Renewable Energy Law Atlantic Canadian Update
June 6, 2011
By James MacDuff, at McInnes Cooper
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• Emera Inc. and Nalcor Energy sign Term Sheet for Muskrat Falls Lower Churchill Project
• Renewable Electricity Regulations passed in Nova Scotia
– Legislated mandate of 25 per cent of electricity to be produced by renewable energy facilities starting in 2015;
– Interim cap on forest biomass supply;
– Community feed-in-tariff rates to be set by the Nova Scotia Utility and Review Board;
– Separate tidal arrays feed-in-tariff; and
– Renewable Electricity Plan goal of 40 per cent renewable electricity starting in 2012 is currently unlegislated.
OVERVIEW OF THE REGULATORY FRAMEWORK
In April 2010, the Nova Scotia government released its Renewable Electricity Plan (the “Plan”). The purpose of the Plan is to assist with and further promote the development of renewable energy resources. Amendments were made to the provincial Electricity Act in May 2010 to establish a legislative basis to put the Plan into effect. Draft renewable electricity regulations were released on May 31, 2010. Province-wide public consultation occurred in June and July and the regulations were finalized in September, 2010. The final Renewable Electricity Regulations (the “RES Regulations”) were enacted in October, 2010.
These regulations will ensure the amount of renewable electricity produced in Nova Scotia dramatically increases over the next decade. The Nova Scotia government has committed to 25 per cent of the province’s electrical supply being produced by renewable energy starting in 2015. The ultimate goal in the current Plan is that 40 per cent of Nova Scotia’s electricity supply will be renewable-energy-produced starting in 2020, which could be met by importing hydroelectricity from the proposed transaction between Emera Inc. and Nalcor Energy with respect to the Muskrat Falls Lower Churchill Project. On April 8, 2011, Nova Scotia issued a press release indicating that it would be developing regulations to mandate 40 per cent renewable electricity by 2020, and it also introduced amendments to the Electricity Act which will permit imported hydroelectricity as an eligible source of renewable electricity. Achievement of this 40 per cent goal would result in the production of more renewable electricity than is required to service all residential customers in the province.
MUSKRAT FALLS LOWER CHURCHILL
Emera Inc. and Nalcor Energy concluded an agreement on a term sheet for the $6.2 billion Muskrat Falls Lower Churchill Project, which will involve an 824 MW hydroelectricity facility and new transmission lines bringing electricity to consumers in Newfoundland and Labrador, Nova Scotia as well as the other Maritime provinces and New England. The project is expected to be completed in 2017 and would include a 180 km subsea transmission line (the “Maritime Link”) to be 100% owned for 35 years by Nova Scotia Power Inc. (“NSPI”), a wholly-owned subsidiary of Emera Inc. NSPI would be entitled to 170 MW or 20 per cent of the power (approximately 1.0 terawatt hours per year) generated from the hydroelectricity facility for 35 years, with the potential to acquire additional 330 megawatts destined for other provinces and the New England market. After the 35 year period, Nalcor Energy will acquire the Maritime Link for one dollar. The Maritime Link connecting the island of Newfoundland to Nova Scotia is expected to cost $1.2 billion, or approximately 20 per cent of the total $6.2 billion project, which will be funded 100% by NSPI. In addition, NSPI will pay the costs of operating and maintaining the Maritime Link during the term of the agreement. The project also includes a 30 km subsea transmission line (the “Labrador-Island Link”, which would run from Soldiers Pond and include the above ground towers and conductors, the AC/DC converter stations, and the subsea portion under the Strait of Belle Isle), which will cost $2.1 billion. Emera Inc. is investing approximately $600 million in the Labrador-Island Link. Energy from the Muskrat Falls Lower Churchill Project is expected to provide 8 per cent to 10 per cent of Nova Scotia’s electricity in 2017, comprising about one quarter of the target for 40 per cent of Nova Scotia’s electricity to be generated from renewable sources by 2020. As part of the agreement, Nalcor will also obtain certain transmission rights from Emera Inc. in Nova Scotia, New Brunswick and Maine.
Upon completion, the Newfoundland and Labrador electricity system will be run on 98 per cent renewable electricity. Of the total, 4.9 terawatt hours per year of power is expected to be produced by the Muskrat Falls Lower Churchill Project. Initially, 2.0 terawatts will be allocated to Newfoundland to meet domestic demand and displace bunker “C” oil used to generate electricity in the province. Nalcor will be able to sell the remaining power not used in Newfoundland or delivered to NSPI under the agreement either as additional energy to NSPI or to other Maritime provinces or New England. Newfoundland and Labrador have significant additional hydroelectricity potential at Lower Churchill, with the undeveloped Gull Island portion of the project having a capacity of 2250 MW.
This project is expected to generate positive economic benefits, including creating approximately 47,800 direct and indirect jobs in Canada, with Canada-wide income to labour and business of approximately $3.5 billion, or $540 million per year.
The project is subject to numerous milestones prior to construction, including, amongst other things, environmental assessments, final ratification of agreements with the Labrador Innu Nation, formal legal agreements, finalization of financing and completion of engineering work.
RENEWABLE ELECTRICITY REGULATIONS
In 2011 and 2012 (the “2011 RES”), NSPI (and each of six municipal owned electric utilities) must supply customers with new post-2001 renewable low-impact electricity from independent power producers (IPPs) in an amount equal to or greater than 5m per cent of its total annual sales. In 2013 and 2014 (the “2013 RES”), these amounts will increase to 10 per cent of new post-2001 renewable low-impact electricity, or a total of approximately 18.5 per cent. Finally, in 2015 (the “2015 RES”), the required renewable amounts will be 25 per cent, which will include both pre-2001 and post-2001 renewable electricity. If NSPI believes it may be unable to achieve the renewable electricity standards in a given year because of the inability of independent power producers to provide the requisite supply, NSPI must supply sufficient renewable electricity from other sources to rectify the shortfall over a period not exceeding 12 months. As mentioned above, Nova Scotia has also stated that it will be introducing regulations that will require 40 per cent of electricity in Nova Scotia to be generated by renewable electricity by 2020 (the “2020 RES”), which can include imported hydroelectricity. The Muskrat Falls Lower Churchill Falls Project would be expected to comprise a significant portion of the 2020 RES.
MEDIUM AND LARGE-SCALE PROGRAMS
Much of the renewable electricity required to meet the 2015 commitment and 2020 goal will come from large and medium-scale projects. To meet this requirement, NSPI must acquire at least 300 GWh from IPPs in addition to the renewable low-impact electricity required to meet the 2011 RES and 2013 RES. The bidding process for these IPP projects will be overseen by the Renewable Electricity Administrator (REA). The Department of Energy will contract out the position of REA. The Department of Energy will engage in consultation with key stakeholders to determine the parameters of the REA’s mandate. The REA will set out the requirements for bids, evaluate proposals and award contracts to successful bidders.
In addition, NSPI can supply renewable electricity to meet the 2015 RES. Nova Scotia’s electricity market regulator, the Utility and Review Board (UARB), will evaluate, approve, and regulate projects proposed by NSPI in the traditional manner which requires regulatory approval for capital expenditures by NSPI greater than $250,000. It is unclear if NSPI will still be required to satisfy the UARB that IPPs are not able to supply a portion of the increased capacity at lower costs, as required by Section 48(3) of the Public Utilities Act. IPPs can form partnerships with NSPI, but NSPI can have no more than 49 per cent ownership or operating authority of such projects for them to remain eligible IPPs. NSPI would have to receive approval from the UARB for any of its expenditures as listed above.
COMMUNITY FEED-IN TARIFF PROGRAM
Feed-in-tariffs (FITs) are a policy mechanism designed to increase renewable energy deployment by providing proponents a guaranteed price and ability to sell renewable energy to a utility, generally at a premium to the price that would be expected through an RFP process. The UARB will set FITs (COMFITs) for the following types of community-based projects:
• Small-scale in-stream tidal arrays
• Wind power (separate tariffs for wind power of 50 KW or less and 50 KW or more)
• Biomass (combined heat and power)
• Run-of-the-river hydroelectricity
To qualify for the COMFIT program, a generation facility (except for combined heat and power biomass facilities) must be majority-owned by one or a combination of any of the following:
• A First Nation
• A municipality or wholly-owned subsidiary of a municipality
• A community economic development corporation
• A not-for-profit corporation
• A co-operative
If the facility uses biomass, it must be a combined heat and power generation facility, but there is no specific community ownership equivalent if the heat is consumed or used by the renewable electricity generator or an affiliate of the renewable electricity generator.
If owned by a municipality or wholly owned municipal subsidiary, it must be located within the boundaries of the municipality or an immediately adjacent municipality. If wholly owned by a Mi’kmaq band council, it must be located on reserve lands or lands leased or owned by a band entity having FIT approval. For a cooperative, community economic development corporation or not-for-profit, at least 25 members or shareholders, as the case may be, must reside in the municipality where the generation facility is located.
All COMFIT projects must be connected with the electrical grid through a distribution system. COMFIT projects are expected to typically be less than 2 MW, but could be potentially up to 5 or 6 MW depending on location, as a result of distribution capacity constraints.
In setting COMFIT rates, the UARB may make allowances for any of the following:
• Necessary working capital
• Costs of land acquired in reasonable anticipation of future requirement
• Return of investments
• Additional matters the UARB deems appropriate
• Cost of labour and supervision
• Organization expenses
• Overheard costs for engineering, superintendence, legal services, etc.
• Costs to connect to the electrical grid
In setting a tariff for developmental tidal arrays, the UARB must consider the same matters as prescribed for COMFIT except that it cannot make allowances for costs covered or reimbursed through government grants or associated with connecting the generation facility with the electrical grid.
DEVELOPMENTAL TIDAL ARRAYS
Developmental tidal arrays in Nova Scotia will have their own FITs and will be permitted to be interconnected through the transmission system. In setting the FITs, the UARB will consider the same matters as are considered for the COMFIT rates, including the costs for the manufacture, deployment and operation of the developmental tidal array, but may not make allowance for costs covered or reimbursed through any government grant or the costs to interconnect with the electrical grid. There are no ownership restrictions imposed in connection with the FITs for development tidal arrays.
FOREST BIOMASS CAP
Renewable energy from primary forest biomass must not exceed an additional 500,000 dry metric tonnes of biomass annually above the average amount of primary forest biomass consumed in the province from 1995-2005 to qualify for the RES standards. This included the ability for NSPI to use up to 150,000 dry metric tonnes of biomass for co-firing in its power generating facilities. However, on April 11, 2011, Nova Scotia issued a press release indicating that it will be eliminating the ability for NSPI to engage in co-firing of biomass as part of meeting the RES standards and it would be lowering the cap of renewable energy which can be generated from primary forest biomass such that no more than an additional 350,000 dry metric tonnes of biomass annually above the average amount of primary forest biomass consumed in the province from 1995-2005 can be used to qualify for the RES standards.
PENALTIES & ENFORCEMENT
The Minister may audit approved renewable low-impact electricity generation facilities to verify compliance. The Minister may also suspend or revoke an approval or take “any action” that the Minister considers necessary to ensure the Regulations’ requirements are met.
A person who fails, neglects, omits, or otherwise refuses to comply with the renewable electricity standards for a given year is liable to a daily penalty of up to $500,000, to a maximum aggregate of $10,000,000, per occurrence. The defences of due diligence and a reasonable and honest belief of certain facts that, if true, would render their conduct excusable, are available, unless otherwise precluded under the Regulations. In addition, no public utility may recover the cost of any penalties imposed on it, in respect of the Regulation, through its rates.
COSTS VS. BENEFITS OF REGULATIONS
The Plan states that efforts to reach the 2015 RES will initially result in an estimated increase of 1-2 per cent to ratepayers’ annual bills, which equates to an estimated $10-$20 annual increase for the average single family or $20 $40 annual increase where electricity is used for heating purposes. However, the Plan also says that it aims to provide lower and more stable electricity rates, lower greenhouse gas emissions and a more diversified clean energy mix in the future. There is expected to be an investment of approximately $1.5 billion to meet the 2015 RES resulting in 5,000 to 7,500 person-years of employment, according to the Plan.
IMPLEMENTATION – FURTHER STEPS REQUIRED
The UARB must determine rates for COMFITs and FITs developmental tidal projects. In Order NSUARB-BRD-E-R-10 (Order), the UARB dictated its process as being consultative with Synapse Energy Economics Inc. (Synapse), UARB counsel consultant, and stakeholders. On February 28, 2011, Synapse created draft COMFIT rates. These were:
Rate Wind < 50KW Wind > 50KW Biomass CHP Hydro Tidal
($/MWh) $449 $139 $156* $140 $625
*$156 per MWh in year 2012 for biomass CHP projects, composed of a fixed component of $94 per MWh and an escalating component of $62 per MWh representing the cost of fuel. The escalating rate would be indexed 75 per cent to CIP for Nova Scotia (all items), excluding energy and 25 per cent to a diesel fuel index.
The UARB commenced public hearings to determine COMFIT and development tidal FIT rates on April 4, 2011 and final written arguments are due on May 6, 2011. After the UARB sets these rates, the Department of Energy will begin accepting applications for the COMFIT program and for development tidal arrays.
NET METERING PROGRAM
In addition to the COMFIT rates, net metering is a program allowing NSPI consumers to connect small, renewable electricity projects to the distribution grid through meters measuring electrical flow in two directions, with the goal of generating more sustainable electricity and simultaneously allowing participants to offset their own electrical costs. In March, 2011, the UARB approved amendments to NSPI’s net metering regulations. All NSPI customers using low-impact renewable electricity resources up to one megawatt in project size will be eligible for the program, but the capacity of the generator will need to be sized to meet the customer’s expected electricity consumption. Solar, wind, ocean-powered, tidal, wave, biomass, landfill gas and run-of-the river hydroelectric energy are all eligible sources of renewable electricity. Participants will now receive payment annually for any amount of excess generation produced. In addition, the net metering enhancements will also permit customers to have multiple meters under one account within a defined distribution zone, so that if a customer has two properties in one distribution zone the customer could install a renewable electricity generator on one property and use the benefits of the electricity generated on both properties, subject to certain restrictions. As a condition of participation in net metering, the customer transfers or assigns all emission credits or allowances arising from the use of renewable energy sources to NSPI to enable NSPI to comply with the requirements of any enactment regulating emissions, but for no other purpose.
According to the Plan, the Nova Scotia government will review and analyze the progress of the Renewable Electricity Plan with a particular focus on the COMFIT program. The purpose of the review will be to determine whether the regulations are supporting the 2015 goal of 25 per cent renewable electricity. The review will also consider whether other objectives, such as increased development of renewable electricity projects, and diversity of energy production, are met.
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