The Feed-in Tariff Controversy:
Renewable Energy Challenges in WTO Law
ANDREW JERJIAN
I. Introduction
The future policy landscape for the promotion of renewable energy (RE) has the potential to be shaped by the legal treatment of feed-in tariff (FIT) programmes under the international trading system. A FIT is an instrument for promoting investment in RE and typically sets a fixed price for purchases of RE power, providing electricity producers with a premium above the market price for electricity—per kilowatt-hour (kWh)—fed into the grid.[1] FIT programmes have been implemented in about fifty jurisdictions worldwide, at either a national or sub-national level.[2] The catalyst for the international proliferation of the FIT model is, in part, the desire to emulate the success of other jurisdictions—especially Germany—in achieving more decentralized, carbon-neutral domestic energy production.[3]
Despite the growing prevalence of FIT programmes, the global RE landscape has more recently been called into question. This issue emanates from WTO actions launched by Japan and the EU against Canada in relation to Ontario’s FIT programme. While the case specifically concerns the legitimacy of domestic content requirements for eligibility in Ontario’s FIT programme, the proceedings also pose more systemic concerns with respect to FITs—as a “subsidy” at risk of being challenged and lacking clear status as a matter of WTO law.
The recent WTO disputes concerning Ontario’s FIT programme will have a detrimental impact on the RE sector, possibly spurring fragmentation of RE policy in the coming years. Not only are the potential ramifications of the panel decisions inimical to the future cohesion of the global RE sector, but they will also serve as a litmus test for the WTO regime’s sustainable development credentials. With systemic issues at stake, the WTO can help Canada and others by providing more transparent and progressive rules on subsidies, while remaining vigilant and alert to the danger of protectionism under the guise of such subsidies.
This paper will first explore the origins and operation of the FIT instrument in Germany and Ontario. In doing so, the stage will be set for the examination of the WTO definition of subsidy and requirements for liability—focusinginitiallyon “actionable” subsidies in the Agreement on Subsidies and Countervailing Measures(ASCM). Furthermore, the FIT programmes of Ontario and Germany will be analysed under the ASCM. This will then be complemented by an examination of “prohibited” subsidies under WTO law and the current controversy ondomestic content requirements. Ultimately, the WTO must be more acceptingof RE public support mechanisms and should provide greater flexibility to the extent required by the needs of nationsin pursuit ofsustainable development objectives.
II. Background to Feed-in Tariffs
This Chapter will examine the origins of FIT programmes and their development within Germany and Ontario.
An Overview: History & Origins
Germany was the first European nation to pioneer a feed-in law incentive scheme for the development of RE production.[4]Although the energy industry was hostile to the notion of new decentralized competition, political support led to the introduction of the Electricity Feed-in Law 1990 (Stromeinspeisungsgesetz, StrEG). The StrEG required utilities to provide renewable energy generators grid access and purchase the energy produced. Remuneration for the energy was correlated to average price of electricity per kWh sold to final consumers; for wind and solar power, the rate was fixed to 90% of this end-user price.[5] One of the declared purposes of the law was to “level the playing field” for renewable energy.[6]
Germany’s Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG) was adopted to improve upon the former StrEG and foster greater expansion of RE production within Germany’s energy portfolio.Some of the more crucial elements of the EEG include the decoupling of rates from electricity prices, fixed rate guarantees for twenty-year terms, and the establishment of tariff differentiation according to the source, size and location of renewable energy plants.[7] More recently, the Act’s innovations were taken further under a 2012 amendment. Among other developments, the revised legislation refined the purpose of the EEG by enumerating previously enshrined objectives in more exacting terms. The Act’s purpose expressly incorporates goals such as the development of new RE technologies and reduction of energy costs, as well as a 35% renewables target for the domestic energy supply—to be achieved by 2020.[8] Germany’s FIT programme does not rely upon a State actor for the provision and management of FIT payments. Itimposes a purchase obligationon private distribution and transmission system operators—collectively involved in the transmission of electric power from the point of generation to consumption—to purchase and share the costs of paying the EEG-imposed tariff to RE producers.
Inspired by Germany’s successful promotion of RE using the FIT model,[9] Ontario sought to adopt its own “European-style” FIT instrument.[10] This was achieved through the Green Energy and Green Economy Act 2009 (GEGEA), which enacted the Green Energy Act. Ontario’s FIT programme is divided into two streams: the FIT and the microFIT.[11] The FIT is applicable to projects generating more than 10 kW, while the microFIT targets individuals interested in more small-scale projects not exceeding the aforesaid threshold. The Preamble of the Green Energy Act enunciates that the legislation strives to secure “cleaner sources of energy” as well as the promotion of both RE projects and a “green economy”. According to the Minister of Energy at the time of the proposed legislation, the policies embedded within the legislation are intended to make Ontario one of the “greenest energy supply mixes in the world.”[12]The FIT programme also aims to create a new “green industry” by requiring solar and wind facilities to meet domestic content requirements—currently, 60% and 50% for solar and wind respectively.[13] These objectives illustrate the dual environmental and economic policy impetus underlying Ontario’s FIT programme.
Ontario’s FIT programme is managed and implemented by the Ontario Power Authority (OPA).[14]Under GEGEA,the OPA is required to comply with the Minister of Energy’s directions in relation to activities such as the procurement of electricity supply and development of a FIT programme. Although the Electricity Act 1998 describes the OPA as not being a Crown Corporation, the Ministry of Energy has delegated to the OPA the responsibility for setting the FIT and administering FIT contracts.[15]With respect to financing, FITs are partially funded by the Global Adjustment Mechanism (GAM). GAM appears as a charge on consumer bills and funds the shortfall between the market price and the guaranteed FIT—which, like in Germany, is provided for a twenty-year period.[16]
III. Subsidies: WTO Law Framework
The development of FIT programmes worldwide has introduced new challenges for the existing framework established by the WTO’s law of subsidies. In this Chapter, the WTO’s perspective on the matter of subsidies will be examined. An overview will be provided in Chapter IV ofthe case against Canada (concerning the Ontario scheme), and reforms which the WTO may adopt—clarifying the matter of subsidies in the RE sector for the future.
A. The WTO’s Approach to Subsidies
(1) Defining Subsidies under the ASCM
After failing to resolve the dispute with Canada during consultations, Japan and the EU (the “Members”) each sought to establish a panel pursuant to Article 6.1 of the WTO’s Dispute Settlement Understanding.[17] The Members specifically argue that Ontario’s FIT is a “prohibited” subsidy under the ASCM (WTO Agreement on Subsidies and Countervailing Measures) because it is contingent on the use of domestic content. More specifically, Ontario’s FIT Rules and FIT Contract both establish that all solar and wind project capacities over 10kW must meet a minimum required domestic content level.
Prior to determining whether Ontario’s FIT violates the WTO law of subsidies, it is vital to underscore a distinction that is drawn between “prohibited” and “actionable” subsidies under the ASCM. Article 3 ASCM makes clear that subsidies linked to export performance or the use of local content are categorically prohibited. By contrast, non-prohibited subsidies require proof of adverse effects (Article 5) and specificity (Article 2), thereby being only potentially “actionable”. With respect to prohibited subsidies, Article 3.1(b)prohibits “subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.” In order to conclude that a measure is “actionable” or “prohibited”, one must analyse whether Ontario’s FIT can be classified as a subsidy under the ASCM.
(a) The First Prong: Financial Contribution or “Price Support”
Under Article 1 ASCM, the definition of a subsidy effectively rests on two prongs: (1) the existence of a “financial contribution” or income or price support; and (2) conferral of a benefit upon the recipient.The concept of financial contribution—albeit acting as an initial control-valveto ASCM disciplines—has been interpreted quite flexibly. In Canada–Measures Affecting the Export of Civilian Aircraft (Canada–Aircraft), the Appellate Body held that the question of whether Article 1 requires a “cost to government” is relevant to the interpretation of “financial contribution”, not as to whether a benefit has been conferred—as suggested by Canada. In concluding that a financial burden for the State is unnecessary, it noted that:
Canada’s interpretation of ‘benefit’ would exclude from the scope of that term those situations where a ‘benefit’ is conferred by a private body under the direction of government. These situations cannot be excluded from the definition of ‘benefit’ in Article 1.1(b), given that they are specifically included in the definition of ‘financial contribution’ in Article 1.1(a)(iv).[18]
The relevance of this decision vis-à-vis government expenditure is therefore linked to an important distinction under Article 1.1—namely, that financial contributions may be either direct or indirect.[19]
(i) Direct Financial Contribution
Direct financial contributions are those that are provided by the government or a public body. Article 1.1(a)(1) exhaustively enumerates four forms of financial contribution, with paragraphs (i)-(iii) being direct in nature. In the context of FIT programmes, paragraph (iii)is especially relevant, as it concerns the “purchase of goods” by a government or public body. Given that electrical energy may be defined as a good under WTO law,[20] the more critical question centres on the interpretation of “public body”. Until recently, Korea–Measures Affecting Trade in Commercial Vessels (Korea–Commercial Vessels)[21] was authority for the view that an entity is a public body where it is controlled by the government. In this matter, the panel’s affirmative finding of a public body was supported “primarily” on the basis that the entity was 100% owned by the Korean government (or other public bodies).[22] This conception of a public body as hinging on the concept of control was hewn in the recent case of United States–Definitive Anti-Dumping and Countervailing Duties on Certain Products from China (US–AD/CVD),[23] where the Appellate Body decided that evidence of a “controlling interest”[24] is itself not sufficient to establish that an entity is a public body. It elaborated that the ability to perform the functions of entrusting or directing private bodies are “core commonalities” between government and public body.In this respect, while any single characteristic—like a controlling financial stake—is not decisive, “meaningful [government] control over an entity and its conduct may serve … as evidence that the relevant entity possesses governmental authority and exercises such authority in the performance of governmental functions”[25] [emphasis added]. The Appellate Body also asserted that the classification of an entity’s functions as governmental under the “legal order” of the relevant Member may be a “relevant”—yet not a definitive—consideration in the determination of public body.
(ii) Indirect Financial Contribution
By contrast, indirect financial contributions are those that originate from or are channelled through private bodies to a beneficiary. Such forms of contribution are addressed specifically under Article 1.1(a)(1)(iv) and entail different imputability criteria compared to direct financial contributions.[26] Paragraph (iv) provides that government payments to a “funding mechanism” are defined as financial contributions. Alternatively, indirect financial contributions also exist where: (1) the government or public body “entrusts or directs” a private body; (2) to carry out a “function(s) illustrated in (i)-(iii)”; (3) which would “normally be vested in the government”; and (4) the “practice, in no real sense, differs from “practices normally followed by governments”.Where a private body is used as a “proxy”[27] by the “government” to carryout the functions listed in paragraphs (i)-(iii), paragraph (iv) is applicable even absent any cost to government.
The “real gateway”[28] to regulation under Article 1.1(a)(1)(iv) is that the type of function undertaken by the private entity must represent a “function” or “practice” normally vested in government—with respect to both the relevant WTO Member and as a normative matter. These provisos impose a heightened evidential and analytical burden, and are “one of the most controversial aspects of WTO subsidy law.”[29] As a starting point, consideration must be given to the legal order of the specific Member in order to determine whether the relevant function “would ordinarily be considered part of [its] governmental practice”.[30] However, in United States–Measures Treating Export Restraints as Subsidies (US–Export Restraints), the panel held that the ‘normal practice by governments’ criterion is a reference to the delegation to private bodies of the functions of taxation and expenditure “and not a reference to government market interventions in the general sense, or the effects thereof.”[31] The panel in Korea–Commercial Vessels more recently reaffirmed this position.[32]
Nevertheless, the unduly narrow conclusions of these panels are antithetical to the Appellate Body’s interpretation of paragraph (iv) in Canada–Aircraft. Rubini has correctly argued that where “normal government practice” is equated to the power of taxation and expenditure, it would “by necessity imply that financial contribution always requires a cost to government which was rejected by the Appellate Body itself.”[33]
(iii) “Price Support”
At this juncture, it is appropriate to mention the alternative to financial contribution that is expressed in Article 1.1(a)(2), which permits a subsidy to be found where there is income or price support “in the sense of Article XVI of GATT”. The reference to Article XVI means that the measure must operate to increase exports or decrease imports of the relevant (or competing) product. Although this provision has not yet been extensively addressed, the Appellate Body in United States–Final Countervailing Duty Determination with respect to Softwood Lumber from Canada (US–Softwood Lumber) affirmed that government subsidisation measures are “broadened still further”[34] by the concept of income or price support. Furthermore, although a 1960 GATT Panel[35] held—in relation to price support schemes—that Article XVI requires a “loss to government”, this interpretation appears “outdated”[36] in light of the conclusion in Canada–Aircraft that a cost to government is not implicit in the general concept of a subsidy.
(b) The Second Prong: “Benefit”
The second element necessary to the determination of a subsidy is the conferral of “benefit”. This criterion focuses exclusively on the advantage to the recipient and is legally distinct from the question of financial contribution (or income or price support).[37] In conducting the benefit analysis, the panel in European Communities–Countervailing Measures on Dynamic Random Access Memory Chips from Korea(EC–DRAMS) agreed with the Appellate Body in Canada–Aircraft, which stated that the finding of a “benefit” implies that the recipient is “better off” than it would have been absent the contribution.[38] As a corollary, it found that the “appropriate basis” for determining the existence of a benefit is the marketplace.[39] This so-called “private investor-test”[40] shares symmetry with—and is indeed inspired by—Article 14 ASCM. With respect to financial contributions under Article 1.1(a)(iii), Article 14(d) establishes that the benchmark in determining the calculation of the benefit is the “adequacy of the remuneration … in relation to prevailing market conditions”. This benchmark has been held by the Appellate Body to be the “relevant context for the interpretation of ‘benefit’ in Article 1.1(b)”.[41]
However, in the context of energy, Howse has argued that a “meaningful” market benchmark remains elusive given that it has been historically distorted by government intervention in favour of fossil fuels.[42] This complements Sykes’s argument that subsidies may actually offset the effects of government intervention by serving as a “corrective” measure.[43] This is a question for reform, as the market price is the relevant benchmark due to the fact that Article 14(d) refers expressly to “prevailing” rather than free market conditions.
(2) Analysing FIT Programmes under the WTO Subsidies Regime
(a) An Assessment under the ASCM
FIT programmes may constitute a financial contribution where they involve the purchase of goods (i.e. electricity) by a government (or public body) under Article 1.1(a)(1)(iii), or by private body under paragraph (iv). For Ontario, the OPA is a State enterprise accountable to the provincial government and responsible for the FIT programme’s implementation, with the authority to enter into FIT contracts with private parties. In light of the Appellate Body decision in US–AD/CVD, the OPA may be deemed to possess “governmental authority”; this is because of its authority to administer the FIT programme and to impose charges on consumers in order to fund its operation. The OPA is also subject to “meaningful” governmental control, as it receives ministerial instruction vesting it with the authority to perform its functions. Although Canada will attempt to assert that the OPA is not a public body, the ruling in US–AD/CVD provides much scope for the conclusion that the entities concerned are exercising governmental authority.[44] Even if the OPA were defined as a private body, it is arguable that the OPA’s GAM may qualify as an indirect “funding mechanism” under Article 1.1(a)(1)(iv), thereby establishing a subsidy through their implication in the administration of public funds.[45]