Nativity scheme: Can Ontario require 'domestic content' for FIT eligibility?13. April 2012 | Top News, Applications & Installations, Global PV markets, Industry & Suppliers, Markets & Trends, Trade cases | By: Cheryl Kaften
Just how important is "home advantage" to players in the renewable energy sector? It could be a game changer, according to Japan and the European Union, both of which have brought complaints against Canada for violating the rules of fair competition.
Specifically, Japan and the EU have protested to the World Trade Organization (WTO) in Geneva that the Canadian Province of Ontario is breaching international convention by stipulating that new solar and wind facilities must be built with a certain amount of domestically manufactured components. For example, solar arrays must be 60 percent "Made in Ontario" in order to participate in the province’s feed-in-tariff (FIT) scheme.
Both nations claim Ontario is discriminating against its global trade partners and giving preferential treatment to local providers. The two cases in all likelihood will lead to a landmark ruling on the legitimacy of "domestic content requirements" in international commerce.
To grasp the implications of insisting on largely domestic-made products, consider how much U.S. manufacturers would gain by the passage of a 60 percent domestic content regulation applying to the components of the Apple iPhone alone, which today is manufactured chiefly in China.
Since the launch of the iPhone in 2007, Corning Glass has manufactured the scratchproof face of the phone out of a factory in Kentucky. Not only has Corning created jobs and profits by becoming a domestic supplier to California-based Apple, but, after the iPhone became a success, Corning received a flood of orders from other companies hoping to imitate Apple’s designs. Its glass sales have grown to more than US$700 million annually, and it has employed about 1,000 Americans to support the emerging market.
Nothing in the renewable energy industry has challenged the scale of the iPhone to date. However, Corning Glass represents proof positive that, yes, it matters where the components are manufactured.
Imports on the outs?
Japan and the EU claim that Canada is in violation of three international trade agreements, because:
- Ontario’s domestic content regulations accord "less favorable treatment to imported equipment" and are "being applied so as to afford protection to Ontario production of such equipment" (General Agreement on Tariffs and Trade [GATT]: Art. III:4, III:5, XXIII:1);
- Ontario’s domestic content stipulations appear to be trade-related investment measures that are inconsistent with the provisions of Article III of the GATT 1994 (Trade-Related Investment Measures [TRIMs]: Art. 2.1); and
- A subsidy had been granted … that would confer a benefit, "contingent [on] the use of domestic over imported goods" (Subsidies and Countervailing Measures: Art. 3.1(b), 3.2, 1.1).
Tensions – and world interest – ran high when the two nations faced off with Canada for oral arguments on March 27 and 28 in Geneva. The key issues to be considered: Was Canada liable to the world court for the independent actions of its province, Ontario?; Were the content requirements of the FIT Program a barrier to fair trade?; and Did Ontario discriminate in favor of domestic goods with subsidies designed to promote production in the province, rather than designed to advance the renewable energy industry?
Canada responded with a rationale that was geared to render all three questions moot. It characterized the FIT scheme as a form of "government procurement, designed to ensure the affordable generation of clean energy in Ontario" – and, by doing so, attempted to shield the FIT and its domestic content mandate from both the GATT and TRIMs provisions. (Government procurement is also exempt from the WTO Subsidies and Countervailing Measures agreement, provided that it does not confer a benefit.)
And although governmental purchases are covered under another WTO pact – the plurilateral Government Procurement Agreement – Canada argued that the GPA represents a purely national commitment. Therefore, Ontario was under no obligation to grant access to its energy procurement market.
However, Tokyo and Brussels insisted that the program provides a subsidy. "The defining aspect of FIT contracts is that they ensure renewable energy generators payments in excess of those that they would [otherwise] receive," argued the Japanese Member, adding, "That excess is best confirmed by examining the difference between the FIT rates and HOEP [Hourly Ontario Energy Price], as HOEP represents the entire rate" on the open market.
Ottawa was quick to eliminate any associated wiggle room. The Canadian Member characterized the HOEP as "an inappropriate benchmark" and opined that "the focus of any benefit analysis must be on the recipients of the benefit – wind and solar energy producers – not consumers."
Court of public opinion
Industry reaction to the WTO hearing has been mixed. David Robinson, president of Senergy Solar Corp., LLC, based in Haverton, Pennsylvania, supported Canada’s mandate for domestic content. He told pv magazine, "I wish that the U.S. government would impose the same sort of content requirements here. Then, we would have solar companies moving here, instead of up north to Canada."
Stephen Morgan, CEO of American Clean Energy, a Saddle Brook, New Jersey-based firm that designs and builds photovolatic arrays, came out against the content requirements. He commented to pv magazine, "The use of content restrictions has nothing to do with promotion of environmentally sustainable energy; rather it is about … subsidizing job creation in a non-transparent manner through otherwise higher-than-necessary alternative energy costs."
By contrast, Matthew Ayres, managing director of Sydney, Australia-based Growth and Innovation Asia-Pacific, advised a more measured approach, telling pv magazine, "A strong bias toward import may reduce the domestic capability base. A strong domestic focus may limit the use of new (international) technology and skills. So, we are left with a prudent balance that respects the domestic economy, the ability to build a sustainable domestic capability in renewable energy; then bringing the best skills and technology to the table in a way that expands the market in a structured and staged manner."
Getting the proper FIT
There are now more than 35 FIT programs worldwide. Will this case have repercussions for any other feed-in tariffs currently in place? That’s unlikely, unless they invoke a domestic content clause. Canada’s Province of Nova Scotia, for example, has its own FIT scheme, but has not been named in any complaint.
How the case plays out remains to be seen. By the end of April, the parties must submit written rebuttals to the panel, which will then schedule a second oral hearing. A ruling on the case is not expected until late October 2012.
Watch out for the May edition of pv magazine, which will discuss the issue in more detail.
Reddy SamiReddyPalle from Pune
Saturday, 14.04.2012 16:36
India also follows domestic content requirement in its solar power generation programme. Last week India has told the US that it does not intend to alter the domestic content requirement in its ambitious national solar power generation programme as it is essentially procurement by the government, which is outside the purview of the World Trade Organisation.
"India is not a signatory to the Government Procurement Agreement under the WTO and hence is not under any obligation to follow rules prescribed by it," a government official clarified.
US commerce secretary John Bryson had in a recent meeting with commerce and industry minister Anand Sharma in Delhi raised concerns about the 30% local sourcing requirement in projects under the Jawaharlal Nehru National Solar Mission, saying it might be in violation of WTO norms. "We have categorically told the US that we do not view the domestic sourcing clause as violative of WTO rules," the official said, adding, "We have no plan of amending the clause."
He said the US was now trying to influence the policy for the second phase of the solar mission.
The second phase, due for launch next year, will aim to consolidate the achievements of the first phase. As per the solar mission, indigenous manufacturing capacity for solar power equipment is vital if the goal of 20,000 MW of solar power is to be met by 2022 in three phases.
A criteria for ensuring domestic content for first phase projects was thus introduced, making it mandatory for projects based on crystalline silicon technology to use the modules manufactured in India. Additionally, 30% domestic content is mandatory for all new solar thermal power projects sanctioned under the first phase.
Stressing that there is no flouting of WTO rules, the commerce department has clarified that domestic content requirement is applicable to grid solar power projects where procurement of solar power will essentially be done by the government through NTPC Vidyut Vyapar Nigam, the designated entity.
The commerce department further explained that grid solar power projects are supported under the Jawaharlal Nehru National Solar Mission only through tariff and not through capital subsidy. Capital subsidy is available for off-grid projects and there is no domestic content requirement on modules in such projects.
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