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The Canadian government is negotiating a settlement with the World Trade Organization (WTO) following a May 24 ruling that found that Ontario's local-content requirements violated international free trade laws.

During a webinar hosted by the Ontario Sustainable Energy Association, panelist Matthew Kronby, partner at law firm Bennett Jones, explained that the party found to be non-compliant - in this case, Canada - must now negotiate with the parties that brought the complaint - Japan and the European Union (EU) - to determine the length of time it will have to become compliant.

If the parties are unable to agree on a time frame, the case will go before an arbitrator, who will decide what is a reasonable time, Kronby continued.

"If the time that Canada has to comply is determined by arbitration," he said, "the guideline in the rules is that the time should not exceed 15 months from when the WTO's decision was adopted, in this case May 24."

He noted that arbitrators generally grant more time when compliance requires changing legislation, as Ontario has said is necessary, than when compliance can be achieved by executive or administrative action.

At issue is Ontario's requirement that a certain percentage of goods and services must be sourced locally. For wind energy developers participating in Ontario's feed-in tariff (FIT) program - and, by extension, their supply-chain partners - the province mandates that at least 60% of the materials and labor used to build wind projects be sourced within the province.

The FIT program was intended to stimulate the local economy and aid the establishment of Ontario as a manufacturing hub for renewable energy equipment and services. By attracting roughly C$27 billion in investment and creating 31,000 jobs, the program achieved those goals and more.

However, the domestic-content requirements drew the ire of the international community, particularly from Japan and the European Union, which claimed the FIT program unfairly pressured producers of renewable energy to buy goods and services from Ontario-based supply-chain providers. The WTO agreed, and found that the FIT program was protectionist and anti-competitive.

Acknowledging the WTO's ruling, the Ontario government has already moved to rectify the controversial program. On May 30, Energy Minister Bob Chiarelli said the provincial government would eliminate the FIT program for large-scale renewable energy projects - exceeding 500 kW in capacity - in favor of a competitive-procurement mechanism while also making 900 MW of new capacity available for the Small FIT and microFIT programs.

And last month, Ontario trimmed its massive C$7 billion deal it signed in 2010 with a Korean consortium led by Samsung C&T Corp. Instead of installing 2,500 MW of wind and solar - as well building manufacturing facilities - the agreement has been reduced to 1,369 MW.

Other suppliers will also be impacted. With utility-scale wind projects largely de-emphasized in the province, Suzlon Group's REpower Systems, which expects to open a blade production facility in Welland, Ontario, this fall, will undoubtedly feel the pinch. Germany-based turbine maker REpower Systems was precisely the type of manufacturer Ontario had envisioned when it unveiled its landmark Green Energy and Green Economy Act of 2009 (GEA), the landmark 2009 legislation that helped usher in the FIT.

Now, the WTO's ruling leaves many questions unanswered, including how it impacts Ontario's future ability to attract foreign investment and stimulate job growth.

One thing is clear: With the local-content requirements for utility-scale projects alleviated, the barriers to enter the Ontario market are largely removed, says panelist David Pichard, executive vice president at Polar Racking, an Ontario-based provider of solar photovoltaic racking systems.

While increased competition will likely force suppliers to focus on product development, which is a good thing for generators, the ruling counteracts the intentions of the GEA - including an effort to attract and relocate some of the jobs lost in the automobile industry to the renewable energy sector.

Panelists offered some alternatives as to what could replace local-content requirements. One suggestion was that the province could apply special technical requirements to bidders to supply products that could withstand Canada's extreme winters.

Pichard wondered aloud if applying the same kind of a priority point system Ontario now uses for First Nation and community involvement of projects could be applied to local- content requirements.

However, Kronby quickly nixed the idea, warning that policy should not be perceived as "favoring domestic goods over imported goods."

He said the new measures need to serve two masters: assuaging the WTO while ensuring market vibrancy. "That's the challenge for Ontario."

IOWA Economic Development id2073

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