WTO Appellate Body Releases Appeal Decision on Domestic Content Requirement of Ontario’s FIT Program

On May 6, 2013 the World Trade Organization’s (WTO) Appellate Body, the highest court at the WTO, released its report with respect to Canada, Japan and the European Union’s (EU) appeals against the decision made by the WTO Panel on the domestic content requirements of Ontario’s Feed-in-Tariff (FIT) Program.

History of Proceedings

Ontario’s domestic content requirements for the FIT Program were  challenged at the WTO by Japan and the EU on the basis that they are contrary to Canada's free trade obligations under the General Agreement on Tariffs and Trade, 1994 (GATT). The WTO Panel Report of December 19, 2012, which partially ruled that the FIT Program breaches Canada’s international trade obligations, was appealed by Canada, Japan and EU.

For more information about the Panel’s Report, please see my blog posting WTO Panel Releases Final Report Domestic Content Requirements and for more information about the WTO’s appeal process, please see WTO Likely to Deem Domestic Content Requirements Illegal.

Summary of the Appeals

Canada appealed the findings of the Panel Report for two key reasons:

  • Canada argued that the resale of electricity purchased under the FIT Program is not commercial in nature and therefore the FIT Program is not covered by the terms of Article III:8(a) of GATT; and
  • Canada argued that Panel failed to find that the Government of Ontario does not purchase renewable electricity “with a view to use in the production of goods for commercial sale.”

Japan and the EU counter appealed to seek a reversal of the Panel’s findings that:

  • The FIT Program and FIT Contracts amount to a government purchasing goods within the meaning of Article 1.1(a) of the Subsidies and Countervailing Measures (SCM) Agreement; and
  • Japan and the EU failed to establish that domestic content requirements confer a ‘benefit’ within the meaning of Article 1.1(b) of the SCM Agreement to electricity generators who participate in the FIT Program.

Summary of Appellate Body Key Findings

The Appellate Body confirmed the main findings of the Panel’s Report:

  • it supported the findings that the local content requirements of Ontario’s FIT-Program are in violation of the TRIMs Agreement and therefore Canada breaches its national treatment obligations under Article III:4 of the GATT and Article II:1 of the TRIMs Agreement; and
  • that the Minimum Required Domestic Content Levels mandated in the FIT Program do not meet the conditions of Article III:8(a) of the GATT.

The Appellate Body reversed the Panel’s findings that Japan and the EU failed to establish that domestic content requirements confer a ‘benefit’ within the meaning of Article 1.1(b) of the SCM Agreement to electricity generators who participated in the FIT Program but the Appellate Body did not complete the analysis and rule how this factor should have been decided.

Conclusion

Once the Appellate Body Report is adopted by the WTO’s Dispute Settlement Body (DSB), it must be unconditionally accepted by the parties. Canada must present a plan for implementing the ruling within a month of the decision. Since only countries can be represented at the WTO, Canadian federal officials have confirmed that Canada will comply with the ruling. However, the Government of Ontario has yet to give a statement as to how this ruling will impact the FIT Program and the program participants.

Despite the WTO ruling, it is important to recognize that the Ontario Power Authority’s FIT Program and the domestic content requirements have been in place since the fall of 2009 and a local industry has been established. While I do not have a crystal ball, it is likely that the province of Ontario will take less than the average 15 months to become compliant with the WTO Appellate Body decision. The primary reason is that 200 MW of small FIT projects (500 kW or less) are scheduled to be awarded this year and the large FIT window is also scheduled to open at some point in the near future. In light of the WTO decision, it is probable that all future FIT contracts awarded will no longer need to be domestic content compliant.

I also anticipate that it is unlikely that the WTO ruling will apply retroactively to existing OPA FIT Contracts as feed-in tariff rates were specifically established with a view to covering the higher than usual capital costs for domestic content compliant renewable energy generation equipment. In our experience, the cost of domestic content compliant renewable energy generation equipment is generally 25% to 50% more than the market price for such equipment in non-protectionist markets.

Finally, I anticipate that the elimination of domestic content will signal the slow decline of the renewable energy manufacturing sector in Ontario. There are two key reasons:

  1. All FIT contracts with a domestic content compliance requirement were awarded in 2010 and 2011. Most renewable energy projects are now scheduled for construction and commissioning in 2013, 2014 and perhaps early 2015 at the latest.  Given that there has been no awarding of FIT Contracts since July of 2011, there will be no need for a domestic content compliant supply chain beyond 2015; and
  2. equipment manufacturers are generally able to source their renewable energy equipment from outside of Ontario at a lower cost.

Lower equipment costs are necessary in order to make the renewable energy industry sustainable in Ontario. The domestic content requirements have actually proven to be an obstacle to reducing equipment costs and feed-in tariff rates to a level that is viewed as acceptable by the general public. As the cost to develop solar and wind power generation projects continues to fall, and the cost of retail electricity continues to increase, there is a real possibility that solar and wind grid parity will be achievable in the near future. With lower capital costs, solar pV has the potential of becoming a major viable alternative source of energy for owners of residential, commercial and industrial properties alike.

By the end of 2013, the province of Ontario will be almost entirely coal-free. 10 years ago, 25% of Ontario’s power production originated from coal fired power plants. By shutting these down, Ontario is reducing greenhouse gas emissions and fighting climate change, protecting human health and filling the energy production void with renewable energy sources.  The renewable energy industry is here to stay with or without the domestic content requirements.

 

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Sven Walker is a Partner at Dale & Lessmann LLP, a Toronto, Ontario, Canada-based full service law firm specializing in renewable energy law and in particular solar, wind, hydro and biogas energy law. Sven is a legal counsel to a number of industry equipment and technology manufacturers, suppliers and installers, as well as investors, developers, purchasers, contractors, consultants and financing entities. To speak with Sven, please call 416-369-7848 or email him at swalker@dalelessmann.com.