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
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
The role of independent power producers in BC Hydro's rate increase is
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
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
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
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
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
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
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
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
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
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
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
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.
SOURCE Clean Energy BC
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