In the past two months, Japan has accused Canadian province Ontario of breaking WTO rules in its support for renewable energy; and the United States has launched an investigation into Chinese support for green industries more generally. Find out why in the WTO Subsidy Dispute Round-up...

Japan initiates WTO consultations with Canada over domestic content in renewable energy subsidy scheme

The government of Japan has initiated consultations with Canada at the World Trade Organization (WTO) over the province of Ontario’s domestic-content requirements in its renewable energy Feed-in Tariff (FIT) Program.

In a 13 September communication to the Canadian delegation to the WTO and the Chairman of the WTO’s Dispute Settlement Body, Japan argued that support from the FIT program appears to be provided “contingent upon the use of equipment for renewable energy generation facilities produced in Ontario over such equipment imported from countries such as Japan,” in contravention of Article 3 of the Agreement on Subsidies and Countervailing Measures (ASCM), among other WTO rules.
 
Launched in September 2009, Ontario’s FIT Program pays approved projects a fixed price for the electricity generated from renewable energy sources such as wind, sunlight, water and biomass. The price is set higher than the market price for electricity, thus providing a subsidy to encourage renewable-energy production.
 
Ontario’s FIT program provides most projects with fixed rates for 20 years, with the exception of hydropower, which has a 40‐year contract period.
 
But the controversial aspect of the program is the domestic-content requirement for the equipment and services used to build some wind and solar projects, something which the province says will help create 50,000 new green jobs in Ontario. 
 
Wind power projects over 10 kilowatts (kW), for example, are required to have a minimum domestic content of 25% if they are operational before 1 January 2012 and 50% if they become operational after that date.  Solar projects are required to have minimum domestic content between 40-60% depending on their size and the date they become operational. According to a memo released by the CEO of the Ontario Power Authority, calculations of domestic content should include expenditure on equipment, resource assessment, design, transportation, construction material, services and labour, but not operation and maintenance costs or the value of land.

Subsidy Watch spoke to Jim MacDougall, senior manager of the FIT Program, who explained that most of the investment in a renewable power project is made at the beginning of a project and the feed-in tariffs are set at a level to provide each project with a stable, steady stream of income over the contract period that will allow the company to recoup its investment and make a reasonable profit.
 
Once the contract period is over, the company can then sell electricity at the market rate to cover the relatively small operation and maintenance costs associated with renewable-energy projects whose main inputs (such as wind, water or sunlight) are usually free, added Mr. MacDougall.
 
Ontario considered setting a cap on the amount of energy that would be supported under the project but decided that the electric grid itself would provide a limit as it can only accommodate an additional 2,500 megawatts (MW) in the province. In this way, Ontario also hopes to encourage investment in the power grid when this limit is reached.
 
On the question of why only solar and wind power projects were selected for the domestic-content requirement, Mr. MacDougall explained that Ontario already has a strong hydropower sector and saw in wind and solar power, the two fastest growing renewable technologies in the world, an opportunity to develop an industry with great export potential.

The European Union and the United States have also asked to join the consultations with Canada. In its request to join consultations the U.S. stated that it was concerned by Ontario’s program because it saw itself as “a primary source of Canadian imports of products used in the production of renewable energy, including solar and wind energy.”
 
Andrew Block of the Ontario Ministry of Energy and Industry said that Canada and Ontario are in the consultations stage of the WTO dispute launched by Japan. “Under WTO rules, these consultations are confidential. We have nothing further to add at this time,” he said when contacted by Subsidy Watch.

United States Launches Investigation into Chinese support for renewable energy

The Office of the United States Trade Representative (USTR) has launched a wide-ranging investigation into Chinese policies affecting trade and investment in green technologies.

The case was launched in response to a 5,800-page petition filed by the United Steelworkers (USW) on 9 September in which the group alleges, “that China has utilized hundreds of billions of dollars in subsidies, performance requirements, preferential practices and other trade-illegal activities to advance its domination of the sector.”
 
The USW claims that several of China’s subsidy programs provide prohibited subsidies to Chinese companies contingent on export performance or domestic content in violation of Article 3 of the ASCM.
 
One of these is the “Ride the Wind” Program, which provides wind-power projects that use domestically produced equipment access to preferential loans and tax subsidies and priority connection to the power grid, according to the USW.
 
Under another program, China’s Export-Import Bank provides export credits to exporters of green technology under preferential terms that the USW labels WTO-inconsistent. “These rock-bottom terms by the world’s biggest export credit agency enable Chinese manufacturers to undercut and outbid U.S. exporters of green technology in markets around the world,” says the USW, adding that, “[t]hese concessional terms also make China Ex-Im Bank’s export credits prohibited export subsidies under Article 3.1(a) of the SCM Agreement”.

According to the USW, China’s Ex-Im Bank provided more export credits in 2008 than all of the export credit agencies in the G-7 countries combined, which has resulted in Chinese contractors now being involved in over half of the hydropower projects in the world, as well as many other renewable energy projects.

In a 15 September press release announcing the investigation, the USTR said that because the issues covered in the investigation involve U.S. rights under the WTO Agreement it would consider requesting consultations under the WTO and that “unless consultations result in a mutually acceptable resolution, the U.S. Trade Representative will request the establishment of a WTO panel,” the next step in the dispute settlement process.