By Derrick Penner, Vancouver Sun, August 20, 2011
Energy from independent sources historically pricier, but panel suggests it could lower rates
Intended or not, British Columbia's private-electricity sector has become a lightning rod for public attention thanks to the recent government review of BC Hydro's operations.
The review panel's report notes that BC Hydro supplements its needs by purchasing power from private sources, known as independent power projects, or IPPs, but government policy for electricity self-sufficiency "has placed pressure on BC Hydro to increase procurement" from private projects.
One of its recommendations, which Energy and Mines Minister Rich Coleman said government would accept, was for the province to review the self-sufficiency requirement with a view to relaxing it.
And in its suggestion that relaxing that policy would ease the pressure on rising Hydro rates, the panel has reignited the debate over whether IPPs represent a fair cost for new electricity that B.C. needs, or are expensive additions that BC Hydro has to support.
The costs of IPPs do stand out.
According to BC Hydro's most recent annual report, British Columbians used 55,207 gigawatt hours of electricity in 2010, 42,115 gigawatt hours from its own generating stations, for which the utility recorded $294 million in costs for water-rental payments to the province.
Its IPP purchases totalled 8,893 gigawatt hours, but that electricity cost BC Hydro $568 million to acquire.
And BC Hydro's own forecast is that its payments to IPPs will rise to $939.8 million by 2014, almost three-quarters of its energy costs, according to its filings with the B.C. Utilities Commission.
The amount is nearly triple the $364 million paid for IPP electricity in 2007.
Critics point to the increasing amount of electricity sourced from IPPs, at a higher rate than from Hydro's historic dams, as a significant cost pressure on rates.
The review panel, which released its report and recommendations Aug. 11, noted that on average, BC Hydro paid some $65 per megawatt hour in 2010, but the newer sources coming on line as part of government's policy to source green electricity average $124 per megawatt hour.
However, the report noted that in 2010, open-market prices for electricity ranged from a low of $4 to a high of $52 per megawatt hour.
The private-power sector believes it is unfair to point to that $124-per-megawatt-hour figure when comparing those new sources of electricity, which are not yet delivering power, with BC Hydro's existing facilities, or even the open market.
"You can't fairly compare the spot market price with a longterm price caught in a contract for 20, 30 or 40 years," said Paul Kariya, executive director of the Clean Energy Association of B.C., which represents independent power producers.
He added that contract prices remain fixed, except for an escalator worth half the annual rate of inflation, for its entire term.
Kariya said that market prices for electricity "today, may be cheap, but may not be five years from now."
And, he said, the price covers all elements of the project including costs for environmental assessment, consultation with aboriginal communities, the cost to connect their facilities to the BC Hydro grid, profit and the project's financing costs.
Kariya said there are other factors that make comparison unfair. For instance, the $124 per megawatt hour price is only the average price for firm power among the projects accepted by BC Hydro in its 2008 call for clean electricity proposals. Firm refers to the electricity that projects can guarantee will always be available.
Kariya said the projects will generate more electricity, but the producers can't guarantee they will be able to deliver it, so BC Hydro pays a lower price for it.
In a report summing up its 2008 so-called "clean call," BC Hydro estimated it would pay producers average "gate prices" ranging from $76.20 to $119.60 per megawatt hour.
Kariya added that the electricity that will be produced by the 27 green power projects BC Hydro accepted in its cleanpower call will carry carbon credits that BC Hydro can sell to defray the cost of acquiring the electricity.
Taking those into account, Kariya argues that IPPs compare favourably with new future electricity sources that BC Hydro is contemplating, such as the proposed $7.9 billion Site C expansion dam on the utility's Peace River system, which carries an estimate of electricity costs ranging from $87 to $95 per megawatt hour.
BC Hydro is now buying electricity from 68 IPPs, some that date back to the 1980s, but most of which have been built since 2000.
And according to rough estimates based on BC Hydro's initial rate application to the B.C. Utilities Commission, the utility's payments to those projects ranged from a low of an average $38 per megawatt hour for the three small projects commissioned in a 2000 request for supplies to an average $110 per megawatt hour for four projects delivering bioenergy.
However, Frank Lin, manager of commercial and portfolio management for BC Hydro, cautioned that those rough estimates calculated by The Sun reflect payments, and anticipated payments, to producers and don't include other costs that BC Hydro must recover in its rates.
Lin pointed to a chart in BC Hydro's rate application showing that its overall average cost for IPP power was $64 per megawatt hour in 2010, and was forecast to rise to $79 per megawatt hour as BC Hydro integrates more of the clean-power projects that were accepted as part of the 2008 clean-power call.
And while BC Hydro has used IPP power to fill its needs, there are costs to integrating the electricity into its system because it limits how the utility can use its reservoirs to trade electricity when it is most advantageous, said Cam Matheson, executive director of electricity planing and procurement at BC Hydro.
"We're predicating the volumes acquired based on customer-demand forecasts," Matheson said, adding that successful bidders are selected on the basis of having the lowest rates for the type of electricity they're looking for.
However, Matheson said many of the projects that generate run-of-river hydro electricity do provide power in the spring at the same time BC Hydro has a wealth of its own electricity, which sometimes creates surplus supplies that it has to "push out into the markets" at low prices.
Or, it uses that electricity within BC Hydro's system, which saves it from having to run its own generating stations and allows it to store water in reservoirs for future use.
But Matheson said that need restricts BC Hydro's ability to use the reservoirs strategically by not running power stations when power on the open market is cheapest, such as at night, and turning them on again at peak demand periods when the price they can get is most expensive.
"We aren't at the limit of [integrating IPPs]," Matheson said, "but there is a cost when we have to divert the system away from what it now would be doing, which is optimizing the value of water in the open market by buying and selling at attractive times."
And that limitation is a key criticism of IPP opponents.
"The advantage BC Hydro has is its ability to play the market, and to give that up for ideological reasons is short-sighted," said John Horgan, NDP energy critic and MLA for Juan de Fuca.
Horgan maintains that much of BC Hydro's need for IPP electricity has been driven by government policies, such as the goals that it has set for sourcing non-greenhouse-gas-emitting electricity and energy self-sufficiency, which directs BC Hydro to, by 2016, build up enough surplus power sources inside the province to carry B.C. through its worst drought year.
At BC Hydro, Matheson said under government's self-sufficiency policy, the utility would be left with a lot of surplus electricity that it would have to sell on the open market and "you're at the mercy of the markets as to what you can recoup."
However, he noted that the panel's recommendation suggests that BC Hydro "should sit down and figure out what would be a more cost-effective planning criteria for ratepayers."
Horgan said a better step for the province to meet its electricity needs before resorting to IPPs would be for B.C. to repatriate the benefits that U.S.based utilities owe the province under the Columbia River Treaty.
B.C. gets credit for the Columbia River water it is storing in reservoirs on the Canadian side of the border that is used to generate electricity in Washington and Oregon. According to BC Hydro's 2011 annual report, the so-called downstream benefit amounts to about 4,400 gigawatt hours of electricity.
Horgan noted that BC Hydro trading subsidiary Powerex now sells the downstream benefits on B.C.'s behalf, and the proceeds go into government general revenue.
"But Powerex could sell it to BC Hydro and it could be used domestically," he added.
As for new sources of electricity, Horgan believes BC Hydro should be guided by market prices and be freer to buy cheap electricity on the open market, even if the sources of that electricity might be fossil fuels.
"I want to buy inexpensive power to meet our domestic needs when we have to," Horgan said. "And if we must buy [carbon] offsets for that, I'm probably okay too. It's still probably going to be cheaper than buying high-cost private power."
With files from Gordon Hoekstra, Vancouver Sun
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