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California clean air regulations could “wipe out” Hydro’s export revenues

By Gordon Hamilton, Vancouver Sun, January 4, 2012

California’s new carbon cap-and-trade regulations, which came into effect Jan. 1, will require BC Hydro’s power exporting arm to buy costly carbon credits on its energy exports beginning in January, 2013, likely wiping out Hydro’s primary export market and increasing the cost of electricity to B.C. consumers in the process, a B.C. energy economist said Tuesday.

Aldyen Donnelly, principal of WDA Consulting Inc., said in an interview that the California regulations require Hydro to pay the full carbon charge on its exports to that state, forcing it to buy carbon credits on the open market. Hydro is being tagged as a dirty energy producer because it has not disclosed its greenhouse gas emissions to California’s Air Resources Board. The board’s concerns are over Hydro’s policy of importing coal-fired energy at night. Through its trading arm Powerex, Hydro buys low-cost but greenhouse gas-loaded energy from coal-fired plants in the U.S. at night. It then restricts the flow of water from its reservoirs, and saves that water for day-time production of higher-priced clean energy.

Hydro uses its energy export revenues to lower B.C. consumer rates. The utility’s own forecasts show it expects to generate $113 million in income from energy exports in 2013.

Although Hydro has not disclosed the value of its export sales to California, every $33 million change in Hydro’s net income results in one per cent change in domestic hydro rates. Donnelly said the lack of transparency makes it difficult to forecast the impact of the California carbon tax on rates but her best estimate shows it could be high enough to wipe out all export income.

“If the price of California allowances continues to trade at around $15 [per ton of carbon dioxide equivalent], that’s enough to wipe out B.C.’s profits on the electricity trade. It’s a big bloody deal,” Donnelly said Tuesday in an interview.

Powerex disputed Donnelly’s conclusion that California’s cap-and-trade regulations will wipe out export revenues.

“At this time, it is too early to determine the impact California’s cap-and-trade program will have on export revenues,” Powerex president Teresa Conway said in the emails. “However, given BC Hydro’s supply of clean and renewable resources, it is expected that the impact will be generally positive and will not negatively impact rates.”

Powerex is “still exploring a number of options with CARB,” she said, to ensure that Hydro’s “clean and renewable resources are recognized as GHG-free.”

“British Columbia and California have had a long, positive relationship in trading electricity and we will continue to sell our clean energy to jurisdictions such as California so that we can help keep our rates here in B.C. among the lowest in North America,” she said in the email.

She argued that Hydro’s “clean, renewable resources” are greenhouse gas free.

While it’s true that the electricity Powerex sells to California is generated at Hydro’s network of reservoirs, it is able to have surplus hydro power by importing low-cost coal-generated power from the U.S. at night for as little two cents a kilowatt-hour, Donnelly said. The clean power it sells to California during the day has a price of three to four cents a kilowatt-hour, she said.

“The reality is, in fact, that a large portion, if not all or the profit that they’ve enjoyed on that overnight storing of coal-fired electricity is about to be wiped out or is close to being wiped out. And they are trying very hard to fight that battle. I don’t see that they are going to win.”

California calls Hydro’s substitution of clean power with coal-fired power “resource-shuffling” and has outlawed it in the new regulations. Donnelly agrees with that particular regulation although she personally does not support cap-and-trade, which she says is nothing but supply-side management regulations that benefit those with quota, in this case carbon credits, while damaging those without.

“It’s a fancy name for supply-side management. It’s like dairy quota,” she said.

Powerex has in the past threatened a NAFTA action against CARB, claiming it is not giving Powerex equal treatment under the free trade act, but Donnelly believes Powerex is really seeking a negotiated solution. The air resources board has rejected Powerex’s demand that it be treated equally with the U.S. government-owned Bonneville Power Authority based on the fact that Powerex has not provided the information on its emissions, information the board needs in order calculate an emission factor. In the absence of that data, CARB has imposed the default factor of 392 kilograms of CO2 equivalent per megawatt hour of power sold to California utilities.

Hydro estimates the factor should be 20 kilograms per megawatt hour, Donnelly said. Her own estimate is that it is closer to 200 kilograms per megawatt hour.

Although the California regulations came into effect Jan. 1, suppliers have one year to comply with them. Powerex is not the only supplier to be challenging them. A California court ruled Dec. 29 that the state’s low carbon fuel standard favours biofuels produced in California over other biofuels and breaches U.S. federal laws protecting inter-state commerce.

ghamilton@vancouversun.com

Blog: vancouversun.com/hamilton

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