May 10, 2013
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.
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.
Canada appealed the findings of the Panel Report for two key reasons:
Japan and the EU counter appealed to seek a reversal of the Panel’s findings that:
The Appellate Body confirmed the main findings of the Panel’s Report:
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.
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:
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.
Tags: Renewable Energy