Projected electricity energy cost increases generated by B.C.’s Clean Energy Act and the recently approved $8.8 billion Site C dam are raising eyebrows in several quarters, including a former executive of the trade association representing BC Hydro’s large industrial customers.
“The whole policy of the provincial government when it comes to managing BC Hydro and its power acquisition program is costing ratepayers over $1 billion per year,” Dan Potts said in an interview prior to the May 26 release of energy economist Robert McCullough’s review critical of the Site C business case.
The West Vancouverite’s resumé includes a 30-year stint in the pulp and paper industry. A former Council of Forest Industries’ (COFI) director of pulp and paper regulatory affairs, Potts also served 10 years as the executive director of the Joint Industry Electricity Steering Committee, which represents the interests of BC Hydro’s large industrial customers.
The 75-year-old is retired, but he remains a keen observer of the North American energy landscape “watching in amazement at what’s going on in the electric power business in B.C.”
Potts maintains that $600 million of that annual $1 billion bill for B.C. residents is the premium the province now pays for renewable energy mandated under the Clean Energy Act (CEA) because the incremental per-megawatt-hour (mW/h) price for energy from run-of-river and other independent power producers (IPPs) in 2014 was approximately $140, whereas buying power from the North American grid would currently cost between US$20 and US$30 per mW/h.
Permanent closure in 2016 of the Burrard Thermal generating plant, which burns natural gas to produce electricity, will remove another local option for meeting power demand during peak periods.
Under the Clean Energy Act, introduced in 2010, the province must produce 93% of its electricity from clean and renewable sources.
By 2017, it must also become energy self-sufficient during periods of average water flows. BC Hydro can buy power when low water flows reduce power generation from dams, but, as Potts pointed out, it can no longer buy power from the North American grid when the province’s water flow is normal or back up any potential shortfall with electricity generated from the Burrard Thermal plant.
Prior to the CEA, Burrard was included in Hydro’s resource plan as a capacity resource that could be used only when energy generated by the largely inefficient steam boiler plant was cheaper than buying power on the open market.
According to Hydro, the Crown corporation imported an average of 3,500 gW/h of power annually between 2006 and 2010. Between 2010 and 2014, Burrard Thermal provided an average of 275 gW/h per year during that time and was down to 42 gW/h per year between 2011 and 2014. Power imports and exports varied considerable during that time depending on river water flows: from 4,463 gW/h imported in 2011 to 6,909 gW/h exported in 2013.
The CEA was enacted before the shale gas revolution unlocked huge new sources of natural gas in North America and around the world. The price of natural gas and electricity generated from natural gas plants have consequently dropped significantly and the efficiency of combustion turbine natural gas generators has increased dramatically.
That has increased the potential premium paid for energy from new sources like Site C significantly, even a decade down the road when the dam’s power is scheduled to be added to the grid.
Liquefied natural gas (LNG) export opportunities also changed the provincial government’s approach to power generation. The Clean Energy Act was updated in 2012 to allow LNG export terminal proponents to use natural gas to power their export facilities – exempting them from the CEA’s 93% renewable requirement.
Meanwhile, low and stable natural gas prices are predicted for the long term by such agencies as the U.S. Energy Information Administration, which forecasts natural gas to increase to just over US$7 per million BTUs by 2040 from around US$4 today.
The International Energy Agency projects that in 2040 the United States will remain the world’s largest natural gas producer.
According to numbers in Hydro’s 2014 financial report, the cost of power is rising for energy consumers in B.C. while the revenue Hydro generated from sales in the United States is falling. Since 2007, that per mW/h cost has risen to $92 from $64 for domestic residential customers and to $74 from $56 for light industrial and commercial customers. Tariff yields from sales in the U.S. market during the same period have dropped to $46 from $65.
Hydro rates increased 6% on April 1.
BC Hydro claims the cost of Site C power will be between $58 and $61 per mW/h, but Potts said that range is based on a complex levelized formula used to compare costs over long periods in major infrastructure projects.
Dividing Site C’s $500 million annual cost to taxpayers by the dam’s expected power output, he said, pushes its per mW/h price closer to $96.
“Levelized energy cost is useful for comparing projects,” said Potts, “but it’s not useful in communicating to people what they are going to pay for something at some future date.”
B.C. energy ministry spokesman David Haslam agreed that the projected costs of Site C power of between $58 and $61 per mW/h are based on a levelized cost formula, but he said amortization and rate smoothing reduces the impact of up-front costs of large hydroelectric assets.
“For example, the cost of power from Revelstoke today is under $30 per mW/h.”
Haslam said the province buys power on the market for between US$20 and US$30 “and sometimes even less.”
But he said that reducing the amount of electricity generated in B.C. and relying on the market to meet the province’s needs rather than being self-sufficient “is a risky approach that would undermine the reliability of our electricity system.”
Haslam added that, in the long run, Site C energy will be cheaper than electricity generated by natural gas because natural gas plants, with significantly higher greenhouse gas emissions, have a 25-year lifespan compared with 100 years for Site C.
He said that, based on current natural gas prices, electricity from new natural gas generation would be $75 per mW/h.
Business Council of BC executive vice-president Jock Finlayson agreed that there are many CEA upsides. They include its focus on tapping the province’s extensive renewable energy resources and fostering a greater role for First Nations in energy development.
But given the market realities of the shale oil and gas revolution and the huge reserves of natural gas the province has, he said B.C. “should take a fresh look at natural gas as a low-cost, and relatively low-carbon, energy source, including in the electricity sector.”
The unpredictable costs of building major hydroelectric dams are another major cost factor.
According to a 2013 Oxford University energy policy study of major hydroelectric projects around the world, three out of four large dams included in the study were over budget and actual costs were 96% higher than estimated costs.
Site C’s estimated construction costs, which started out at roughly $6.6 billion, are now estimated at $8.8 billion.
In addition to the $600 million cost of replacing Burrard Thermal or equivalent power bought on the open market with IPPs, Potts estimates annual costs for Site C energy will be $300 million more than the power’s market value and pending IPP contracts will add another annual premium of $370 million.
He said the CEA’s requirement that B.C. be energy self-sufficient and generate 93% of its electricity from renewable sources is unrealistic and will erode competitive economic advantages in the province, chase power-intensive industries to other jurisdictions and stifle economic growth.
“It’s worse than being not realistic; it’s terribly counterproductive because it’s costing, or will cost us, a $1 billion per year.”