Domestic Content: Storm Clouds on the Horizon?

Update: Check out this blog post at Clean Break for an economic/policy perspective on the Domestic Content issue.
 
Despite considerable optimism around Ontario's nascent Green Energy and Green Economy Act ("GEGEA"), the province continues to experience growing pains with this transformational piece of legislation. As has been widely reported, the most recent storm clouds gathering on the horizon arrived with a Japanese complaint to the World Trade Organization ("WTO") related to the GEGEA's domestic content requirements.

The Feed-in-Tariff ("FIT") Program, implemented under the GEGEA, provides 20-year guaranteed contracts at premium rates to generators of qualified renewable energy installations. For instance, rooftop solar projects between 10 kW and 250 kW receive 71.2 cents per kWh for energy delivered to the provincial grid. However, project proponents for solar and wind must meet prescribed domestic content levels in their projects in order to qualify for a FIT contract. In the case of solar, subject to an exception for certain microFIT projects, proponents will have to achieve a level of 60% domestic content starting in 2011 in order to maintain their eligibility.

The domestic content obligation is the lynchpin in the government's attempt to create 50,000 green energy jobs in three years. It is essentially the guarantee for Ontario's return on investment from the subsidies it is providing to encourage companies to set up their facilities in the province.

The Japanese complaint alleges that the FIT Program's domestic content requirements are a violation of Canada's WTO obligations. Lawyer Tim Armstrong has summarized the key questions as to whether the requirements are consistent with the WTO's Trade Related Investment Measures (TRIMS) and Agreement on Subsidies and Countervailing Measures:

"The former explicitly prohibits developed economies from imposing local content requirements on goods manufactured for export. Some argue that the Ontario legislation is justified since it involves 'government procurement.' But Japan’s complaint extends beyond government procurement and involves the production by private companies of green energy equipment and supplies for export.
Alternatively, are the subsidies justifiable since they originate in subnational (provincial) rather than national (federal) legislation? If not, are there alternative defences?"

So what happens now?  How will these questions be answered and what does it mean for the FIT Program?

The WTO dispute resolution process was created in order to have members use a multilateral system to settle disputes instead of taking action unilaterally. This means following an agreed-upon procedure and the observation of the WTO panel's decision. Ideally, the process is designed to arrive at a prompt settlement taking no longer than 12-15 months including the potential for an appeal.  In practice, only about 136 of 369 cases had reached the full panel process by January 2008, while others were settled "out of court" or continued to follow the consultation process from as far back as 1995.

Japan and Canada are now in the first stage of consultations between the governments, which lasts for 60 days.  The next stages of the process are as follows:

45 days	Panel set up and panelists appointed
6 months	Final panel report to parties
3 weeks	Final panel report to WTO members
60 days	Dispute Settlement Body adopts report (if no appeal)
Total = 1 year	(without appeal)
60-90 days	Appeals report
30 days	Dispute Settlement Body adopts appeals report
Total = 1y 3m	(with appeal)

Source:  World Trade Organization

Reports have stated that the federal government believes the FIT Program to be WTO compliant.  While this may simply be diplomatic posturing, the Ontario government has made this an important part of its program and will likely do everything it can to defend it. I am no International Trade lawyer but this would seem to suggest a strong likelihood of pursuing the full WTO process rather than finding a negotiated solution unless Japan is willing to compromise for something less than a full repeal of the domestic content requirement.

Thus, a certain level of uncertainty has been created for producers (e.g. solar module manufacturers) who may otherwise have been willing to set up operations in the province to ensure their products meet the domestic content obligation. Now, they may prefer to hold off an a multi-million dollar investment to see if they will eventually be able to enter a domestic content-free market. Naturally, this would be weighed against the risk of ceding one of the hottest renewable energy markets in the world to those producers who were willing to be first-movers and have already set up shop and may become established as market leaders.

It will be interesting to see which producers decide to grab their umbrella and enter this turbulent market and which ones lock the door and come out once the sun is shining again.

Sunny Days(?),
~Rob