Jageman Law

Parsing Ontario’s new clean energy credit initiative

This article originally appeared in The Lawyer's Daily published by Lexis-Nexis Canada on February 9, 2022.

by Caroline Jageman Michael Killeavy

On January 26, 2022, the Ontario government announced a new environmental initiative — a voluntary Clean Energy Credit (CEC) registry which could create new opportunities for businesses to meet the environmental portion of their voluntary ESG commitments. The minister of energy tasked the Independent Electricity System Operator (IESO) with designing the CEC program with a view to having it implemented in January 2023.

What is a CEC? CECs are certificates that each represent one megawatt-hour of electricity that has been generated from a non-emitting source, such as solar, wind, bioenergy, hydroelectric and nuclear power. In substance, a CEC represents the environmental benefit of generating electricity from a generating resource that does not emit any greenhouse gases. For context, an average Ontario home will consume about three-quarters of a megawatt-hour on a monthly basis.

The CEC registry will track and account for the CECs from the clean generator to the consumer, making sure that each CEC is only counted once. CEC credits will be verified by an independent third-party giving businesses that purchase CECs confidence in the CEC and their customers confidence in those businesses’ ESG claims.

One interesting feature of the announced CEC registry is that it will include megawatt-hours generated by nuclear energy. Nuclear energy is indeed a non-emitting generation resource, but not generally considered a renewable source of energy. It will be interesting to see how nuclear CECs are received as a means to achieving sustainability.

Environmental attributes like the proposed CECs are common in the United States, where they are called Renewable Energy Certificates (REC),but not all that common in Canada. RECs have value and are tradable in markets in the U.S., as far back as 20 years in some states. Renewable generators register their RECs, sell them to a buyer, and the registry retires the RECs upon purchase, which signifies consumption of renewable electricity.

There are two types of markets for RECs in the U.S. — compliance markets and voluntary markets. Compliance markets are used by utilities to meet their mandatory Renewable Portfolio Standard obligations, which are legal requirements at the state level for utilities to obtain a certain amount of electricity from non-emitting renewable sources. Voluntary markets are where businesses can purchase RECs to satisfy their self-imposed sustainability goals. Ontario’s CEC registry will be voluntary, and as the government press release says, it will be a tool that business can use to achieve their sustainability goals.

Corporate sustainability has become more and more important in the last few decades. As the public becomes more concerned about the environment and climate change, corporations want to demonstrate to their customers that they are good environmental stewards and are helping to combat climate change. Many corporations set and publicly disclose sustainability goals, such as reducing GHG emissions from their business processes, using a certain amount of electricity from renewable energy sources, using recycled materials in manufacturing their products, etc.

Corporations worldwide are increasingly contracting directly with renewable generators to exclusively purchase the RECs generated in order to meet their sustainability goals. These contracts are often referred to as corporate power purchase agreements (PPAs). They are very common in the U.S. and other countries. In fact, 2021 was a banner year for corporate PPAs. Bloomberg NEF reports that in2021, 31 gigawatts of renewable electricity was purchased using corporate PPAs worldwide. For some perspective, 31 gigawatts is approximately equal to all the installed generation in Ontario. More than half, 17 gigawatts worth of renewable generation, was in the U.S. The market for the purchase of renewable energy and CECs under corporate PPAs in Canada is nascent. There have been some high-profile deals in Alberta over the past few years.

A government-sponsored CEC registry offering verified CECs might be the very thing Ontario needs to give its corporate PPA market a kick start. The design of the registry will be important in determining the value of CECs to purchasers. Under IESO generation contracts, renewable generators assign all CECs to the IESO, making the IESO the largest CEC owner in the province. If the IESO chooses to sell its vast store of CECs it would likely drive down CEC prices. If the IESO only places certain CECs on the market or releases them to the registry in a measured fashion this can perhaps be avoided.

Further a key feature of the CEC policy will be how the government chooses to spend the proceeds of CEC sales. The IESO’s wealth of CECs results from the many renewable energy contracts that the IESO has entered into over the previous 15 years. The contract price paid to such generators that is higher than the price paid by Ontario electricity consumers to purchase electricity, and the difference is the Global Adjustment. Global Adjustment sits at about $13 billion annually now and is charged to Ontario consumers in accordance with an intricate allocation method. In effect, Ontario residents have already purchased the CECs and are paying for them. Presumably, the proceeds from CEC sales would be applied to reduce Global Adjustment. It will be interesting to see whether the government reduces the Global Adjustment charge equally among all electricity consumer groups, or whether some consumer groups benefit more than others.

As Todd Smith, the minister of energy said, the new CEC registry will offer businesses the opportunity “to meet their corporate environmental and sustainability goals.” However, will the CEC actually result in less GHGs in the atmosphere than before the implementation of the registry? This remains to be seen.

As noted above, Ontario has already “bought” a lot of non-emitting renewable and nuclear generation. Ontario’s grid is already very clean with over 90 per cent of Ontario’s electricity coming from non-emitting resources. These renewable and nuclear facilities will continue to produce clean non-emitting energy with or without the CEC registry. If the CEC registry does not incent build of new non-emitting generation, you might say that Ontario is really just selling the rights to corporations to claim they are paying more for clean energy. On the other hand, if the CEC price is high enough to drive construction of new generation, then the CEC registry may actually create a market for new clean generation. With some back of the napkin calculations, we believe the CEC price would need to be in the range of $50 per megawatt-hour to $90 per megawatt-hour, depending on technology and project size, to do so. Notwithstanding our above comment about the CECs being more like bragging rights than actual reductions of GHGs, the CEC registry is a positive step for Ontario towards reliable sustainability claims, and we look forward to its introduction.

Landmark Dutch case creates legal obligation to reduce GHG

This article originally appeared in the The Lawyer's Daily published by Lexis Nexis Canada on Wednesday, June 02, 2021 @ 11:01 AM | By Caroline Jageman and Michael Killeavy

On May 26, 2021, The Hague District Court in the Netherlands ordered Royal Dutch Shell (RDS) to reduce the CO2 emissions of its group of Shell companies (referred to as the Shell Group) by net 45 per cent per in 2030 as compared to 2019 levels. The Shell Group is made up of 1,100 companies that produce, refine and sell oil, gas and other energy products across the world.

RDS, as the parent company, sets the policy direction for the Shell Group. The Shell Group’s aggregate CO2 emissions are estimated to be equivalent to Russia’s, the fourth-highest emitter in the world. Shell Canada’s fracking operations in the tar sands were specifically highlighted as an example of CO2 and methane emission intensive activities. At the same time, RDS has made multiple public commitments to adopting a corporate strategy where the Shell Group increases its sustainable energy portfolio and to becoming net-zero by 2050 with respect to its own subsidiary operations and supply chain. According to RDS, emissions caused by its end use of its products should be reduced in step with social norms

Verenigung Milieu Defensie together with six other environmental organizations including Greenpeace Nederland and the Dutch youth organization, Jongeren Milieu Actief, representing over 17,000 individual claimants, brought an action against RDS in The Hague court. The claimaints sought a ruling that RDS has an obligation under the Dutch Civil Code to contribute to the prevention of climate change through the corporate policy it implements for the Shell Group. RDS’s corporate policy, they argue, violates this obligation by being inconsistent with the global climate targets set by the Paris Accord, of which the failure to be met would cause dangerous life-threatening climate change. This, in turn, violates or threatens to violate the claimaints’ human rights, specifically the right to life and the right to respect for private and family life.

The Dutch Civil Code provides that it is unlawful to act in conflict with generally accepted unwritten law. Looking at inter alia, United Nations Guiding Principles on Business and Human Rights and other international and European human rights jurisprudence, The Hague court found that unwritten law includes an obligation by corporations to prevent and mitigate human rights abuses and adverse impacts linked to them and their supply chain, products or services. These human rights include a right to be protected against dangerous climate change as it threatens the right to life. Therefore, at a broad brush strokes level, the generally accepted unwritten law (or, the standard of care applicable to corporations) requires them to take steps to prevent climate change.

Ultimately, the court ruled that RDS must reduce the Shell Group’s total CO2 emissions by net 45 per cent by 2030 relative to 2019 levels. With respect to the Shell Group’s supply chain and end-users (including us, the consumer), RDS must use best efforts to remove or prevent the serious risks ensuing from the CO2 emissions and to use its influence to limit any lasting consequences as much as possible. Shell has indicated that it intends to appeal.

The decision translated into English, which can be found here, is a thoughtful consideration of a corporation’s role and obligations to the public when it comes to reducing CO2 emissions. While there seems to be general agreement that CO2 emissions should be reduced, by how much, how quickly, by whom and who gets to make those reduction decisions is far less clear. RDS’s defence relied on accepting the traditional environmental policy framework where the government sets the minimum standards for greenhouse gas emissions. Provided that a corporation meets the targets set out in its environmental policy, then it has done all it needs to do.

The Hague court’s decision envisions a framework where the general public has the ability to hold a corporation accountable not only for the greenhouse gases that it has emitted, but also for not doing enough to reduce greenhouse gas emissions. Under this framework, corporations must look beyond the narrow question of what environmental laws permit them to do or not. Corporations seemingly have a larger duty to look at how their direct and indirect CO2 emissions impact people and take responsibility for reducing those impacts.

Key also, is the fact that, according to this decision, the public has the right to proactively require a corporation to reduce greenhouse gas emissions where it appears that a corporation may fail in its obligation to reduce greenhouse gases, as opposed to remedial damages levied after the corporation has failed (and the greenhouse gases have been released into the world.) Here, The Hague court adopted the specific emissions reduction target put forth by the claimants and required RDS to adopt it as RDS’ corporate policy. This remedy intrudes on the shareholders’, board’s and management’s rights to govern the corporate entity, and is not often seen.

While this decision was based on specific provisions of Dutch and European law, large corporate emitters must now be considering if similar arguments can be made in other jurisdictions. For example, Ontario has a different a very legal toolkit from the Netherlands. It would be interesting to see if Ontario tort law or public nuisance law could be used to make similar arguments here as made by the claimants at The Hague, and whether the standard of care in Ontario should include a similar right to avoid greenhouse gas emissions contributing to dangerous climate change as in the Netherlands. As we have seen in recent Canadian decisions, the far-reaching and border-crossing effects of greenhouse gases have required to courts to rethink old frameworks when it comes to environmental law.

Vereinigung et al. v Royal Dutch Shell could just be an overreaching environmental case that gets overturned on appeal. On the other hand, this decision could just well be a first sign that the legal framework is changing. Given the existential threat posed by climate change, as even our own Supreme Court has recognized in its recent decision on the constitutionality of federal carbon pricing legislation, perhaps it makes sense to envision new legal frameworks where corporations are fully accountable for all the greenhouse gases released by their operations. In the past decades we have seen environmental causes being front and centre in political debates at the various levels of government in an attempt to influence policy making. Given the decision in Vereinigung et al. v Royal Dutch Shell, we may see individuals and environmental organizations turning more and more to the courts to influence the implementation of those policies to combat climate change.

Ramifications of Supreme Court’s carbon pricing decision

This article originally appeared in the The Lawyer's Daily published by Lexis Nexis Canada on Wednesday, March 31, 2021 | By Caroline Jageman and Michael Killeavy

On March 25, 2021, the Supreme Court of Canada handed down its decision on the constitutionality of the Greenhouse Gas Pollution Pricing Act (GGPPA). The Supreme Court held that the GGPPA was constitutional (Reference re Greenhouse Gas Pollution Pricing Act 2021 SCC 11).

Under the GGPPA all provinces are required to put a price on greenhouse gas (GHG) carbon emissions but are afforded the flexibility to create their own provincial emissions solutions in their own jurisdictions. If a province does not price carbon emissions, the GGPPA acts as a type of “backstop” to price carbon emissions for the province in the absence of an approved provincial program.

The first two parts to the GGPPA were contentious: Part I, the fuel charge; and, Part II, the Output-Based Pricing System (OBPS). The fuel charge is an excise tax levied on the consumption of greenhouse gas emitting fuels and is administered by the Canada Revenue Agency (CRA). The OBPS on the other hand is designed for large emitters, those that emit 50,000 tonnes of carbon dioxide or more annually (and lesser emitters who choose to opt in to the program) and who are required to pay for emissions over certain industry-specific emissions thresholds (OBPS participants can obtain an exemption from the fuel charge from CRA).

Ontario, Saskatchewan and Alberta all challenged the constitutionality of the GGPPA by referring the question to their respective Courts of Appeal. The provincial governments mainly argued that the federal government is overstepping its jurisdiction by imposing a carbon tax regime on the provinces. The federal government on the other hand argued that addressing climate change is of national concern and should be regulated by the federal government. The federal government relied on its s. 91 power under the Constitution to ensure “peace, order and good government” to implement the GGPPA.

The Ontario (4-1) and Saskatchewan Courts of Appeal (3-2), in split decisions, found in favour of the federal government. In another split decision, the Alberta Court of Appeal (4-1), however, found in favour for its provincial government. The Supreme Court heard arguments from the provinces and federal government last September and reserved its judgment at that time.

The Supreme Court (6-3) ultimately favoured the federal government argument. It held that the GGPPA was in fact constitutional, because “Parliament has the jurisdiction to enact this law as a matter of national concern under the peace, order and good government clause of section 91” of the Constitution. The court used a well-established two-stage analysis to render its decision on constitutionality. In first stage, it characterized the “pith and substance” of the GGPPA by analyzing its purpose and effects. In the second stage it then classified the subject matter of the GGPPA with reference to the heads of power under the Constitution to determine whether in was intra vires for the federal Parliament to enact.

At the first stage, the court found that the subject matter of the GGPPA was to establish a minimum national price for greenhouse gas emissions to reduce these emissions. In the words of the court, “the GGPPA establishes minimum national standards of GHG pricing that apply across Canada, setting a GHG pricing floor across the country.”

At the second stage, the majority found that, the GGPPA regulates a matter of national concern, namely, a Canada-wide GHG pricing system, which the provinces are unable to create. Notably, the Supreme Court recognized here that climate change poses an existential threat to the human life. The majority determined that if a province were to fail to address climate change to a minimum standard, all Canadians would suffer the impact, with the brunt of it borne by the vulnerable Arctic and coastal regions and by Indigenous people.

Although the GGPPA does impact provinces’ freedom to legislate on matters that fall under provincial heads of power, its impact is qualified, limited and outweighed by the harm that would result from the provinces failing to act. If a province failed to implement a carbon pricing program, the GGPPA imposed a backstop carbon pricing system, but only to the extent necessary to remedy the provincial deficiency to address the extraprovincial and international harm that might be caused by the provincial failure to set a minimum standard on greenhouse gas emissions.

The minority wrote three separate dissents. Justice Suzanne Côté agreed that Parliament may legislate a national pricing scheme for greenhouse gas emissions, but found that specific sections gave the governor-in-council such overly broad and unfettered discretion to regulate emissions, fuels and industries that the GGPPA is unconstitutional and offensive to the rule of law.

Justices Russell Brown and Malcolm Rowe viewed setting a minimum price on greenhouse gas emissions as falling squarely within the jurisdictions of the provinces under their powers to legislate on property, including regulating trade and industrial activity within their borders; on local works and undertakings; or on all matters of a merely local or private nature in the province. Nothing they heard took the GGPPA outside of matters of provincial jurisdiction, nor qualified it for Parliament’s residual authority to legislate on matters relating to the peace, order and good government of Canada. Specifically, a matter within provincial jurisdiction cannot become a federal matter just because it has an impact outside of the province. As they put it, the fact that the harms cross border is not enough to make a matter national. The national impact of greenhouse gas emissions is only the aggregate of provincial and territorial impacts of greenhouse gas emissions, on which provinces are capable of legislating (as the GGPPA itself demonstrates by being “backstop” legislation).

The court’s decision has several short-term and longer-term implications. The Supreme Court decision has brought certainty to the question of carbon pricing for businesses and the established minimum characteristics of carbon pricing programs. This is important for any business making investment decisions. Absent such clarity, businesses would be reluctant to invest in new processes or technologies to curb carbon emissions. When the GGPPA was first proclaimed, Ontario was on the list of provinces without a federally approved carbon pricing program, and as such the GGPPA was then applicable in Ontario. Last September the federal government approved the Ontario Emissions Performance Standards, but no transition date between the federal and provincial programs has yet been decided. It is likely that Ontario and the federal government will soon agree on a transition date now that the constitutional question has been decided. Also, provinces without a federally approved carbon pricing program are highly likely to establish such programs to exercise direct control over the proceeds of the program.

In the longer term, the Supreme Court has determined that greenhouse gases are “predominantly extra-provincial and international in their character and implications,” and in part on this basis determined that setting a minimum national price floor falls into the federal government’s residual authority to legislate for peace, order and good government. Now that the Supreme Court has confirmed that the federal Parliament has the jurisdiction to implement legislation to create a backstop national price for GHG emissions, potentially more such backstop legislation could be enacted to address GHG emissions.

It is also interesting to note that many other environmental matters have the potential to be characterized as “predominantly extraprovincial and international in their character and implications,” as do many other subject matters, given how interconnected our world is. While the majority decision affirmed the importance of the federalist system, preserving provincial diversity and reserving meaningful powers to the provinces, it will be interesting to see if this decision nevertheless represents a shift toward greater federal authority to legislate other backstops and minimum requirements.

Key energy themes from 2020 that will carry into 2021

This article originally appeared in the The Lawyer's Daily published by Lexis Nexis Canada on January 7, 2021

By Michael Killeavy and Caroline Jageman

While COVID-19 management was the dominant policy focus of 2020, green and energy policies continued to be moved forward at all levels of government. For our “year in review,” we set out below selected energy policies from 2020 which will continue to attract political and investment interest into 2021. We hope you find them interesting.

Conservation, federal budget 2020

The theme of the federal government’s 2020 budget is “Building Back Better.” It is pitched as a recovery plan to stimulate the economy out of its COVID-induced recession towards one that is “greener, more innovative, more inclusive and more competitive.”

At the voter level, the federal government proposes to invest a total of $2.6 billion over the next seven years in grants to homeowners of up to $5,000 to make energy efficient improvements to their homes and in free home energy audits. The federal government has also indicated that it will make available a low-cost loan program to fund efficiency retrofits in homes. An additional $150 million would be invested in growing the zero-emission vehicle charging network.

The budget allocates $4.8 billion to planting two billion trees, restoring ecosystems, protecting wildlife and improving land and resource management practices and towards creating a fund that fosters climate change solutions for the agricultural industry. The funds will be deployed through various government agencies, provinces, territories, non-governmental organizations, Indigenous communities, federal landowners and municipalities.

Finally, the federal government reiterated its commitment to achieving its net-zero emissions targets by 2050. The proposed Canadian Net-Zero Emissions Accountability Act would, if passed, legally commit the government to a process to achieve net-zero emissions by 2050 and to report annually on its progress.

It is noteworthy that “green” was the pre-eminent adjective used to describe the budget policies. Similarly, in the United States, President-elect Joe Biden’s campaign also heavily featured green policies, such as making the power sector emissions free by 2035, retrofitting six million homes and businesses and investing in clean and green technologies.

Electricity costs, Ontario budget 2020

The Ontario budget cites increased electricity costs caused by the green energy policies of a previous government as a key deterrent to investment and business growth in Ontario. This budget shifts some of the costs of green energy from the electricity rate base to the tax base. This policy change is projected to reduce the average commercial and industrial electricity price to 8.05 and 14.31cents per kilowatt-hour respectively and total bills by eight to 16 per cent, depending on the industry.

Tucked into the Ontario budget bill were controversial amendments to the Conservation Authorities Act. The conservation authorities vocally opposed these amendments arguing that their authority was significantly eroded in issuing, refusing or placing conditions on development permits. Conservation authorities, they argue, make permit decisions based on scientific evidence for the protection of ecosystems and wetlands. The budget amendments, they assert, shift power to the minister of natural resources to make political decisions which they believe will be more developer-friendly

Hydrogen strategy

Hydrogen is an energy source. Hydrogen is three times more energy dense than carbon, and its byproduct is water, rather than greenhouse gases. The catch to hydrogen is that while it is abundant in many chemical compounds, it rarely exists in its elemental form. Electrolysis is one method of creating hydrogen by splitting water into hydrogen and oxygen, but it requires energy. Where the energy for electrolysis is generated by fossil fuels, “grey hydrogen” results; non-renewable energy produces “blue hydrogen;” and renewable energy creates “green hydrogen.” Hydrogen-powered vehicles have been around for decades but until now have not been widely adopted.

In mid-December 2020, Natural Resources Canada released the Hydrogen Strategy for Canada. The strategy envisions that hydrogen will be a transformative technology, and, if Canada pursues hydrogen, it can be used in a widespread way to power vehicles, generate electricity and heat, and in various industrial applications. By 2050 hydrogen may be used to generate up to 30 per cent of Canada’s energy, replace 50 per cent of natural gas and fuel five million cars in Canada.

The strategy cites multiple benefits from large-scale use of hydrogen, such as significant reduction in greenhouse gas emissions; transitioning the petroleum sector to a greener economy; the creation of 350,000 green jobs; economic recovery; and positioning Canada as a world leading developer of hydrogen. To get there, the strategy also lays out the challenges. The costs of hydrogen technology need to come down to make it competitive with other energy sources; hydrogen-based applications need to be made more commercially ready; infrastructure to support the use of hydrogen needs to be built; policies need to be developed to regulate the use of hydrogen; and the public needs to be made aware of hydrogen.

Similarly, Ontario released a discussion paper in November and opened consultations on developing a provincial hydrogen strategy. The province’s vision is to leverage Ontario’s clean energy base to produce green/blue hydrogen, create jobs, attract investment and reduce greenhouse gas emissions.

Small modular reactors

Small modular reactors (SMR ) are mini nuclear reactors (700 kilowatts and 300 megawatts), delivered fully constructed to the end-user. SMRs are already in current use in nuclear-propelled submarines and for demonstration and research projects but are not commercially available. On Oct. 6, 2020, Ontario Power Generation announced its plans to construct an SMR at the site of the Darlington Nuclear Generating Station.

The federal government announced its SMR Action Plan on Dec. 18, 2020. The SMR Action Plan is the federal government’s plan for the development, demonstration and deployment of SMRs for multiple applications in Canada and abroad. It implements the SMR Roadmap released by the federal government in November 2018. The SMR Action Plan is a list of 450 concrete actions to be implemented by 109 partnering organizations to implement SMR technology in Canada by the late 2020s. The federal government estimates that the SMR market will be worth about $150 billion in 2040.

In addition to helping to deliver on Canada’s climate change and clean energy commitments, the federal government believes that it could also strengthen Canada’s position as a policy leader and early mover in SMR deployment to become an international standard-setter for strategic influence and geopolitical security. The federal government also believes that it could open opportunities for regional development and assist Indigenous and northern communities on addressing their energy challenges.

The federal government has identified SMRs as a potentially game-changing technology that can heat and power communities and serve industrial applications with zero emissions over the next seven to 10 years.

Widescale, commercial deployment of SMRs raise a number of legal and regulatory questions which will also need to be addressed, such as how will SMR waste be managed, how will SMRs be licensed and regulated and how will SMR risks be managed. We look forward to further developments in SMR deployment.

Carbon tax, GHG emissions

As we discussed in earlier articles, Ontario, Alberta and Saskatchewan continue with their challenge to the constitutional validity of the federal Greenhouse Gas Pollution Pricing Act. The hearing ended in September and it is anticipated that the Supreme Court will release a decision shortly.

As part of the federal Canada Net-Zero announcement on Dec. 11, the federal government announced its Healthy Environment and Healthy Economy Plan. Under it, the carbon tax will increase by $15 per tonne per year to be $170 by 2030. The carbon tax proceeds will be distributed to individuals and invested in other green projects, such as retrofitting municipal and community buildings, continuing the $5,000 rebate on electric vehicles, reducing GHGS emitted by public transit infrastructure and investing in renewable power generation.

As part of this announcement the federal government also earmarked $964 million over four years for smart renewable energy and grid modernization projects and $300 million over five years to assist rural, remote and Indigenous communities in replacing diesel power with cleaner forms of generation by 2030.

In the meantime, Ontario has fleshed out its Made-in-Ontario Environment Plan with its Emissions Performance Standards regulation, which is similar to the output-based pricing system under the federal system. On Sept. 20, 2020, the federal government approved Ontario’s Emissions Performance Standards, however, a transition date was not announced. On Dec. 16, the province posted proposed regulation amendments for a Jan.1 transition from the federal to the provincial program but stressed that no agreement had yet been reached on a transition date.

Distributed energy resource integration

The Ontario Energy Board and the Independent Electricity System Operator both have ongoing consultations into facilitating small-scale generation and storage into the electricity grid, understanding large load demand management capabilities.

We expect that all of the above policies will continue to be advanced in 2021 and look forward to following them in the coming months.

Made in Ontario emissions standard

This article originally appeared in the The Lawyer's Daily published by Lexis Nexis Canada on October 9, 2020

By Michael Killeavy and Caroline Jageman

Pricing carbon emissions has been a rather contentious issue over the past several years. In the autumn of 2018, the federal parliament enacted Bill C-74, the Greenhouse Gas Pollution Pricing Act (“GGPPA”). Under the GGPPA all provinces are required to put a price on carbon emissions but are afforded the flexibility to create their own provincial emissions solutions in their own jurisdictions. If a province does not price carbon emissions, the GGPPA acts as a type of “backstop” to price carbon emissions for the province.

There are two parts to the GGPPA: Part I, the fuel charge; and, Part II, the Output-Based Pricing System (“OBPS”). The fuel charge is the price on carbon emissions – an excise tax administered by CRA. The OBPS on the other hand is designed for large emitters, those that emit 50,000 tonnes[1]or more annually (and lesser emitters who choose to opt-in into the program), and who are required to pay for emissions over certain industry-specific emissions thresholds (OBPS participants can obtain an exemption from the fuel charge from CRA). When the GGPPA was first proclaimed, Ontario was on the list of provinces without a carbon price, and as such the GGPPA was applicable in Ontario. Ontario has challenged the constitutionality of the GGPPA, and this has been a source of friction between the Ontario and federal governments.

There has been a recent development in the ongoing controversy related to carbon pricing in Ontario. On September 21, 2020, the provincial government announced that the federal government had approved of the provincial Emissions Performance Standards (“EPS”) as a substitute for the OBPS, i.e., and made in Ontario emissions standard. The EPS was first introduced as a proposed regulation back in February 2019 when the emissions standard was posted to the Environmental Registry of Ontario. On July 4, 2019, the provincial government enacted O. Reg. 241/19, which implements the EPS (“the EPS regulation”). Although the federal government has approved the EPS, both governments are still discussing when the EPS will begin to apply to carbon emitters in Ontario.

The EPS shares many of the features of the OBPS that is contained in Part II of the GGPPA. Under the EPS the province will regulate emissions for the same sectors as the federal OBPS, which includes electricity generation from fossil fuels. Schedule 2 of the EPS regulation contains a complete list of all industries that are subject to the EPS. A covered facility is any facility that is required to register under the EPS regulation. Like the OBPS, the EPS applies to facilities that emit 50,000 tonnes or more annually. Also like the OBPS, facilities that emit at least 10,000 tonnes and less that 50,000 tonnes can voluntarily apply to participate. Voluntary participation may on its face seem an odd thing for a carbon emitter to do but it can be potentially advantageous for such facilities because they can obtain an exemption from the fuel charge, and if they can control their emissions, reduce the total price on their carbon emissions.

The EPS regulation refers to a methodology for calculating the total annual emissions limit (“TAEL”). Since TAEL is intensity-based, more efficient facilities can avoid having a compliance obligation, i.e., having to pay for their carbon emissions, if they are below the TAEL.

Compliance instruments are eligible to be used to satisfy compliance obligations. Compliance instruments include excess emissions units (“EEU”) for emissions over the TAEL and emissions performance units (“EPU”), for emissions under the TAEL, subject to certain eligibility requirements. EPUs must be distributed in the year after a compliance period to facilities for which the verified total annual emissions limit for the compliance period is more than the verified verification amount for the compliance period, i.e., the difference between the TAEL and verified emission under the TAEL constitute EPUs. EPUs expire after five years. Eligible compliance instruments will be removed from a facility’s account at the end of a compliance period, with EEUs to be removed before any EPUs are removed. EPUs may be transferred between facilities’ accounts by agreement if notice is provided.

The EPS only replaces the OBPS. There is no corresponding fuel charge in Ontario, which is something the provincial government strongly opposes. Subject to Ontario’s constitutional challenge of the GGPPA, the fuel charge in Part I of the GGPPA will still apply in Ontario.

The provincial government, along with those from Saskatchewan and Alberta, has challenged the constitutionality of the GGPPA at the Supreme Court of Canada (“SCC”). On appeal from these three provincial courts of appeal, the SCC heard arguments from the provinces on September 22 and 23, 2020 and has reserved its judgement. If the constitutionality is upheld, the GGPPA is good law and will apply in Ontario. If it is not upheld, the GGPPA will be struck down but the federal government could use the judgement to re-craft the legislation at a later date.

The provincial governments mainly argue that the federal government is overstepping its jurisdiction by imposing a carbon tax regime on the provinces. The federal government on the other hands argues that addressing climate change is of national concern an should be regulated by the federal government. The Ontario (4-1) and Saskatchewan Courts of Appeal (3-2), in split decisions, found in favour of the federal government. In another split decision, the Alberta Court of Appeal (4-1), however, found in favour for its provincial government. We will write a follow up to this article once the Supreme Court has rendered its decision. Given the split decision in the provincial courts of appeal, it will be very interesting to see when the Supreme Court lands.

[1] All references to tonnes in this article mean tonnes of CO2 equivalent of carbon emissions.

Where administrative law meets electricity market

This article originally appeared in the The Lawyer's Daily published by Lexis Nexis Canada on September 24, 2020

By Michael Killeavy and Caroline Jageman

Rayonier A.M. Canada Enterprises Inc. v. Independent Electricity System Operator [2020] O.J. No. 3879 is an examination of the intersection of administrative law with the rules that govern the Ontario electricity market. This motion to quash looks at whether the Independent Electricity System Operation (IESO) can implement and administer a dispute resolution process.

Rayonier (formerly Tembec Enterprises Inc.) is a large manufacturer of woodchips and newsprint. Operation of its Spruce Falls facility requires a large and steady supply of electricity, which Rayonier purchases from the Ontario electricity market. Electricity market prices are, in concept, set by supply and demand. Buyers and sellers in the market are governed by the IESO market rules.

Large electricity consumers, like Rayonier, submit bids into the electricity market specifying the price at which they would purchase electricity. Because of some alleged breaches of the market rules in submitting bids for electricity by Rayonier (as alleged by the IESO between 2010 and 2016), Rayonier received approximately $21 million in compensation for electricity that the system was not able to deliver. (This compensation under the IESO market rules is called Congestion Management Settlement Credits.)

A business unit within the IESO, the Market Assessment and Compliance Division (MACD), began investigating Rayonier’s bids in 2014. In 2017, MACD began a separate investigation against Rayonier for failing to respond to information requests. In both investigations, the IESO sent Rayonier a draft of its findings and provided Rayonier an opportunity to respond, which Rayonier did. In 2020, the IESO delivered two Notices of Non-Compliance and Orders (NNCOs) to Rayonier, which included that Rayonier implement a compliance plan and pay a financial penalty (the amount of which was not stated in the decision but is at least $12.5 million).

Under the IESO market rules, Rayonier may dispute the NNCOs, which stays the obligation to pay the financial penalty and publication of the NNCOs. The dispute process under the IESO market rules includes negotiation, mediation and arbitration. A party unhappy with the arbitrator’s decision can then appeal it to the Ontario Energy Board (OEB). The OEB decision can then be appealed to Divisional Court.

Rayonier chose not to use the dispute resolution process in the IESO market rules, but instead seeks judicial review of the NNCOs by Divisional Court. The IESO brought a motion to quash the judicial review. This decision by Justice Thomas Lederer is about whether the judicial review should be quashed.

Rayonier sought judicial review on two points. One, Rayonier argues that the investigative process set out in the market rules is inherently biased, because it invests the IESO with the powers to investigate, prosecute and decide the outcome of an alleged breach of market rules. Justice Lederer rejected this argument because after the issuance of the NNCOs Rayonier has multiple steps to appeal and each step gives Rayonier opportunity to present its side. The NNCOs are more like a report on the findings of the MACD investigation than a decision. Ultimately, he concluded that the question of inherent bias can only truly be answered after the parties have completed the full dispute resolution process. Accordingly, the allegation of inherent bias aspect of the judicial review was quashed.

Two, Rayonier argued that the IESO does not have the jurisdiction to compel information and disclosure of documents from market participants. Under the statutory scheme, those powers are given to the OEB and the Market Surveillance Panel. Accordingly, Rayonier argued that the IESO does not have the authority to set out and implement the dispute resolution process in the market rules. The market rules form the basis for the participation agreement between the IESO and any market participant. The market participant and IESO are both bound to the Market Rules and are agreeing to use this process to resolve disputes.

Justice Lederer concluded that it was not plain and obvious that Divisional Court would conclude at a full judicial review that the IESO has the authority to create and apply the market rules dispute resolution process. Accordingly, the question of whether the IESO has the statutory authority to implement a dispute resolution process will proceed to judicial review. This, he noted, is more efficient than to require Rayonier to first complete the Market Rules dispute resolution process, before it can challenge the legitimacy of that process. He also noted that an arbitrator or even the OEB would be put in an awkward and difficult position to rule on the very large question of the IESO’s statutory authority. The orders under the NNCOs are stayed until the judicial review hearing by Divisional Court.

As Justice Lederer notes, it would be a very big deal if Divisional Court were to find that the IESO does not have the jurisdiction to implement the dispute resolution process under the IESO market rules. As the IESO describes MACD: “MACD enforces compliance through the detection and investigation of potential breaches of the market rules. The Director of MACD has the authority to issue non-compliance rulings and impose sanctions, including financial penalties, when the rules have been breached. MACD also administers other rules which may result in repayments to the market.”

If Divisional Court were to determine that the IESO MACD lacked jurisdiction to oversee market participants, the IESO, the OEB and the Market Surveillance Panel would need to fundamentally redesign its governance of the electricity market. Potentially, the responsibility for overseeing of market participants might shift to the OEB. Although it was not the subject matter of the motion, there seems to be a potential conflict of interest for MACD with regard to the investigation and enforcement of potential breaches of the market rules by the IESO itself. Having the OEB investigate and conduct enforcement might make sense in the long run and avoid potential conflicts of interest for MACD.

Report card time for independent electrical system contrac

This article originally appeared on The Lawyer's Daily website published by LexisNexis Canada Inc. on September 18, 2020.

By Michael Killeavy and Caroline Jageman

In November 2019, we reported on the order-in-council from the minister of energy, northern development and mines directing the Independent Electricity System Operation (IESO) to engage an independent third party (independent consultant) to review existing generation and identify ways to lower electricity costs within such contracts. The review was to focus specifically on larger gas, wind and solar projects and portfolios of projects expiring over the next 10 years.

As we explained in our November article, Ontario uses long-term contracts to provide certainty to project developers and investors in energy projects to counter the uncertainty created by the competitive electricity market launched by the province in 2002. The province turned to long-term contracting (of 20 years or more) to allow generators to obtain favourable, lower cost financing. A long-term contract at a fixed price that is signed by a creditworthy provincial corporation with the statutory right to draw on the electricity rate base is generally seen as less risky, and therefore requiring lower cost financing. Lower costs of financing encourages project construction and therefore adequacy of electricity supply.

The IESO’s review of long-term electricity contracts caused a lot of concern in the generator community. Reducing electricity costs by 12 per cent was an important election promise made by Premier Doug Ford, and the COVID-19 pandemic caused the province to reduce rates temporarily. There is no current long-term solution to high electricity costs. Generators feared that they and their investors would bear the brunt of any cost reduction schemes initiated by the province.

The IESO published its Contract Review Directive Report together with the independent consultant’s report and other supporting materials on Aug.26, 2020. Below, we discuss the report.

Amendment by agreement

As noted by the IESO’s counsel and published as part of the report, the IESO contracts, like many other commercial contracts, can only be amended with the consent of both parties, and there is no unilateral right for the IESO to impose amendments or to terminate in this case.

The IESO contracts do contain a right for the IESO to terminate for convenience. However, this right is extinguished once a project achieves commercial operation and is in service generating electricity. (For the 758 Feed-in Tariff (FIT) and Large Renewables Procurement (LRP) contracts that were at this stage in 2018, the IESO exercised this right to terminate in response to a ministerial directive. Terminating a contract without a contractual right to terminate is generally very expensive, as was demonstrated by the previous government when it attempted to unilaterally amend the Greenfield South gas-fired generation in 2011. The auditor general of Ontario assessed the cost of relocating the plant at $275 million.

In addition, most generating facilities are funded with non-recourse debt and lenders have taken a secured interest in the contracts. In order to attach the secured interest, the lender, generator and IESO enter into secured lender consent and acknowledgement agreements. This is a complicating factor for any contract amendment process since this means that all three parties would need to agree to the amendment. The report concluded that negotiation was the only means of arriving at amendments. Generally, the IESO would need to offer generators and lenders something to entice them to agree to amending their contracts.

The independent consultant reviewed three main amendment scenarios and assessed the likely savings from each.

Blend, extend

We reported on the blend and extend amendment in our November 2019 article, whereby generators would agree to be paid a lower price per megawatt of electricity in exchange for extending the contract term for an additional 10 years. Blend and extend is premised on generators and lenders valuing the certainty of a longer contract term, and in their assigning a discount value such that the net present value of the lower-but-longer term contract payments would be greater than the net present value of the higher-but-shorter term contract payments. The independent consultant concluded that there would not be any savings from such amendments because ratepayers would ultimately end up paying more for electricity over the extended term in any scenario which would be attractive enough to generators to agree to an amendment.

Buyout, buydown

The independent consultant also looked at contract buyouts and contract buydown. Under buyout, the IESO would make a lump sum payment to the generator in exchange for the generator agreeing to terminate the contract. The independent consultant assessed only wind and solar contracts for buyout. Buying out gas-fired generation contracts was ruled out because the continued viability of gas-fired generation became questionable given the low wholesale electricity market price. Without reliable gas-fired generation, the reliability of the electricity system as a whole is threatened. Buydown is similar to buyout, however, the contract would still continue but at a reduced price per megawatt, and the IESO would make a lump sum payment in exchange reducing the contract price.

In order to make the lump sum payment in the buydown or buyout scenarios, the IESO would need to borrow funds. The IESO’s borrowing costs significantly reduced the net savings to the ratepayer. Buyouts for wind and solar contracts could potentially save between approximately $187 million and $253 million, and buydowns for these contracts would result in net savings of $260 million and $396 million. Buydowns of gas-fired generation contracts would save between $35 million and $47 million. These are one-time, net present value savings and not ongoing savings.

To put these savings in context, it is important to understand the composition of customer electricity bills. There are three main components: commodity cost; regulatory charges; and, connection charges.

The commodity cost is the largest component and it is predominantly made up of the Global Adjustment (GA) charge. The shortfall between the price of electricity paid by wholesale market electricity consumers and the amount payable to generators by the IESO under IESO contracts is allocated to the GA account, which account is ultimately charged back to consumers. Currently a little over $1 billion gets charged to the GA account per month. Under the most optimistic savings scenario, the results of a buyout or buydown would be about a one-time three per cent reduction in the GA.

The independent consultant reviewed several other non-contractual savings options; however, none was costed in the report and it seems these are ideas that the IESO may consider in the future.

The report is silent on using legislation to effect contract amendments or terminations. Under the doctrine of parliamentary supremacy, the legislature could enact legislation to extinguish a private party’s contractual rights. This, however, is rarely resorted to. Although we do note that the current government did use legislation soon after it was elected in 2018 to terminate the White Pines Wind Project.

Hopefully, the contract review’s conclusion that there are only moderate savings to be made from contract amendments will end the uncertainty for generators and their investors. This is important because a cloud has hung over the sector for about a year while this study was underway. Generators have investment decisions to make with their assets and they need certainty to do so. The IESO is forecasting a capacity need of approximately 2,000 megawatts in 2023 timeframe. Meeting this need will require new investment.

Wind farm decision sends strong message to renewable energy

This article originally appeared on The Lawyer's Daily website published by LexisNexis Canada Inc. on May 27, 2020.

In January of this year, we wrote about the revocation of Nation Rise’s Renewable Energy Approval (REA) for its 100-megawatt wind energy project (available here) by the Minister of Environment, Conservation and Parks, Jeff Yurek. Minister Yurek had found that the project would cause serious and irreversible harm to nearby bat maternity colonies. A REA is required under the Environmental Protection Act to construct and operate a wind project: the effect of Yurek’s decision was to require the demolition of this almost completed project.

The director of the Ministry of Environment, Conservation and Parks had issued the REA to Nation Rise in May 2018. The Concerned Citizens of North Stormont (CCNS) had appealed Nation Rise’s REA to the Environmental Review Tribunal. In order to overturn the REA, CCNS would need to demonstrate on a balance of probabilities that the project would cause either (a) serious harm to human health, or (b) serious and irreversible harm to plant life, animal life or the natural environment. The Environmental Review Tribunal found neither and dismissed CCNS’s appeal. With respect to bats, it heard expert evidence from both sides, and concluded that the risk of harm was low and further reduced by Nation Rise’s monitoring and mitigation measures. Bat maternity colonies were not raised.

Environmental Review Tribunal decisions may be appealed to the minister “on any matter other than a question of law and the minister shall confirm, alter or revoke the decision of the tribunal as to the matter in appeal as the minister considers in the public interest.” CCNS so appealed the Environmental Review Tribunal’s decision. It raised various concerns with the wind project, such as changes to soil conditions and the use of prime agricultural land, but nothing related to bats.

In determining the appeal, the minister relied heavily on his authority to act “in the public interest.” He framed his own questions including whether the Environmental Review Tribunal had erred by failing to determine that the project would cause serious and irreversible harm to bats. The minister found that it was not possible to determine the full extent of the harm to local bat maternity colonies, and so he would take a precautionary approach and proceed on the basis that the harm would be serious and irreversible. Based on that finding, the minister revoked the REA without hearing submissions from Nation Rise as to alternative remedies.

Nation Rise appealed the revocation of the REA to Divisional Court. The court reviewed the minister’s decision on a reasonableness standard, importing restraint by the reviewing court and respect for the minister’s decision-making role. The court overturned the minister’s decision to revoke the REA, concluding severely that it was “not reasonable and does not deserve deference. The decision does not meet the requirements of transparency, justification and intelligibility.” The court’s decision was based on the merits of the minister’s decision and a breach of procedural fairness (Nation Rise Wind Farm Limited Partnership v. Ontario (Minister of the Environment, Conservation and Parks) [2020] O.J. No. 2137).

With respect to the merits, a key issue was whether the section of the EPA that permits appeals to the minister required him to consider only those issues raised by CCNS, or whether he had broad discretion to consider any issue in the public interest. Based on the wording of the section which gives the minister the authority to revoke an Environmental Review Tribunal decision “as to the matter of the appeal,” the Divisional Court found that the minister can consider only issues raised by the appellant. As such, the minister did not have the authority to raise the issue of whether the project caused harm to bat maternity colonies, which was not a factor in the Environmental Review Tribunal decision.

Further, with respect to the merits, the minister applied the incorrect burden of proof by considering the potential for harm to bat maternity colonies rather than whether there would be harm on a balance of probabilities. The court found no basis for the minister’s conclusion that the project would result in harm to bats or bat maternity colonies, noting: “A reading of the Minister’s decision leads to the conclusion that he has misunderstood some key evidence, and more importantly, that he has ignored the significant evidence of the only witness who was an expert on bats.”

Nation Rise also argued that the minister breached the duty of procedural fairness (i) by failing to give it adequate notice that the minister was considering potential harm to bat maternity colonies, and by failing to give it an opportunity to make submissions on this point; and (ii) by failing to give Nation Rise an opportunity to make submissions on alternative remedies to revoking the REA.

The minister argued that the duty of procedural fairness was minimal as his decision was more akin to a public policy decision than a judicial review. The court considered various factors, such as the parties’ legitimate expectations and the scheme of the EPA. It concluded that there was a more than minimal duty of procedural fairness. Procedural fairness also required that after the minister had determined that there would be serious and irreversible harm to bat maternity colonies, Nation Rise be granted the opportunity to make submissions on alternative remedies. Nation Rise could have highlighted various other measures it would take to further reduce harm to bats, and perhaps persuaded the minister to leave the REA intact.

Accordingly, the Divisional Court overturned the minister’s decision. It noted that in the normal course CCNS’s appeal would be sent back to the minister to remake the decision. In this case, however, the court concluded that the only reasonable finding is that the wind project would not cause serious and irreversible harm to bats, and so the court reinstated the REA.

On one hand, this decision clarifies that the minister’s appeal authority under the EPA does not grant him a broad power to make any REA-related order in the public interest. This result should give a measure of confidence to project owners that the scope of matters for which a REA may be revoked is somewhat more limited. On the other hand, even though the REA was ultimately reinstated, the minister’s December initiative to revoke the REA may have sent a message to potential investors that renewable energy projects in Ontario will be strictly reviewed for their impact. This factor should be considered when making renewable investments in Ontario.

By Michael Killeavy and Caroline Jageman

Association of major power consumers in Ontario denied marke

This article originally appeared on The Lawyer's Daily website published by LexisNexis Canada Inc. on January 29, 2020.

Earlier this month we wrote about the challenge by the Association of Major Power Consumers in Ontario (AMPCO) to the market rule amendments from the Independent Electricity System Operator (IESO) to change the way it conducted its Demand Response Auction (DRA). On Jan. 23, 2020, the Ontario Energy Board (OEB) handed down its decision on the market rule challenge by denying it.

To recap, demand response consists of large consumers of electricity, i.e., large loads, reducing their consumption of electricity when the system is peaking.

The reduced consumption by these consumers helps reduce the peak demand that the system must meet to keep the supply and demand of electricity balanced. The large loads receive an out-of-market payment for them to be on standby to reduce consumption, in other words to be activated, as required by the IESO.

Last September, the IESO proposed new market rules to transform its DRA into a Transitional Capacity Auction (TCA) by allowing electricity generators to participate in the auction. The generators would supply electricity when system reaches peak capacity. From the system’s perspective there is no difference between reducing a load’s consumption of electricity and increasing the supply of electricity from a generator to meet the peak demand.

On Sept. 26, 2019, AMPCO filed an application with the OEB to revoke the proposed TCA market rule amendments. The AMPCO application alleged that the inclusion of electricity generators was unjustly discriminatory against traditional load participants and inconsistent with the Electricity Act.

Electricity generators will receive both the out-of-market payment for being on standby and, in addition, will also be paid for the electricity they supply into the grid. Loads will only receive the out-of-market payment for being on standby.

There are two statutory tests in the Electricity Act for the OEB to consider in determining whether to review or revoke an IESO market rule amendment. The first, is whether the market rule amendment is consistent with the purposes of the Electricity Act.

The second, whether the market rule amendment is unjustly discriminatory in favour of, or against, a market participant or class of market participants. For the purposes of the AMPCO application, all parties agreed that the market rule amendments were consistent with purposes of the Electricity Act, and the discriminatory nature of the market rule amendments was what was in contention.

In a prior case, the OEB determined that unjust discrimination meant unjust economic discrimination. The central issue of this case was whether the market rule amendments that permitted both loads and generators to compete in an expanded capacity auction would be unjustly discriminatory towards the loads.

The OEB noted that meting out different treatment to different resources with dissimilar circumstances could be discriminatory, but not unjustly discriminatory. However, the decision says that if the resources’ circumstances were the same, “different treatment in the broader economic context — that is, through the IESO’s market design and supporting rules” would result in the market rule amendments being unjustly discriminatory.

The OEB found that three elements were required to establish unjust discrimination. First, there must be economic discrimination. Second, it must be demonstrated that any difference in treatment is not justified by a difference in circumstances. Third, any claim of discrimination cannot be purely qualitative and must have some quantitative aspect.

In its decision, the OEB found that there was economic discrimination in that loads and generators were being paid differently. With regard to the second aspect of the test, the OEB found that there was no difference in the circumstances of loads and generators since they both incurred costs in being activated, but that these costs could vary among the members of these two classes of market participants.

On the third element of the test, the OEB stated that there was no evidence as to the activation costs that loads would incur. This third limb of the test was fatal to AMPCO’s application. The OEB found that in the absence of quantitative evidence on costs that the parties incur, the OEB could not determine with any certainty whether the circumstances between generators and loads were in fact similar or different.

As such, the OEB could not conclude whether different treatment could constitute unjust discrimination. The OEB denied the application for an order to revoke the market rule amendments.

This is only the second time that market rules have been challenged at the OEB. With this decision we have learned more about how the OEB will determine the fate of applications alleging market rule amendments are unjustly discriminatory.

Firstly, we have learned that the OEB will require substantial evidence before it will review or revoke an IESO market rule amendment. This is the applicant’s burden and arguably it is a greater burden in an application to revoke a market rule amendment.

More importantly, the OEB decision indicates that any application alleging unjust discrimination needs to be backed up by some form of quantitative evidence to allow the OEB to decide the unjust discrimination issue using its three-part test.

If the applicant cannot provide the evidence that the OEB requires for its test, it is likely doomed. It is not just enough to say that the treatment is discriminatory in a qualitative fashion. The applicant needs to clearly demonstrate this with a quantitative analysis. In other words, objective evidence needs to be adduced. Secondly, we now know how the OEB will approach any application to revoke a market rule amendment.

As we have said in the previous article the IESO is currently undertaking a Market Renewal Program (MRP), which will fundamentally change the IESO-administered markets, and that the AMPCO application served as a type of template for launching challenges in the future.

This decision arms any future applicant wanting to challenge any MRP-related market rule amendment with the knowledge of the legal tests the OEB could apply and types of evidence it needs to provide in order to prevail at the OEB.

By Michael Killeavy and Caroline Jageman

natural resources, Environmental cases to watch in 2020

By Caroline Jageman and Michael Killeavy

This article originally appeared on The Lawyer's Daily website published by LexisNexis Canada Inc. on January 8, 2020.

Last year was very eventful for those practising in the energy sector. There have been some very important legal and policy decisions around carbon emissions and the Feed-in Tariff (FIT) program that will continue to have an impact into the new year. This is the first part of a two-part article where we discuss three other key cases to watch in 2020.

In part one, we discuss a challenge to the Independent Electricity System Operator (IESO) market rules and the revocation of a necessary permit to build a wind farm. In part

two, we will discuss a constitutional challenge to Ontario’s Global Adjustment Mechanism.

Challenging Market Rules

Major consumers market rule challenge Since 2015, the IESO has run a Demand Response Auction in which heavy consumers of power such as industrial consumers

are paid a fee to be on standby, and, if the Ontario electricity grid nears peak capacity, to reduce their consumption of power. The IESO runs a reverse-auction for participants in this program. Large consumers of electricity participate in this auction. They bid in the hourly rate for which they would be willing to reduce their electricity consumption.

On Sept. 5, 2019, the IESO published a series of amendments to the Demand Response Auction rules, which are intended to transform the Demand Response Auction into the Transitional Capacity Auction (TCA) by expanding participation to electricity generators. With respect to generators, when the electricity grid nears peak capacity, generators produce power to supply into the grid. From the grid’s point of view, there is no difference between reducing a load’s consumption of power and injecting power into the grid.

On Sept. 26, 2019, the Association of Major Power Consumers of Ontario (AMPCO) filed an

application with the Ontario Energy Board (OEB) to review the proposed TCA amendments. The AMPCO application alleged that the inclusion of electricity generators is unjustly discriminatory against traditional load participants and inconsistent with the Electricity Act. Electricity generators will receive both the standby payment and, in addition, will also be paid for the electricity they supply into the grid. Loads will only receive the standby fee.

As part of its application, AMPCO asked the OEB to stay the operation of the

TCA amendments, which would effectively shut down the TCA for 2019, originally

scheduled to be held Dec. 4-5, 2019. The OEB has broad powers to stay an amendment, if

it is in the public interest, and based on the merits of the application among other reasons. On Nov. 25, OEB issued the stay, effectively agreeing with AMPCO and preventing the TCA from taking place until the OEB can decide on the merits of the application.

The OEB found that there was a serious issue to be adjudicated and that the public interest was better served by staying the TCA because the IESO can still run the Demand Response Auction in its previous form with only traditional load resources.

The OEB found that the AMPCO challenge could potentially succeed on its merits because of the disparate payment schemes between loads and generators are potentially unjustly discriminatory and may negatively affect competition as between loads and generators to be selected for the participation in the TCA.

The OEB must issue its final decision on the amendments no later than Jan. 26, 2020. In

making its decision on the amendments the OEB can consider whether the amendments are consistent with the purposes of the Electricity Act or unjustly discriminate in favour or against a market participant or class of market participants.

The implication of the OEB pushback on the IESO is significant. The IESO is currently

undertaking a Market Renewal Program to change the structure and operation of the

Ontario hybrid electricity market. This will be accomplished by amending the existing

market rules.

The AMPCO market rule challenge serves as a template for other sector participants in the future should they wish to challenge Market Renewal Program market rule amendments.

Nation Rise wind farm revocation

On Dec. 4, Jeff Yurek, Ontario’s minister of the Environment, Conservation and Parks,

revoked the Renewable Energy Approval (REA) issued to the 100-megawatt Nation Rise

wind farm. This wind farm is more than half completed with a number of turbines already erected. Renewable energy developers need the REA to develop their projects and revocation of the REA effectively requires the developer to stop work on the project.

The Nation Rise wind farm has been regarded as a controversial project since its inception, by some members of the host community of North Stormont, who twice voted against it. The director under the Environmental Protection Act issued a REA to Nation Rise in May 2018. A group of local residents, the Concerned Citizens of North Stormont, appealed the REA to the Environmental Review Tribunal (ERT). The ERT upheld the REA. The ERT was satisfied with the project’s commissioned studies that showed there were no material adverse effects, including no threats to the local bat population.

The Concerned Citizens of North Stormont appealed the ERT’s decision to the Environment Ministry. The Ministry has the authority to confirm, alter and revoke decisions of the ERT if the REA will cause serious harm to human health or to plant life, animal life or to the natural environment and if it is in the public interest to do so.

While Yurek largely agreed with the ERT, he did come to a different conclusion as to the

effect of the wind farm on the local bat population. Here, Yurek determined that there

would be serious and irreversible localized harm to the admittedly small bat population.

Having met the “harms test,” the minister then turned to the public interest analysis.

In the context of a REA, the Environmental Protection Act mandates the protection and

conservation of the “environment,” where environment includes the “social, economic and cultural conditions that influence the life of humans or a community.” Accordingly Yurek considered the benefits of renewable energy against the harm to bats, the impact of the project on the local community and the need for electricity from the project. He ultimately concluded that the harm to the bats outweighed the value of the electricity from the Nation Rise Wind Farm and revoked the REA.

The revocation of the Nation Rise wind farm is an illustration of the extremely broad

jurisdiction that the Ministry potentially has to consider anything. In this case, Yurek

assessed the value of the energy output from this wind farm to the grid and concluded it

as minimal. He states: “In terms of electricity need, while renewable energy is an important component of the province’s electricity grid, the project’s expected output of up to 100 megawatts, as noted on the approval, is obviously only a small fraction of Ontario’s energy usage.” In this decision, he determines that the province does not really need the output from Nation Rise.

The project’s owner, EDPR Canada, asserts that Yurek exercised his discretion in revoking

REA for the project without presenting evidence against EDPR’s expert studies that the

harm to the bat population will be minimal. We look forward to seeing if EDPR will appeal the minister’s decision.

The Environment Ministry’s decision to revoke the REA is surprising and only adds to the

uncertainty that generators are currently facing since the change in government in June

2018. This sends a strong message to infrastructure investors and lenders that Ontario is a risky place to do business. Any infrastructure developer looking to reduce policy-change risk might considering planning their projects to ensure that they can be developed, loans repaid and equity returns earned within the mandate of one government.

In part two of this series, we review National Steel Car Limited v. Independent Electricity

System Operator 2019 ONCA 929 which is a constitutional challenge to Ontario’s Global

Adjustment Mechanism. Parties with power purchase agreements with the IESO may wish to follow this case to ensure that the IESO has access to the funding it needs to meet its contractual obligations.

More energy and Environmental caseS to watch in 2020

By Caroline Jageman and Michael Killeavy

This article originally appeared on The Lawyer's Daily website published by LexisNexis Canada Inc. on January 13, 2020.

In part one of this two-part article, we discussed the Independent Electricity System

Operator (IESO) Market Rule challenge by the Association of Major Power Consumers in Ontario and the revocation of the Renewable Energy Approval for Nation Rise wind farm. In part two we discuss the recent Court of Appeal decision on the IESO’s Global Adjustment mechanism. This decision could have serious implications for how electricity costs get recovered in Ontario. The constitutional validity of the Global Adjustment charge was challenged in National Steel Car Limited v. Independent Electricity System Operator 2019 ONCA 929 at the Court of Appeal level.

By way of background, an electricity consumer’s bill consists of multiple charges. The two largest charges are (1) the hourly market price paid to generators to supply electricity as set by the provincial supply and demand, and (2) Global Adjustment which is the difference in cost between the hourly market price and the amount that the IESO is obligated to pay to electricity generators under contract. Each month in Ontario Global

Adjustment is around $1 billion.

Very roughly speaking, the IESO reports Global Adjustment payments as going approximately 45 per cent to nuclear generators, 40 per cent to renewable generation, 10 per cent to gas-fired generators and the balance to other forms of generations and conservation. The IESO’s breakdown is available here.

National Steel Car (NSC) makes steel rail cars and is a heavy industrial consumer of electricity. In 2008, NSC’s electricity bill was approximately $208,000. By 2016, it had increased to approximately $3.4 million. NSC attributed this staggering increase to the introduction of the Green Energy and Green Economy Act and the introduction of the Feed-in Tariff program (FIT Program) in 2009. The FIT Program was a renewable energy generation program in which generators received a set price under a long-term 20-year contract to produce green energy. The difference between the market price of electricity and the contract price for electricity under the FIT Program is paid for through Global Adjustment.

In the spring of 2018, NSC brought a challenge to the constitutionality of Global

Adjustment. The FIT Program, it argued, is a social policy to subsidize rural and Aboriginal

communities, municipalities and co-operatives. The (now repealed) legislative

authorization of the FIT Program specifically encouraged the participation of Aboriginal and local communities. It also provided that these communities would be paid a higher price for the electricity generated.

Apparently, the province agreed that a stated policy goal of the FIT Program was to build

stronger economics in local and Aboriginal communities. Global Adjustment, which funds the FIT Program, NSC argued, is therefore not a regulatory charge which can be levied by the province but is instead a tax that can only be levied at the federal level.

From a constitutional validity standpoint, Ontario has the power of “Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes.” (s. 92(2)).

Canada has the much broader power to raise “money by any mode or system of taxation.”

To distill the Court of Appeal’s analysis, only Canada can levy an indirect tax where the

proceeds are used for an unrelated policy goal. Ontario can only levy a regulatory charge that is ancillary to a valid regulatory scheme (at paras. 27-28). In other words, if Global Adjustment is an indirect tax, it cannot be enacted by Ontario, and is therefore invalid. On the other hand, if Global Adjustment is a regulatory charge, it is valid.

The Court of Appeal acknowledges that it is often difficult to distinguish between a

regulatory charge and a tax. Quoting the Supreme Court, one must look at the levy’s

primary purpose. If its pith and substance is to raise revenues for a general purpose, it is

likely a tax. If it is more like a user fee to finance a regulatory scheme, then it is a

regulatory charge.

Initially, the motions judge reviewed NSC’s claim and dismissed it without a hearing on the basis that it was plain and obvious it had no chance of success. NSC appealed. The Court of Appeal overturned the motions judge’s decision finding that the constitutional invalidity of Global Adjustment was plausible.

Without commenting on NSC’s chances of success at the full hearing on its merits, if Global Adjustment is found to be invalid under the Constitution Act, 1982 this would require a fundamental change to how electricity is paid for in Ontario over the next couple of decades. The IESO needs Global Adjustment to fund its payment obligations under the various long-term power purchase agreements it signed with Ontario electricity generators. Global Adjustment between September 2018 to August 2019 was at approximately $12.5 billion: that money needs to come from somewhere. Without it, the IESO would be in default.

Parties who have generation contracts with the IESO may wish to follow this case to

ensure that the IESO has access to the funding required to meet its contractual

obligations.

That said, if Global Adjustment were found to be invalid, it is unlikely that the province

would allow the IESO to default on its contracts. Theoretically, the province could permit

the IESO to draw on provincial revenues to meet its obligations.

Each of the cases we have discussed in this two-part article has the potential to impact the structure of the Ontario electricity system. We will be following the above cases closely this year and report back on significant developments.

This is part two of a two-part article. Part one: Natural Resources, environment cases to

watch in 2020.

ONTARIO’S LOOMING ELECTRICITY SUPPLY NEED

Canada’s next steps for clean air and strong economy

Parsing Ontario’s new clean energy credit initiative

Landmark Dutch case creates legal obligation to reduce GHG

Ramifications of Supreme Court’s carbon pricing decision

Key energy themes from 2020 that will carry into 2021

Made in Ontario emissions standard

Where administrative law meets electricity market

Report card time for independent electrical system contrac

Wind farm decision sends strong message to renewable energy

Association of major power consumers in Ontario denied marke

natural resources, Environmental cases to watch in 2020

More energy and Environmental caseS to watch in 2020

ONTARIO’S LOOMING ELECTRICITY SUPPLY NEED

Canada’s next steps for clean air and strong economy

Parsing Ontario’s new clean energy credit initiative

Landmark Dutch case creates legal obligation to reduce GHG

Ramifications of Supreme Court’s carbon pricing decision

Key energy themes from 2020 that will carry into 2021

Made in Ontario emissions standard

Where administrative law meets electricity market

Report card time for independent electrical system contrac

Wind farm decision sends strong message to renewable energy

Association of major power consumers in Ontario denied marke

natural resources, Environmental cases to watch in 2020

More energy and Environmental caseS to watch in 2020

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