydro. Information from colleagues in the UK indicate the average waterpower project size in the UK is about 60kW. In contrast, we obtained an estimate from an Ontario company for completing the Class Environmental Assessment process for a small 7kW site and the estimate was $45,000 plus the cost of any needed environmental studies. This cost alone would have made the project non-viable. This current regulatory structure and burden increases the required FIT pricing in Ontario by a lot.
  2. The nature of MOECC, MNRF’s and other government bodies involvement in the CLASS EA process is very similar to the role their counterparts take in the USA, but this role differs highly from the role their counterparts take in the UK. In Ontario and the USA the process is entirely proponent driven, the regulatory bodies involved in the process wait to be contacted, and review what analysis is given to them by the proponent, and essentially look for proof and evidence supporting the analysis and conclusions. They generally look for this evidence and “proof” in the form of field work and research which is they hope is in the form of expert consulting reports. The proponent or developer is responsible for paying for all the research and reports, and the proponent doesn’t have much control over it. The regulatory bodies, like to define the scope of work. But in the end you never know quite what to expect. As a result there is great uncertainty for the proponent about what proof will be required, and what amount of proof will be enough, with the authorities generally requiring more proof than the proponents want to provide. In contrast, the UK Environment Agency is very much “out front” doing research related to hydro installations, and providing easy concise decision making guidance in the form of charts and tables, etc. for developers to use to analyze their situation and decide upon a course of action quickly that will meet UK Environment Agency requirements. The UK Environment Agency still reviews everything, but they’re not sitting back waiting for others to do everything, they’ve done the work and published guidance so that developers know that if the guidance is followed there is a high degree of certainty that approvals will be forthcoming. For instance, we use the Archimedes screw technology to generate electricity and the UK Environment agency has done research regarding Archimedes screw generators and has published a short 16 page guideline with easy to follow tables specifying diameters, maximum rotation rates, and number of flights in relation to each other so that developers using the technology can follow the guidance and know that if they follow the guidelines their project will meet UK EA requirements. As another example, the UK publishes guidance for run of river hydropower on flow and abstraction management, a short 8 page publication available on line. The guidance clearly outlines what the developer needs to do, how to assess the watercourse type via some easy calculable statistics, how to determine a hands of flow for the watercourse type and project type using tables provided, and the hydrological data the developer should use to support the analysis and examples of what that data looks like. As another example, the UK EA provides guidance on fish passage in a short 7 page guideline, with an additional 369 page fish passage manual which provides detailed guidance on the selection of an appropriate fish passage. The UK EA publishes helpful guidance of this kind in abundance, all of it extremely user friendly, which allows the user to come to an actionable answer quickly. Essentially the UK Environment Agency is developing and implementing best practice guidance much like the Ontario Waterpower Association is doing. But in the UK because the UK Environment Agency itself is preparing this guidance, it is changing the nature of the approvals process. The result of the UK EA being out front in research and publication of decision support tools such as these is that it isn’t necessary for developers to hire expert consultants for everything and there is incredible certainty surrounding what is required and there is no adversarial dynamic created in the approvals process. This means lower costs and lower risks for developers in the UK, less headaches and workloads for the UK Environment Agency staff because they don’t get problem submissions because everyone knows the requirements, which reduces the required FIT pricing. It also means that small projects are possible in the UK. In contrast, none of this information mentioned exists in Ontario. The nature of the regulatory approvals process in Ontario increases required FIT pricing.
  3. Water taking permits are currently required for all waterpower installations, even for run of river installations which do not actually “take” water from the watercourse, and do not attempt to manage flows in anyway. All of the water that was going to pass through the site area, still passes and in the same amounts. In these instances water taking permits represent another element of bureaucracy and regulatory burden that only increases costs. Water taking permits have three classes, and though one would think waterpower installations would fall into the lowest risk class, we have seen them assessed as the highest risk class by the people issuing the permits largely due to their inexperience with waterpower at any size. This requires a $3000 dollar fee, sign off by a hydrological expert, and daily reporting and measurement which also increases costs. Hydropower should just have to prove it’s run of river and be exempt from this requirement. This bureaucracy currently increases required FIT pricing in Ontario.
  4. Government entities which are part of the Class Environmental Assessment for waterpower projects process are now starting to charge fees for reviewing the Class EA prepared by proponents.(eg Conservation Authorities). This is in addition to permitting fees. If this continues increased FIT pricing will be necessary to compensate for these extra costs.