BC's Clean Electricity Same Price as BC Hydro's New Electricity
Clean Energy Producers Respond to Review of BC Hydro panel report
VICTORIA, Sept. 7, 2011 /CNW/ - BC's clean energy producers say that the electricity they produce costs less, if not the same, than new electricity produced by BC Hydro, while providing good, fair and long-term value for money for BC's ratepayers.
That is the message delivered today by the Clean Energy Association of British Columbia (CEBC) in response to the recent Review of BC Hydro panel report.
"While we appreciate and support the work of the BC Hydro Review panel, British Columbians need apples to apples comparisons when it comes to the price of clean energy, a critical commodity for our economy and quality of life," said Paul Kariya, CEBC's executive director. "BC's clean energy producers provide good, fair and long-term value for money for BC's ratepayers. The reality is that new electricity generation costs more than old electricity, whether it is from clean energy producers or BC Hydro."
According to the panel report, clean energy producers contract with BC Hydro at a price of $124/MWh, which is an "all-in estimated cost" in today's dollars for a premium, fixed price clean electricity product over 20, 30, or even 40 years. The average plant gate price payable to clean energy producers is about $100/MWh.
However, the actual average price paid for electricity from clean energy producers over the past 20 years is $64/MWh, as noted by BC Hydro in the utility's 2010 Annual Report.
By locking clean energy producers into long-term contracts, BC Hydro can hedge against market fluctuations and eliminate price uncertainty for ratepayers. Thus, clean energy assets being built today are tomorrow's low-cost heritage assets. The cost of their electricity in 20, 30 or 40 years will be much lower than the cost of new electricity that will be generated at that time.
CEBC is also cautioning the province on the panel report's recommendation that the definition of self-sufficiency be changed from critical water to average water for planning purposes. The CEBC, however, feels it may be time to look at eliminating the 3,000 GWh insurance requirement, as per the panel's recommendation.
"Market conditions have fundamentally changed," Kariya said. "We fully support the need to keep costs down for the ratepayer, and believe it may be prudent to consider the elimination of the 3,000 GWh of insurance in the self-sufficiency definition. However, it is crucial for ratepayers and our economy to continue to define self-sufficiency based on critical water, not average water."
Maintaining the definition at critical water will not produce any short-term rate increases, and will result in long-term cost savings for the ratepayer. Conversely, redefining the definition of self-sufficiency from critical to average water creates significant economic risks for the province, and in particular specific industries the government intends to grow, such as natural gas production, LNG exports, mining and the green economy.
The alternative to generating electricity from BC resources - through BC Hydro or clean energy producers - is importing it from the United States through the spot market. However, BC Hydro's own Mid-C price forecast (in real 2010 $US/MWh) from April 2011, predicts the spot market will rise 50 per cent by 2020 and 100 per cent by 2028.
"An increasing reliance on the spot market is not a sustainable long-term environmental solution," said Andrew Weaver, one of the world's foremost climate scientists and UVIC Professor of Earth, Ocean and Atmospheric Sciences. "Spot market power is dirty power from coal plants and runs contrary to BC's climate action objectives."
"Clean electricity produced by Canadian companies like Innergex is good value. In fact BC Hydro's purchases of clean energy accounted for only 2.6% of BC Hydro's originally proposed rate increase," said Graham Horn, Vice President of Corporate Affairs, Western Region, Innergex Renewable Energy Inc. "Along with BC Hydro, clean energy producers are building tomorrow's low-cost heritage assets today. We are providing a dependable supply of cost effective clean electricity that creates jobs in BC."
To date, clean energy producers' existing operations have created 18,000 person-years of employment in BC; these jobs are often in First Nations and rural communities. The sector has contributed more than $2 billion to the provincial economy, and $378 million to government revenue for public services - money that pays for our hospitals and schools. The 19 projects in the Clean Power Call represent 3,000 person-years of employment during construction and $3 million in capital investment across the province.
"These clean energy projects are an economic advantage for BC's First Nations," said Judith Sayers, UVIC adjunct Professor of Law and Hupacasath First Nation member. "Over 125 BC First Nations are involved in the clean energy sector through direct ownership, equity investments and partnerships arrangements. Clean energy has opened the door to a better economic future and greater opportunities for First Nations."
The Cost of Electricity from Independent Power Producers
British Columbia's clean energy producers provide good, fair and long-term value for money for BC's ratepayers. The cost of electricity generated by clean energy producers is equal to or less than the cost of electricity generated by newly built BC Hydro facilities. Unfortunately, while the Review of BC Hydro made many useful recommendations that should reduce costs for the ratepayer, critics were quick to use the report to spin misinformation about the cost of private sector-generated electricity. Here are the facts:
The role of independent power producers in BC Hydro's rate increase is minimal
- According to BC Hydro's current rate application before the BCUC, the third largest component of the proposed increase is $148 million allocated for the "cost of energy", including imported electricity and clean electricity from clean energy producers - 4.1% of the total increase.
- Of this $148 million, $94 million is for purchases from BC's large (e.g., Alcan, Columbia Power, Columbia basin Trust) and small private power producers, totalling only 2.6% of the total 32.1% rate increase over three years.
- BC Hydro's rate increase is more about renewing publicly-owned infrastructure than energy purchases from clean energy producers. Capital charges - financing, amortization - alone account for half of the rate increase.
Good, fair and long-term value for money for BC's ratepayers
- The Review of BC Hydro states that $124/MWh is the cost of electricity under long-term contracts from the latest power call for IPP energy. However, what the review does not note is that this is an "all-in estimated cost" in today's dollars for a premium, firm, fixed price clean electricity product over 20, 30, or even 40 years.
- Unfortunately, the review compares this price to other electricity products that are not fair comparators, e.g., Site C and the spot market. The costs of new IPP electricity must be compared to costs of new BC Hydro electricity - produced by new or upgraded projects - not heritage assets.
- This price does not include the much lower priced non-firm electricity delivered under these contracts. When the non-firm and firm are combined, the average plant gate price payable to clean energy producers is about $100/MWh.
- BC Hydro states in its 2010 annual report that the average price paid for electricity from IPPs over the past 20 years is $63.85/MWh. When the cost of firm electricity from the Clean Power Call is added, this price may rise to $75.00/MWh.
- Comparing the price of electricity produced by an IPP in 2011 to the price of electricity from a heritage asset is like comparing the cost of constructing a house in the 1960s to the cost of constructing a house in 2011, and then criticizing the price of the house built in 2011 as more expensive.
- A proper comparator is BC Hydro's Aberfeldie dam, which was officially budgeted by BC Hydro at $95 million, more than double the original estimate. Constructed in 1922, Aberfeldie had a 5 MW capacity and was redeveloped into a 25 MW facility in three years, beginning in 2007.
- In February 2009, BC Hydro testified before the BC Utilities Commission that the cost of power produced at Aberfeldie was about the same as (not less than) the average IPP.
- Unlike all IPPs, Aberfeldie was not a brand-new project requiring staff to map new terrain, build extensive new roads or install new power lines, etc.
- By locking IPPs into long-term contracts, BC Hydro can hedge against market variations and eliminate price uncertainty for its ratepayers. Therefore, the argument that BC Hydro is subsidizing clean energy producers by paying them for their electricity at a price in excess of the current spot market price is an apples to oranges comparison.
- The fact is clean energy assets being built today are tomorrow's low-cost heritage assets. The cost of their electricity in 20, 30 or 40 years will be much lower than the cost of new electricity that will be generated at that time.
- Using the spot market for long-term need is risky. For example, as confirmed by the review, spot prices reached in excess of $900 MWh in 2001, far exceeding what BC Hydro was paying for electricity from clean energy producers.
- From January through April 2008, BC Hydro experienced a significant electricity shortfall while spot market prices jumped because of weather and a run up in oil and natural gas prices. Spot market prices were well above those paid to IPPs.
- On Page 93 of the review, the panel assumes that in order to gain rate reductions of up to 8 per cent in 2016 and 20 per cent in 2020, the current low spot market prices would have to continue.
- However, this assumption is inconsistent with BC Hydro's own Mid-C price forecast (in real 2010 $US/MWh), made public in April 2011, which predicts spot market prices will rise 50 per cent by 2020 and 100 per cent by 2028. Based on this forecast, it does not appear possible to see the rate savings that the panel reported.
Growing BC's rural and First Nations economies
- To date, clean energy producers existing operations have created 18,000 person-years of employment. Many of these jobs are in First Nations and rural communities.
- The clean energy sector has contributed more than $2 billion to the provincial economy, and $378 million to government revenue for public services - money that pays for our hospitals and schools.
- Together, the 19 projects in the Clean Power Call represent 3,000 person years of employment during construction and $3 billion in capital investment across the province.
- Clean energy producers are leaders in negotiating long-terms economic benefits agreements with First Nations. Some 125 First Nations in BC are directly involved as owners, equity investors and partners in the clean energy sector in all regions of the province.
Energy Self-Sufficiency in BC
The Clean Energy Act and the 2007 BC Energy Plan require BC Hydro to be energy self-sufficient by 2016 at critical water levels. Redefining the definition of self-sufficiency from critical to average water, as recommended by the BC Hydro Review Panel, creates significant risks for the provincial economy. Maintaining the definition at critical water will not produce any short-term rate increases, but will result in long-term cost savings for the ratepayer. The Clean Energy Association of BC believes it may be prudent to consider the elimination of the 3,000 GWh of insurance in the self-sufficiency definition, as per the panel's recommendation.
Self sufficiency and drought
- Self-sufficiency is not new - it's a long-standing policy designed to provide ratepayers with low-cost, domestically-produced electricity that provides energy security and reliability over the long term, while protecting ratepayers from the highly volatile U.S.-based spot market.
- With one minor exception, BC Hydro has planned its electrical system on the basis of self-sufficiency. The reason is simple: almost all of its generating facilities are hydro electric and are subject to variations in reservoir inflows because of the weather.
- During a drought period, electricity demand still must be met through firm supplies of electricity. However, given the fact that no one can accurately predict when and for how long a drought will occur, it is prudent for BC Hydro's system to be based on critical water; it provides the utility with a buffer or contingency reserve for unforeseen load growth.
Impact on the BC economy and BC Hydro demand scenarios
- BC Hydro's current demand forecast does not include key industries and initiatives that the BC government intends to support, namely: LNG terminals, unconventional gas development and new mines.
- With trains 1 and 2 at the Kitimat LNG facility, the increase in demand will be at least 3,000 GWh. If Shell builds a facility, it is expected to use 4,000 to 5,000 GWh. Progress Energy and Petronas are also looking at LNG. Currently there is only 1,000 GWh in BC Hydro's load forecast for LNG use. LNG production costs and GHG risk will rise if LNG producers are forced to self-generate electricity, making Oregon an attractive location.
- Natural gas extraction and production in the Montney could require up to 4,000 GWh of new electricity. BC Hydro's current load forecast includes less than half of this amount. Without new transmission and new supplies of clean electricity the upstream sector may be forced to self generate electricity, unnecessarily driving up production costs.
- If four of the 14 mines in the final stages of permitting processes proceed, there will be a 1,400 GWh increase in electricity demand that is not in BC Hydro's current load forecast.
- This type of load growth has not been seen in BC since the rise of the pulp and paper industry in the 1960s and 70s. This growth is in addition to the 1 to 2 per cent annual load growth driven by population and normal economic growth.
- A shift from critical to average water at a time of large, pending industrial growth could mean that BC Hydro will not be able to serve the load, and by extension, support these new economic opportunities. Acquiring this amount of energy on the spot market is risky, and may be prohibitively expensive. Its impact on the transmission system and Powerex's trading activities has not been made known.
Impact on ratepayers
- According to BC Hydro's 2011/12 - 2013/14 Service Plan, the utility will essentially have sufficient supplies of electricity to meet demand under critical water conditions by 2016. Changing the definition to average, therefore, will result in no net savings for ratepayers.
- On the contrary, maintaining the definition at critical will not produce any short-term rate increases and will result in long-term cost savings for the ratepayer. As well, it will protect ratepayers and industry from rate shocks in a drought and ensure that there is a buffer or industrial electricity contingency reserve to attract and drive economic development.
Reliance on the spot market
- By redefining self-sufficiency to average water years, BC Hydro would become more dependent on the spot market for long-term needs, which is risky given price volatility. For example, in 2001 spot electricity prices reached in excess of $900 MWh for months at a time, far exceeding what BC Hydro was paying clean energy producers for their power.
- The panel assumes that in order to gain rate reductions of up to 8 per cent in 2016 and 20 per cent in 2020, the current low spot market prices would have to continue. However, this assumption is inconsistent with BC Hydro's own Mid-C price forecast (in real 2010 $US/MWh), made public in April 2011.
- BC Hydro's own price forecast for the spot market predicts it will rise 50 per cent by 2020 and 100 per cent by 2028. Based on this forecast, it does not appear possible to see the rate savings that the panel reported.
- It appears the panel overlooked the fact that the price for wind energy has declined considerably since the 2008 Clean Power Call. The price for wind at the plant gate is now comparable to BC Hydro's projected spot market price, adjusting for the cost BC Hydro pays to get the electricity to the border ($5 MWh) and the income and taxes wind projects provide to the BC government.
Economic impact on First Nations
- Moving to average water will negate the ability of BC's first nations, many whom are direct owners, equity participants or partners in the clean energy industry, to reap the economic and social benefits of clean energy development.
- This stands in opposition to the express objective set out in the Clean Energy Act, regarding fostering the development of first nation and rural communities through the use and development of clean or renewable resources.
Risk related to Demand Side Management (DSM)
- A further risk to BC's domestic supply of electricity relates to the potential that BC Hydro may not meet its DSM targets. Under this scenario, moving to average water for planning purposes will place BC in a more dependent position on a spot market where prices are expected to rise in the coming years.
- Changing the definition of self-sufficiency must take into account BC Hydro and Powerex's ability to maximize revenue from its short term electricity trading with California — by far, Powerex's largest market. Moving to average from critical may result in a very significant loss in trade revenue due to the state's legislated requirements concerning GHG emissions.
- If the province opts to increasingly depend on the spot market for a portion of its energy needs, British Columbians will be importing dirty energy generated largely by fossil fuels, such as coal, as well as nuclear power from neighbouring jurisdictions. This will derail the province's GHG targets as set out in the Clean Energy Act and would be ironic given the federal government has called for no new coal-fired generation after 2016.
- Moreover, while British Columbians are importing dirty U.S. power, we are essentially exporting jobs, investment and rural economic development to neighbouring jurisdictions. The only real beneficiaries of moving to average water will be U.S. power producers.
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