BIV 25th Anniversary: Independent producers add private juice to B.C.’s public power grid

Over the last 25 years, private companies have radically changed the business model of province’s power supply

Private power producers responded quickly to industry deregulation, as shown by this BIV story from 2001

Throughout the latter half of the 1980s and the early 1990s, B.C. had a surplus of electricity, thanks to the completion in 1984 of the Revelstoke hydroelectric dam. BC Hydro subsidiary Powerex – created in 1988 – was selling surplus power to the U.S. and making significant profits.

Thirty years after the Revelstoke dam was completed, British Columbians are once again debating whether or not to build another major hydroelectric project – the $8 billion Site C dam on the Peace River.

If Site C is built, it will be BC Hydro’s last major dam project, predicts Mark Jaccard, an energy economist with Simon Fraser University and former BC Utilities Commission chairman.

While there is no question that industrial development associated with new mines and a liquefied natural gas industry will require more power in the coming years, there is debate about whether it needs to come from a large hydroelectric dam project.

Over the past decade, independent power producers (IPPs) have gained a foothold in the province thanks to BC Liberal government policies that opened up new power generation to the private sector. The sector has developed engineering and financing expertise, which it is now exporting to other countries.

Today, 20% of all the electricity produced in B.C. comes from the private sector, mostly through run-of-river hydro projects and wind farms, and Clean Energy BC insists that IPPs can provide all the power that Site C would, at a lower cost.

When the Revelstoke dam was built, BC Hydro was the only game in town. A lot has changed since then.

“B.C. electricity, up till the late ’80s, was still this monopoly model,” Jaccard said. “If you wanted electricity, they [BC Hydro] were going to produce it for you.”

Under the Social Credit and NDP governments of the 1980s and 1990s, there were a handful of small independent power projects approved. But it wasn’t until 2002 that the private power sector began to take off in B.C.

The Liberal government moved to break BC Hydro’s monopoly by requiring all new power generation in B.C., with the exception of Site C and large hydro dam upgrades, to be done by the private sector. The government also required 93% of new electricity generation to be carbon neutral, which ruled out comparatively cheap gas-fired thermal power.

Under a public-private hybrid model, the financial risk of building new power generation would be assumed by the private sector, mostly in the form of smaller run-of-river, wind and cogeneration power plants. BC Hydro would be the wholesale purchaser.

“I think that model’s been working successfully ever since,” said Jaccard, who was one of the experts who recommended the current public-private hybrid model.

BC Hydro now has more than 90 power purchase agreements with IPPs and another 32 under development. Most are run-of-river projects, although there are also four large wind farms in operation in B.C. Many of those projects have been built in partnership with First Nations.

“Those entrepreneurs need to get social licence from the community, and so what we saw, when we were developing small run-of-river projects in B.C. – and some wind – was that, in many cases, the independent power producers were involving First Nations and First Nations were quite supportive of it,” Jaccard said. “It was a pretty good model.”

Opening up new generation to the private sector has drawn billions of dollars of investment in B.C.

In 2003, Don McInnes, who had founded several mining companies, made the leap from mining to clean energy, forming Plutonic Power, which built B.C.’s first large-scale run-of-river project.

Prior to Plutonic, there were 32 run-of-river projects in B.C., but the average size was only 7 megawatts (enough to power about 7,000 homes). At 235 MW, Plutonic’s Toba Valley run-of-river power project was the first utility-scale private power project to be built in B.C. In 2011, Plutonic Power merged with Magma Energy Corp. to form Alterra Power (TSX:AXY).

In addition to the 235-MW Toba Montrose ROR project and the 144-MW Doki Wind farm in B.C., Alterra now also owns geothermal power plants in Iceland and Nevada and a solar power plant in Ontario, and has several other renewable energy projects in development in B.C. and several other countries.

Investment has also flowed to B.C. from other Canadian companies, such as Alberta’s AltaGas Ltd. (ALA:TSX) and Quebec-based Innergex Renewable Energy Inc. (INE:TSX).

AltaGas has invested $725 million in the 195-MW Forrest Kerr run-of-river project, and also built the 102-MW Bear Mountain wind farm. Innergex has invested well over $1 billion in B.C., mostly on run-of-river projects.

Since 2002, Innergex has completed 13 run-of-river projects in B.C., and has another four under construction and a number of projects in development, including a wind farm. The four projects under construction are worth $800 million, according to Richard Blanchette, senior vice-president of Innergex.

Despite the investment that IPPs have brought to B.C. over the last decade, not everyone is sold on them. B.C.’s business community is divided on the issue. Some industries argue that private power is more costly than if all new generation were built by BC Hydro.

The BC Chamber of Commerce, for example, has argued that the model has resulted in the “over-acquisition of power and an excess of the relatively more expensive IPP energy option, which is then sold at lower rates than it was purchased for.”

David Austin, a lawyer specializing in energy markets, points out that IPPs assume all the financial risk, whereas the public has to cover the costs when a public project goes over budget.

“A lot of the risks that IPPs shoulder would otherwise be shouldered by BC Hydro but not accounted for,” Austin said.” When there’s a cost overrun, BC Hydro’s customers are responsible for it. If there’s a cost overrun on an IPP project, it’s the IPP’s shareholders that are responsible for it.”

Jock Finlayson, executive vice-president and chief policy officer for the Business Council of BC, is critical of some B.C. government policies on power, but he’s not convinced that IPP power is any more expensive than publicly funded electricity.

“I think that’s a point for debate, frankly,” he said. “The people who make that criticism often don’t demonstrate that it would have been cheaper for Hydro to construct and procure the power itself. That’s why you should have a utilities commission that’s empowered to inquire into these matters.”

Under both the NDP and Liberal governments, the BC Utilities Commission has been marginalized, Finlayson said. It has had no say, for example, on whether Site C is the best and most cost-effective option for obtaining additional power.

As far as he is concerned, the problem is not whether new power generation is built by the public or private sector, but whether it is the most cost competitive. And when the B.C. government excluded natural gas as a potential source for new power generation, it ruled out one of the cheapest sources of new electricity.

“We think natural gas should be part of the mix in terms of the future of electricity generation in B.C.”