Provincial electricity report is politically charged

You just knew from the cover of “Review of BC Hydro’s Purchase of Power from Independent Power Producers” commissioned by the B.C. Ministry of Energy that it was a political document.

On the cover it says: “Zapped.” BC Hydro’s electricity rates need to go up and if there is anything that politicians hate it is to tell voters the news. Most think government-owned large hydroelectric projects produce low-cost electricity forever.

Then there is reality. The lion’s share of the need to increase BC Hydro rates is because its asset base is getting old and needs extensive renovations. According to the corporation:

“So why do rates need to go up? It’s all about the need for system upgrades, and the growing demand for electricity.

“These upgrades are costly: we need to invest about $7.2 billion over the next three years in capital investments to the system, including building new substation, seismically upgrading aging dams and increasing transmission capacity in key areas.”

The need for BC Hydro’s capital spending isn’t going to end tomorrow. It will go on for a very long time and so will the need for rate increases.

If I am a politician, what do I do? The answer is to create a diversion and try to pin the blame on the previous government. Since the 1990s BC Hydro has be acquiring some electricity from independent power producers (IPPs), which include Rio Tinto Alcan, pulp mills and the Columbia Power/Columbia Basin Trust, which are arms of the government. Unlike with BC Hydro projects, the cost of these acquisitions are easily identifiable because there is a long-term contract that contains the price.

In contrast, the costs for a project like Site C will be buried for 70 years in successive financial statements.
The gist of “Zapped” is that the contracts that BC Hydro entered into with IPPs in the mid 2000’s were overpriced and not needed because of political interference by the governing BC Liberals. BC Hydro independently forecast its electricity requirements and acquired or built generation accordingly. For the Zapped thesis to be correct, the BC Liberals conspired with BC Hydro to inflate the load forecast or forced the pen of the forecaster. There is no evidence of this.

BC Hydro’s forecasts have been consistently high since the year 2000 and demand has been more or less flat during the same period. The result is that more electricity has been acquired than is necessary. No conspiracy and no silent hand. Just incorrect forecasting.

In the mid-1980s exactly the same thing occurred when BC Hydro’s Revelstoke hydro megaproject went into operation. It took about 15 years before its output was fully absorbed. The surplus was dumped into the spot market for whatever price could be obtained.

The spot market or Mid-C is located in the U.S. It is like the leftover bin in a vegetable store. The prices and quantities vary day to day. It is volatile and transmission access to and from Mid-C to B.C. is very constrained. According to Zapped, BC Hydro should increase its current roughly 10% reliance on the spot market to a much higher number. The lesson from the California energy crisis: enter into firm contracts.

All dollars spent on spot market purchases flow out of B.C. and there is no carbon tax payable on imported coal or gas fired generation – big advantage for out-of-province producers.

The IPP contract prices from the mid -2000s were not too high. Mostly they were the result of competitive bidding processes and are market prices. Since then there have been dramatic declines in the cost of renewable generation and in particular about 70% for wind and solar. There have been no such declines for large hydro and the cost of electricity generated from Site C will be far higher even when the cost of backup when the “sun don’t shine and the wind don’t blow” is taken into account for wind and solar.

As long as we elect politicians, there will be a minister that waves around a report that supports his or her position. Voters need to be wary of the contents of the report.

David Austin is a lawyer specializing in the energy sector with Stirling LLP.