Ontario’s Renewable EnergyStandard Offer Program June 2008

It’s an enticing and exciting

prospect: virtually unlimited,

everlasting, clean and sustainable

electricity from nature, without

having to burn non-renewable

hydrocarbons or use other fuels

with higher environmental

impacts. After all, energy is all

around us, in the wind, in flowing

water, in sunlight and in plants

and other biological matter that

can be converted to yield clean-

burning liquids or gases.

The technologies to generate electricityby harnessing wind, water, the sun andbiomass are constantly being improved.The challenge is to make them economically viable so that producersand consumers alike can gain the environmental and social benefits that renewable energy can offer without incurring excessive costs. Another challenge is to adapt the electricity grid to receive decentralized generationfrom renewable energy projects atwidely dispersed and sometimes remote locations.

In Ontario, the vision of having renew-able sources meet a truly significantshare of the province’s total electricityneeds is becoming a growing reality.Throughout the province, small-scaleproject developers are planning, building or operating renewable energygenerating facilities and connectingthem to the province’s power grid whilereducing some of the financial and business risks that can deter investorsfrom undertaking such projects.

This booklet describes the measurestaken by the Ontario Power Authority(OPA) – a not-for-profit organizationwith a mandate from the provincial government to ensure the long-term

Renewable Energy for Ontario – A Growing Reality

reliability of electricity supply in Ontario– to foster and support the growth of renewable energy supply in theprovince. It focuses in particular on Ontario’s Renewable Energy StandardOffer Program (RESOP) for projects with an installed generating capacity of no more than 10 megawatts (MW).

The OPA has also designed programs to support the development of larger renewable energy projects in Ontario.Details on these and other OPA generation procurement programs, including rules, contract terms and information guides to participation, can be found on the OPA website, www.powerauthority.on.ca/gp.

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Through its Standard Offer Program, Ontario is the first Canadian province to actively support the development of solar electricity generation projects that will enable small, local, renewable energy producers to enter the energy market on a more economically viable basis.

Biomass: Biomass energy – the conversion of organic waste matter into a combustible fuel for electricity generation – is a cost-effective energy source that can reduce dependence on non-renewable fuels without harming the environmentand as an adjunct to other agricultural operations.

Ontario has plentiful sources of biomass than can be tapped for electricity genera-tion, especially residual material from forestry and agricultural production, as well as millions of tonnes of organic municipal waste.

Ontario is fortunate to be rich

in the natural resources and

conditions that can be used

to generate electricity from

renewable sources. Following

are brief descriptions of

each of these sources and

the opportunities in Ontario.

Wind Power: Wind is one of the oldest sources of renewable energy harnessed by mankind – to propel sailboats and turn windmills to grindgrain. Today, wind-driven turbines areused around the world to capture windpower and convert it to electricity, inboth small, single-turbine operationsand large, multi-turbine “wind farms.”

Ontario currently has about 500 MW of wind power in service, with close to 1,500 additional MW expected to be in service by 2010. Because areas close to the Great Lakes or with high elevation and exposure to prevailingwinds have significant potential for development, wind power can be aneconomic and viable contributor to Ontario’s electricity supply mix.

Renewable Energy Sources – Ontario’s Natural Advantages

Water Power: As one of the cleanestsources of electricity, waterways providemany opportunities for renewable energy generation. In Ontario, hydro-electric power currently supplies over 25 percent of the province’s electricityfrom more than 200 generating stations.In fact, Ontarians traditionally refer to electricity as “hydro,” reflecting thelarge part that hydroelectric generationhas played in supplying their needs.

Even so, with Ontario’s 250,000 lakesand countless rivers and streams hold-ing nine percent of the world’s freshwater, there is a substantial opportunityfor water power to play an even greaterrole in the future. And smaller projects,either “run-of-the-river” projects or facilities constructed at existing dams,can make a significant contribution.

Solar Photovoltaic Power: Solarpower uses energy from the sun to directly generate electricity. Today’s solar photovoltaic (PV) panels are notvery efficient and initial costs are high for multi-panel systems that can contribute power to the grid, but thetechnologies are evolving and the long-term benefits of solar power are tremendous.

Bracebridge Generation

Bracebridge Generation Ltd., a subsidiary of Lakeland Holding

Ltd., which is wholly owned by the municipalities of Bracebridge,

Huntsville, Burk’s Falls, Magnetawan and Sundridge, operates

a waterpower facility on the Muskoka River in Ontario that has

been receiving payments under the RESOP since January 2007.

A recent project added a 1.5 MW

generating plant to an existing

800 kilowatt plant that has been in

operation since the 1940s. At its full

capacity of 2.3 MW, the plant provides

power for 1,600 homes in local

communities.

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Over the next 20 years, about

80 percent of Ontario’s existing

electricity supply capacity will

need to be replaced with a

combination of conservation

and new supply facilities. This

outlook reflects some clear

realities: projected population

and economic growth; the

decisions required for Ontario’s

nuclear-power generating

facilities, which today account

for about one-half of total

supply; and the need to

eliminate environmentally

harmful coal-fired generation,

which today accounts for

about 20 percent of supply.

Renewable sources, primarily

hydroelectric power, currently

supply about 27 percent of

total electricity consumption.

The Government of Ontario is commit-ted to making the maximum practicaluse of renewable sources to help closethe supply gap. Specifically, a 20-year Integrated Power System Plan (IPSP) for the province prepared by the OPAcalls for renewable energy supply in theprovince to double to almost 16,000MW by 2025. The provincial governmenthas set an additional target of having2,700 MW of electricity generated bynew renewable sources by 2010.

The IPSP recognizes that both large and small renewable energy projectswill need to contribute to meeting thesetargets. Procurement processes imple-mented by the Ministry of Energy (in2004 and 2005) and the OPA (from2005 on) have led to a number of large project proposals and plans to expand existing facilities that, when implemented, will result in substantialprogress toward the 2025 target. Someforms of renewable energy are ideallysuited to smaller, decentralized projectsin diverse locations. However, the complexity, costs and administrativeburden of developing project proposalsunder procurement processes intendedfor larger projects can be serious barriers for prospective smaller projectdevelopers.

The Need for Renewable Energy – and Ontario’s Response

Accordingly, after extensive research and consultation, the OPA designed a Renewable Energy Standard Offer Program (RESOP) for small projects that provides a standard pricing regime and simplified eligibility, contracting and other rules. Theprogram makes it easier for the operators of small renewable energy generating facilities to help meet Ontario’s electricity supply needs by supplying power throughtheir local distribution company and being paid a fair and stable price for the powerthey provide.

Ontario’s RESOP was launched in November 2006 and was the first initiative of itskind in North America.

Exceeding Renewable Energy TargetsNew Renewable Generation in Ontario

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Sub-zone restrictionsCertain areas of the provincial transmission grid are limited in their ability to accept new generation. For this reason, in some areas of the province, the OPA willimpose limits on eligible projects because of transmission connection constraintsuntil transmission is expanded or reinforced.

Project ownershipIn general, the program rules do not impose restrictions on who can own eligible generating facilities, or on where facilities can be located other than those subject tosub-zone restrictions. The program will impose project capacity limits on developersto allow broader participation in the program.

In-service requirementsThe OPA will require developers to demonstrate progress after receiving a RESOPcontract by meeting project development milestones. The program requires projectsto reach commercial operation by the third anniversary of the contract date.

Payments under the contractThe pricing system under the RESOP is designed to be simple and to minimize administrative costs for both generators and the OPA. For projects other than solarPV projects, it provides a fixed price to be paid to generators per unit of energy produced, subject to annual indexed adjustment for inflation. The program also provides a performance incentive for generators (other than solar PV generators)who can control output to meet peak demand requirements reliably.

Solar PV projects are paid at a higher rate in recognition of the higher costs of solarPV technologies, but this rate is not indexed for inflation and solar PV generators are not eligible for the peak-period performance incentive.

Payments are made by the OPA through settlement between the generator and the local distribution company, and according to the regulatory requirements applying to the local distribution company.

Ontario’s standard offer program

for small renewable energy

projects is designed to strike a

balance between the energy

available from such projects, the

province’s renewable energy

generation targets and the value

of electricity to Ontario rate-

payers. A fixed price paid to the

generator for power supplied

provides stability and certainty

against future energy prices,

protecting ratepayers from

fossil-fuel and other fuel price

increases while allowing

developers to plan projects

with confidence.

What is the Standard Offer Program?

EligibilityTo be eligible, projects must generateelectricity from wind, solar PV, renewable biomass, biogas, biofuel,landfill gas or water power. Projectsmust be located in Ontario with an installed capacity of not more than 10 MW and connected to an eligibleelectricity distribution system in Ontario at a voltage of 50 kilovolts or less.

Other contractual requirementsGenerators must enter into a contractwith the OPA for a term of 20 years. Applicants must also meet certain requirements, including a connectionimpact assessment, environmental assessment and demonstrated site access, as well as other contractualterms. Full details of contract terms are available on the OPA website, www.powerauthority.on.ca/SOP.

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At the time that Ontario’s RESOP

was launched in November 2006,

it was estimated that about

1,000 MW of eligible projects

might be developed within

10 years. As of May 31, 2008, the

OPA had entered into contracts

for more than 1,300 MW of

generating capacity.

When the program was introduced in November 2006, the base payment for non-solar PV generators was 11.0 cents per kilowatt-hour (c/kWh) for electricity deliveredto the local distribution company. As of May 1, 2008, this base rate was 11.08 c/kWh. The additional payment for projects delivering power reliably during peak hours is 3.52 c/kWh for electricity delivered during peak hours. Solar PV generators are paid a fixed price of 42.0 c/kWh for the full 20-year term of the contract.

Pricing under the RESOP will be reviewed periodically and may be modified by the OPA according to changing technological or market conditions. However, modifications will apply only to future contracts, not to contracts already executed.This broad program review is scheduled for fall 2008.

Progress to June 2008 – Ahead of Expectations

This means that the estimated 10-yearparticipation level was exceeded within18 months of the RESOP’s inception – a remarkable and encouraging earlyachievement for an innovative and untried program in the North Americanenergy marketplace. A total of 326 contracts had been executed under the program, with a further 60 applicationsfor contracts under consideration. A total of 93 projects had achieved commercial operation and were receiving payments under the program,representing more than 34 MW of new renewable generation.

Including planned larger projects, exe-cuted renewable generation contractsrepresenting more than 2,500 MW werein place as of June 2008, with contractsfor an additional 1,500 MW of genera-tion expected to be executed by the end of 2008, for a total of more than4,000 MW since the inception of theOPA in 2005.

With this combination of planned and executed contracts for both smalland large renewable projects, Ontario ison target to double its installed renew-able energy supply capacity by 2025, as called for in the province’s 20-year Integrated Power System Plan.

Windshare/Exhibition Place

A landmark along the shore of Lake Ontario just

west of downtown Toronto is the 30-storeys tall wind

turbine located at Exhibition Place. Jointly owned by

Windshare, a community-owned cooperative, and

Toronto Hydro, the project operates under a RESOP

contract with the OPA.

With a generating capacity of 750 kilowatts, it is the

first and largest urban-based wind turbine in North

America and the first community-owned wind power

project in Ontario. Operational since January 2003, the turbine generates an

average of 1,450 megawatt-hours of power per year, enough to meet the electricity

needs of 250 homes, and displaces some 380 tonnes of carbon dioxide emissions.

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Ontario’s RESOP was designed

to achieve several goals. These

include easing the strain on

the province’s electricity system;

avoiding future costly investment

in conventional generating

infrastructure; making it easier

for small, community-based

renewable-source generators

to sell their electricity to the

provincial grid and help build

a sustainable and reliable

electricity system; and minimizing

the environmental impacts of

electricity generation develop-

ment and operation.

Diversity of Projects Reflects Strong ResponseFollowing is a summary of contracted projects under the RESOP as of May 31, 2008:

Source No. of Projects Generation Capacity (MW)

Wind 88 757

Solar PV 198 470

Water 19 66

Bio-energy 21 68

326 1,361

The number and diversity of renewable energy projects covered by executed contractsand those under consideration reflect a strong and enthusiastic response to theRESOP by Ontarians in all areas of the province, from commercial energy suppliersand municipalities to individual homeowners installing solar PV panels and farmersusing agricultural waste to generate bio-energy.

Wind-power projects accounted for more than 60 percent of the planned generatingcapacity of contracts executed before May 2008, solar PV projects accounted formore than 30 percent, and waterpower and biomass projects each accounted forabout five percent. Some 93 operating projects were receiving payments as of June2008, and biomass projects accounted for about half of the total of about 34 MW ofpower being generated, wind projects about 30 percent, water projects slightly lessthan 20 percent and solar PV installations about one percent.

Looking Ahead – Challenges and Opportunities

Early experience with and results fromthe program indicate that strongprogress has been made on all thesefronts. In fact, interest in the programhas been so strong that the number andpotential generating capacity of projectsfor which program applications havebeen received exceed the capability ofthe province’s transmission system toaccommodate all of them.

This applies particularly in areas of theprovince with good wind resources,where demand for the RESOP far exceeds the capabilities of local distribution systems. Also, in some areasproposed smaller projects under theRESOP are conflicting with proposedlarger generating projects procuredunder other OPA initiatives. From its inception, the RESOP was intended tooperate within the context of transmis-sion capability. In a sense, the greater-than-expected success of the programhas presented challenges that were expected to arise later rather thansooner.

In some communities, large-scale generators have secured access to distribution and transmission systemsand effectively prevented some smaller,community-based projects from moving forward.

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The Lovell home in Port Credit

Former Canadian Olympic cyclist Jocelyn Lovell and his wife, Neil, are strong

supporters of renewable energy and believe in leading by example. The couple

installed solar photovoltaic panels that generate six kilowatts of electricity on their

four-year-old home in Port Credit, Ontario, and are contracted generators under the

RESOP. All the power generated is sold to the local utility and more than covers

the Lovells’ total energy costs, Lovell says.

Fepro Farms

Dairy farmers Paul and Fritz Klaesi operate a 50 kW biomass generation

facility at Fepro Farms in Cobden, Ontario, and are contracted RESOP generators.

Manure from the dairy operation, along with grease obtained from grease traps

in local restaurants and pasteurized, is processed through an anaerobic digester

to produce combustible methane gas. The gas is burned to produce steam that

drives a turbine to generate electricity. Plans are in place to expand the facility

to a 75 kW operation this year.

Revising Program RulesTo meet these and other challenges, revised RESOP program rules were announced on May 13, 2008. These changes include:

• To ensure fair and efficient allocation of access to local distribution and transmissionfacilities, prospective generators will be restricted to no more than 10 MW of generating projects per transformer station. In addition, at any one time a generatorcan have no more than 50 MW of projects per resource type (wind, water, solar PV,biomass) under development at one time.

• To ensure that limited connection capacity is being used efficiently, progress milestones will be established for new contracted projects..

• In addition to these contract changes, the OPA will better coordinate RESOP initiatives with other generation procurement activities in terms of limited transmission capacity. RESOP developers will also be required to focus on areaswhere distribution and transmission capacity is available.

In SummaryOverall, within a short period since its inception, Ontario’s Renewable Energy Standard Offer Program for smaller generation projects has been outstandingly successful in spurring the development of projects that will harness electricity fromwind, water, the sun and biomass. Both existing renewable energy supply companiesand new entrants, such as homeowners, small businesspeople, farmers and localcommunities, have planned and initiated self-standing and cooperative projects to save costs, generate revenue, contribute to ensuring reliable electricity supply in Ontario and help the environment.

As the first program of its kind in North America, the RESOP should provide encouragement for other jurisdictions to implement similar initiatives with confidence. It should also give all Ontarians confidence that the objective of ensuring reliable electricity supply in the future can and will be met.

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For Further Information

Ontario Power Authority120 Adelaide Street WestSuite 1600Toronto, ON M5H 1T1

Phone: (416) 967-7475Fax: (416) 967-1947www.powerauthority.on.ca/sop

OM OPA and Ontario Power Authority are each official marks of the Ontario Power Authority.