In 2009, the Government of Ontario launched a Feed-in Tariff Program ("FIT") formulated along the lines of Germany's earlier StrEG (Stromeinspeisungsgesetz -"feed-in laws") to provide attractive off-take pricing, improved regulatory environs, and more predictable grid connection processes for renewable energy developers - all with the hope of supporting the continued growth in the province's wind, solar, bio, and hydro industries.
Under FIT, the Ontario Power Authority, or the "OPA" (as it was known prior to merging with and becoming part of Ontario's Independent Electricity System Operator ("IESO") in January of 2015), paid contracted operators of renewable energy projects a set price for every kilowatt-hour of electricity that their project fed into the provincial energy grid.
In an attempt to encourage FIT Program participation by Ontario's First Nation communities, Ontario provided an "Aboriginal Price Adder" - essentially an increased contract price - for projects having a minimum percentage of Aboriginal ownership. The Aboriginal Price Adder has been effective in encouraging Aboriginal communities to maximize their interest in renewable energy projects in Ontario; however, as we see it, there are numerous opportunities that remain unexplored.
Along with the Aboriginal Price Adder, the Ontario Government also launched in its 2009 budget a lesser-known but arguably just as important equity funding program known as the Aboriginal Loan Guarantee Program ("ALGP") to support Aboriginal equity participation in renewable energy projects in Ontario.
Although the interface between the FIT Program (run by the IESO) and the ALGP (by the Ontario Financing Authority) is sometimes less than perfect, the combination of the two programs can significantly enhance project return and, as a result, creates a unique and potentially quite attractive opportunity for private project developers to partner with Aboriginal communities.
Qualifying for the Aboriginal Price Adder
When conducting the analysis to determine whether a project can become eligible for the Aboriginal Price Adder, sponsors will need to make a preliminary determination as to what the "Economic Interest" of a qualifying "Aboriginal Community" will be in that project.
Readers familiar with Ontario's FIT Program will know that the defined term "Economic Interest," as it is used under the program, is a somewhat imprecise concept -some combination of a risk of loss and a right to receive a return from a given project, closer by nature to equity than to debt.1 Fortunately, what qualifies as an "Aboriginal Community" under the FIT Program is somewhat more certain: (i) a First Nation that is a "Band" as defined in the Indian Act (Canada); (ii) the Métis Nation of Ontario or its active Chartered Community Councils; or (iii) some form of business entity owned by or deemed to represent the collective interests of (i) or (ii).
If an Aboriginal Community does hold an Economic Interest in a FIT contracted-project, the Aboriginal Price Adder may be available. The question then becomes what percentage of Economic Interest they hold. Each version of the FIT Contract establishes a minimum threshold for qualifying for the Aboriginal Price Adder. For example, under FIT Contract versions 1.3 to 1.3.2, an Aboriginal Community must hold at least a 10% Economic Interest in a project in order to receive any portion of the available Aboriginal Price Adder. If the Aboriginal Participation Level meets the 10% threshold, the project is defined as an Aboriginal Participation Project. Version 3.0 of the FIT Contract sets a higher threshold - requiring the Aboriginal Community to have an Aboriginal Participation Level that is greater than or equal to 15%.
Under all FIT Contracts (thus far), a project must qualify as an Aboriginal Participation Project at the time of commercial operation in order to qualify for the Aboriginal Price Adder. For prospective developers hoping to lever a higher return on equity for their project, this leaves the entire period before commercial operation to find and partner with an Aboriginal Community in order to gain access to the higher returns. Those willing to run the numbers will realize that the enhanced returns are quite substantial both for non-Aboriginal project co-sponsors and for Aboriginal Community participants -particularly when considered on a leveraged basis.
What is the Aboriginal Price Adder Worth and How Does it Work?
The actual dollar per kilowatt hour amount of the Aboriginal Price Adder varies depending on the Aboriginal Participation Level, the renewable fuel type, and the FIT Contract version in question. Taking FIT Contract Versions 1.3 - 1.3.2 as an example, the calculation for the Aboriginal Price Adder is as follows:
Maximum Aboriginal Price Adder (see chart below)
x Aboriginal Participation Level
The Maximum Aboriginal Price Adder for FIT Contract versions 1.3 - 1.3.2 are set out in the following table, segregated by generation technology:
||Solar Photovoltaic (Ground Mounted)
|Basic FIT Rates (¢/kWh) 2
|Maximum Aboriginal Price Adder (¢/kWh)
Adding ¢1.5/kWh to the ¢13.5/kWh FIT power purchase price available for an onshore wind project, for instance, enhances the power purchase price by a factor of more than ten percent. On a levered basis, the impact on equity return is obviously even more significant.
To take a solar energy example, a 5-MW ground-mounted solar PV (photovoltaic) project with an Aboriginal Participation Level of 10% would qualify for an Aboriginal Price Adder equal to 0.30 ¢/kWh.
Thus, under FIT Contract versions 1.3 - 1.3.2, the amount of the Aboriginal Price Adder available breaks down as follows:
- If an Aboriginal Community holds a 50 - 100% Economic Interest in the project, it will be eligible for the Maximum Aboriginal Price Adder;
- If an Aboriginal Community holds a 40 - 49% Economic Interest in the project, it will be eligible for 80% of the Maximum Aboriginal Price Adder;
- If an Aboriginal Community holds a 25 - 39% Economic Interest in the project, it will be eligible for 50% of the Maximum Aboriginal Price Adder; and
- If an Aboriginal Community holds a 10 - 24% Economic Interest in the project, it will be eligible for 20% of the Maximum Aboriginal Price Adder.
To be clear, the Aboriginal Price Adder cannot be greater than the Maximum Aboriginal Price Adder.
Under FIT Contract version 3.0, the Aboriginal Price Adder is only available to projects that have an Aboriginal Participation Level equal to or greater than 15%. However, under FIT 3.0 a different Aboriginal Price Adder applies to projects with: (1) 15 - 50% participation level and (2) greater than 50% Aboriginal Participation Level.3
The Maximum Aboriginal Price Adder under FIT Contract version 3.0 is:
|Basic FIT Rates (¢/kWh)4
|15 - 50 % Participation
||> 50% Participation
|Maximum Aboriginal Price Adder (¢/kWh)
Thus, to take another wind example, under FIT Contract version 3.0 a wind project with an Aboriginal Participation Level greater than 50% would be eligible to receive the FIT Contract price of 12.8¢/kWh, plus an additional 1.5¢/kWh. This means that the total price would be 14.3¢/kWh for this project.
Unlocking the Potential of the Aboriginal Price Adder
The Aboriginal Price Adder encourages partnership with Aboriginal Communities and encourages Aboriginal Communities and their prospective partners to maximize the Aboriginal participation in the investment. However, in order to do so, a project must qualify as an Aboriginal Participation Project at the time of commercial operation, with the Aboriginal Community having a minimum percentage of ownership in the project that is between 10 - 15%, depending on the FIT Contract version.
For projects that are pre-commercial operation (pre-COD), there is an exciting opportunity to partner with Aboriginal communities to take advantage of the preferential pricing available under the FIT program. With appropriate transaction structuring, it is possible to take Aboriginal Participation Level from 0% to 51% on a pre-COD basis using Ontario's ALGP.
Although there has been significant uncertainty regarding the interface between the FIT Program and the ALGP, with proper project structuring and careful consultation, it is possible to leverage equity loan guarantees available under the ALGP as well to benefit Aboriginal project participants interested in FIT Program project co-ventures.
The ALGP program operates as a loan guarantee given by the Ontario Minister of Finance in support of a loan made by one or more commercial lenders to a qualifying Aboriginal community in relation to a qualifying renewable energy project. Unfortunately, the result is that there will be at very least three parties to the negotiation of the ALGP loan documentation -the commercial lender, the Aboriginal community, and the Ministry of Finance. More often, than not senior project lenders, equity co-investors and the IESO will also have some say on ALGP documents - adding to the overall complexity of the process and the documentation.
Senior debt providers should be notified in advance of the parties' intention to access ALGP financing. Equity co-investors should also be made aware of the ALGP requirements, including specific undertakings and acknowledgements which will need to be given by the "Supplier" of record under the FIT Contract should an IESO comfort letter be required by senior project lenders or their counsel (who will often have little familiarity or comfort with Ontario's FIT program).
Just to be clear, the "Supplier" under the FIT program will, in most cases, be the corporation or the limited partnership formed by the Aboriginal community and their non-Aboriginal project partners, meaning that the non-Aboriginal joint-venturers will need to get comfortable with the representations, warranties and undertakings which the IESO and the Ministry of Finance require of the "Supplier" in order to approve the Aboriginal loan guarantee. In many cases, these will cover matters pertaining to project approval by the First Nation and the maintenance of the Aboriginal Interest (discussed above), which are not necessarily within the knowledge or control of the non-Aboriginal partner. The result: this takes time, close consultation, and careful selection of senior lenders, lender legal counsel, and equity partners.
The End Result
Although the process can be challenging, a small number of Ontario First Nations and non-Aboriginal equity co-investors have now successfully wedded the Aboriginal Price Adder with the ALGP to create substantial opportunity and attractive returns on investment. As indicated above, we recommend advance planning and the careful selection of project partners (and counsel) to make the process possible.
As per kW renewable energy project development prices continue to fall and as Ontario's First Nations continue to recognize the opportunity at hand, there will be significant opportunities available for both Aboriginal and non-Aboriginal project proponents in the renewable energy sectors. Using the Aboriginal Price Adder and the ALGP should, in our view, only be the start of a long and prosperous relationship between project sponsors and Aboriginal communities seeking stable long-term investment opportunities in the renewables sector. We see decades of growth to come.
1 Readers working on Ontario's current LRP program projects will know that the definition of "Economic Interest" has been changed under the newer program to specific equity participation only.
2 FIT Price Schedules (September 24, 2009; July 2, 2010; August 13, 2010).
3 FIT Standard Definitions, version 3.0, ss 9 - 10.
4 FIT/microFIT Price Schedule (September 30, 2014 for FIT and January 1, 2015 for microFIT)