Canadian Power – Key Developments in 2019, Trends to Watch for in 2020: British Columbia - Overview
The following is a chapter from our Power Group's fifth annual Canadian power industry retrospective Canadian Power - Key Developments in 2019, Trends to Watch for in 2020. A form to request a PDF copy of the publication is available at the end of the article.
2019 proved to be another year of transition for B.C.’s power sector. Following the completion of Phase 1 of its comprehensive review of BC Hydro early in the year, the provincial government embarked on its second stage, which will involve a deeper assessment of the province’s energy policy and markets, utility models, and emerging technologies. At the same time, BC Hydro’s historical power purchases from independent power producers (“IPPs”) were the subject of a highly critical government-commissioned report, which further reinforced the continuing moratorium on power procurement opportunities in the province. Meanwhile, development activities for the province’s two largest energy projects continued, with construction beginning in earnest for LNG Canada’s liquid natural gas project in Kitimat following its final investment decision in October 2018 and key construction milestones being achieved for BC Hydro’s 1,100 MW Site C Project as both projects target a 2024 in-service date. In the face of these developments, the provincial government continued to pursue its CleanBC climate strategy, aimed at further electrifying the province’s large industrial operations and accelerating the adoption of zero-emission vehicles. Finally, the B.C. government enacted historic legislation committing it to align provincial laws with the United Nations Declaration on the Rights of Indigenous Peoples and, further to the achievement of this goal, substantially updated its environmental assessment processes to incorporate Indigenous considerations at all stages.
Government Review of BC Hydro Moves into Second Phase
In February 2019, the B.C. government completed Phase 1 of its comprehensive review of BC Hydro, the province’s public electric utility (the “Review”). The B.C. government initiated the Review in June 2018 with the objective of developing a plan for BC Hydro to contain electricity rates in the long term and to ensure sound financial and regulatory oversight of the public utility.
A number of significant actions were taken as a result of the Phase 1 report, including the following:
Restored Authority for BCUC
The B.C. government restored or enhanced the regulatory oversight of BC Hydro by the British Columbia Utilities Commission (“BCUC”) following years of curtailment of this authority under the previous government. The BCUC now has the power to review the scope and amortization of most of BC Hydro’s regulatory accounts, which determine BC Hydro’s net income for rate-setting purposes (following a two-year transition period), and set electricity rates. The BCUC will also have the authority to review and approve BC Hydro’s integrated resource plan (“IRP”), the utility’s 20-year projection of electricity demand in the province and plan to meet this need, the next of which is due in February 2021.
Reform of Regulatory Accounting
The B.C. government has written off the entire balance of BC Hydro’s approximately $1.14 billion Rate Smoothing Regulatory Account, which was established to defer collection of revenues from ratepayers to later fiscal periods, effectively transferring the burden of the account from future ratepayers to current taxpayers. The B.C. government also repealed the Deferral Account Rate Rider (“DARR”), a 5% surcharge on ratepayer bills used to pay down BC Hydro’s three energy deferral account balances.
Revised Rates Forecast
BC Hydro revised its five-year cumulative electricity rates increase forecast (through fiscal 2024) downward to 8.1% over the next five years, which represents a cumulative decrease of 5.6% for the same period established under the previous electricity rates forecast, to be achieved by a combination of measures, including a $2.7 billion reduction in capital expenditures over ten years, reduction in operating costs, a phase-out of electricity purchase agreements (“EPAs”) with biomass generating facilities, pursuit of additional revenue streams, and cancellation of new procurement under the utility’s Standing Offer Program, which was aimed at renewable energy projects with capacities under 15 MW.
BC Hydro Five Year Rates Forecast (Fiscal 2020 – Fiscal 2024)
© Source: BC Hydro
The Review process has now moved into its second phase, which will take more of a long-term, transformation-oriented view, looking at evolving energy markets and trends, new utility models and emerging technologies, as well as opportunities to reduce carbon emissions through electrification, with the goal of developing recommendations for how BC Hydro can accomplish the provincial policy objectives laid out in the CleanBC plan and support the province in meeting its legislated 2030, 2040, and 2050 greenhouse gas reduction targets. Phase 2 will consider potential impacts of North American energy and market trends, current and future customer needs, evolving technologies and utility structures, affordability of electricity, and opportunities to involve Indigenous peoples and communities. Its findings will inform the next provincial IRP.
As part of its efforts to explore new revenue streams, BC Hydro is implementing strategies to grow domestic electricity demand by, for example, attracting energy-intensive customers such as data centres, cryptocurrency mining, and cannabis producers; considering increased sales of low-carbon fuel credits; and exploring the possibility of offering current industrial customers year-round access to real-time, market-based pricing for incremental energy purchases.
Electricity Procurement in 2019: Still on Hold
In the wake of the completion of Phase 1 of the Review, and the concurrent release of a highly critical government-commissioned report on BC Hydro’s historical purchases of power from IPPs, a number of measures were announced by the utility aimed at reducing its costs and maintaining low rates. Chief among these was to reduce future energy purchases from IPPs. Indeed, the Phase 1 report took pains to emphasize that future in-creases to BC Hydro’s energy costs are being driven primarily by increasing costs under EPAs, which are set to rise by 5.6% between 2019 and 2021 due to price escalation clauses.
Accordingly, in February 2019, BC Hydro indefinitely suspended its Standing Offer and Micro Standing Offer Programs and stated that it would no longer accept new applications or award any new EPAs under those programs (excluding five First Nations clean energy projects announced in March 2018 and discussed in last year’s edition of this publication). In addition, the Review concluded that biomass EPAs set to expire in the coming years would be phased out following a transitional period designed to minimize the impact on the province’s forestry sector.
Another key cost-reduction initiative has been the cancellation, deferral or downsizing of existing EPAs. Since 2014, BC Hydro has either terminated or not renewed 19 EPAs, and has negotiated reductions or deferrals to 13 EPAs. Going forward, EPA renewals will be made more selectively, at lower prices, and for shorter periods. Since 2016, BC Hydro has renewed seven hydro EPAs through bilateral negotiations. Rather than adopting Standing Offer Program pricing as some IPPs might have hoped, BC Hydro has been seeking significantly lower pricing based on electricity spot prices and the developer’s cost of service, including an acceptable rate of return on incremental invested capital.
BC Hydro’s current plan is to renew roughly three-quarters of existing run-of-river EPAs set to expire by 2024. Developers seeking renewals may have leverage where a project is deemed to be “strategic” to BC Hydro, such as where the project is close to a load centre, has an energy profile that matches peak load months, is able to provide standby resources from storage capacity, or serves a remote or off-grid community.
BCUC Review of EPA Renewals
As we noted in our publication last year, in May 2018 BC Hydro applied for BCUC approval of renewed EPAs entered into in respect of three hydroelectric projects – Sechelt Creek Hydro, Brown Lake Hydro and Walden North Hydro – whose original EPAs date back to the early to mid-1990s.
In October 2018, BC Hydro obtained BCUC approval to suspend the regulatory timetable for the EPA renewal applications until four weeks following the release by the government of the Phase 1 report of the Review. Following the release of the Phase 1 report in early 2019, BC Hydro filed its arguments in July and September 2019, and the BCUC released its decision on November 8, 2019.
In its decision, the BCUC considered four topics in connection with the EPA renewals: (i) the duty to consult Indigenous groups; (ii) qualitative benefits of the projects; (iii) resource planning and the need for energy; and (iv) cost effectiveness. With respect to the first two topics, the BCUC found that BC Hydro’s duty to consult Indigenous groups was not triggered by any of the EPA renewals because there are no anticipated adverse impacts on Indigenous rights or title, and it recognized the importance of the additional benefits provided by each of the EPA renewals to both the local Indigenous and non-Indigenous communities. However, with respect to the third and fourth topics, the BCUC found that there is insufficient evidence to support an approval of the EPA renewals.
In considering resource planning and the need for new energy, the BCUC noted that BC Hydro’s most recent IRP from 2013 is outdated, with a new IRP expected from BC Hydro in 2021, and that the Phase 1 report of the Review stated that BC Hydro is currently forecast to be in an energy surplus into the 2030s. Therefore, the BCUC determined that, in the absence of a new IRP, there is insufficient evidence that BC Hydro has a need for the energy from the EPA renewals over their 40-year terms.
In considering cost effectiveness, the BCUC again focused on the 40-year terms of the EPA renewals, and found that ratepayers are exposed to a significant level of risk due to the uncertainty in market prices and potential changes in the energy industry in general over this time period. Therefore, the BCUC determined that there is insufficient evidence that the EPA renewals are cost effective over their 40-year terms.
As a result, while acknowledging the benefits the projects provide to their local and Indigenous communities, the BCUC found that, in the absence of an updated IRP, it was unable to determine that the EPA renewals are in the public interest over their 40-year terms. Importantly, however, the BCUC declined to make a determination that the EPA renewals are not in the public interest, and stated that it is prepared to consider accepting the EPA renewals for periods shorter than 40 years to allow for the conclusion of the next IRP process, at which time there may be further clarity on BC Hydro’s long-term energy needs and supply alternatives to meet demand.
Accordingly, the BCUC adjourned the proceeding for 60 days to allow BC Hydro and the counterparties to restructure and resubmit the EPA renewals with a term not to exceed three years, if they so choose. Given the BCUC’s decision with respect to these EPA renewals, it appears that any new EPA renewals will need to be for a similarly short term until BC Hydro’s new IRP is approved, at which time there may be a basis for longer-term renewals if long-term supply is supported by the new IRP.
The province’s nascent liquefied natural gas (“LNG”) export industry received a boost with the announcement in March 2019 of a new tax credit regime whose effect will be to reduce applicable corporate tax rates from 12% to 9%, while replacing the prior LNG tax regime that was seen by many as a barrier to project investment.
Site C Project Update
Construction continues to progress on the $10.7 billion, 1,100 MW Site C project on the Peace River in Northeastern BC, with the project reportedly hitting a concrete placement milestone months ahead of schedule. The most recently released employment figures show that the project employed 4,823 people in October 2019, approximately 75% of whom were workers from B.C. The project missed a key milestone for timing of diversion of the Peace River due to geotechnical issues that resulted in a one-year delay and increased project costs, but BC Hydro has indicated that Site C is still expected to meet its target in-service date of November 2024. On completion, the project is expected to produce 5,100 GWh of electricity per year for the province.
Site C has faced numerous legal challenges but has prevailed in all 15 court actions so far. In an ongoing civil action, West Moberly First Nations allege that the project unjustifiably infringes their Treaty 8 rights and seek relief including a permanent injunction against completion and operation of the project. In October 2018, the B.C. Supreme Court refused an application by West Moberly for an interlocutory injunction to enjoin certain work on the project pending resolution of their civil claim, but directed that the trial should conclude by no later than mid-2023 such that a judgement could be rendered in advance of reservoir flooding, which is presently scheduled for Fall 2023. Prophet River First Nation is also continuing with its parallel civil action to West Moberly, similarly alleging infringement of its Treaty 8 rights. In February 2019, the B.C. government, BC Hydro, West Moberly and Prophet River agreed to enter into confidential discussions to seek alternatives to litigation, which discussions have apparently been unsuccessful to date.
Following the announcement of its final investment decision (“FID”) in October 2018, LNG Canada – a joint venture between Shell Canada, PETRONAS, PetroChina, Mitsubishi Corporation and KOGAS – set to work on the construction of its $40 billion LNG facility in Kitimat, British Columbia. Key activities undertaken in 2019, include dredging in Kitimat harbour to prepare the existing port for larger vessels, environmental offsetting programs (including the creation of salt marshes, a fish ladder, and the diversion of the Kitimat River to offset the environmental impact of construction-related work) and site preparation for Cedar Valley Lodge (the project’s long-term workforce accommodation centre and associated facilities), which is targeted to open in the first half of 2020.
Pursuant to an electricity supply agreement entered into with BC Hydro in 2014, the LNG Canada project is expected to draw approximately 2,000 GWh/year of electricity from BC Hydro’s grid to power its ancillary (non-liquefaction) activities. With LNG Canada targeting a 2024 completion date, this new load is expected to coincide with Site C’s targeted in-service date.
Pacific Oil and Gas Ltd.’s Woodfibre LNG project, which announced a positive FID in November 2018, also continues to achieve milestones in the development of its 2.1 million tonne per annum, $1.6 billion LNG project near Squamish. Having received a key facilities permit in July 2019, the project continues to progress toward construction with a view toward achieving an in-service date in 2023.
The most significant pre-FID LNG project remaining is Kitimat LNG, a 50/50 joint venture between Chevron Canada and Woodside Energy, which comprises the 471 km Pacific Trail Pipeline and a natural gas liquefaction facility at Bish Cove near Kitimat. The Kitimat LNG plant includes up to three LNG trains totalling 18 million tonnes per annum. Significantly, the project has committed to powering its liquefaction and ancillary activities entirely with electricity, which according to its proponents, would enable Kitimat LNG to achieve the lowest emissions intensity of any large-scale LNG facility in the world.
In early December 2019, the Canada Energy Regulator approved Kitimat LNG’s application to increase its size to 18 million tonnes per annum and extend its export licence from 20 to 40 years. Shortly thereafter, Chevron Canada announced that it plans to exit its investment in Kitimat LNG and intends to commence soliciting expressions of interest for its 50% interest in the project.
In its most recent load forecasts, BC Hydro has estimated the province’s prospective LNG load at 2,700 GWh, based solely on the LNG Canada, Woodfibre LNG and Tilbury LNG plants. Should the Kitimat LNG project proceed on a fully-electrified basis, the province’s LNG load would significantly exceed this estimate. In its updated project proposal, Kitimat LNG plans for the use of electric motor drives totalling 700 MW, which represents approximately two-thirds of the planned capacity of Site C.
Canada-B.C. Clean Power Planning Committee Established
In August 2019, the governments of Canada and British Columbia entered into a Memorandum of Understanding (the “MOU”) to establish the Canada–British Columbia Clean Power Planning Committee (the “Committee”), whose mandate will be to advance projects that increase electrification and power transmission in British Columbia.
The MOU, which is effective for a five-year term, forms part of a broader effort by both jurisdictions to advance clean power in the province. The Committee will be made up of senior representatives from both jurisdictions as well as BC Hydro. The Committee will also engage with Indigenous groups to help ensure Indigenous views are appropriately reflected in the initiatives set out in the MOU.
The Committee will undertake the following actions in order to achieve its mandate:
- advance natural gas and liquefied natural gas electrification initiatives, including the CleanBC Facilities Electrification Fund, Bear Mountain to Dawson Creek Voltage Conversion project, and North Montney Power Supply project;
- explore other electrification and transmission expansion opportunities, as identified by the participants;
- improve cross-government coordination to connect existing and new funding sources to priorities, and in particular with respect to federal infrastructure funding; and
- develop and consider new and/or alternative financing models to advance priority transmission projects, including potential Indigenous or other private sector ownership and participation by the Canada Infrastructure Bank.
The participants will jointly decide on overall resource levels to devote to the initiatives set out in the MOU. A total of $680 million in near-term electrification projects for joint funding is under consideration.
Clean-BC Initiative Creates Opportunities for Electrification
Launched in late 2018, the B.C. government’s CleanBC initiative seeks to move British Columbia’s energy consumption from fossil fuels to clean energy to help support legislated greenhouse gas (“GHG”) emissions-reduction targets. Increased electrification of the industrial and transportation sectors in the province are major pillars of the strategy.
The CleanBC plan estimates that by 2030, implementation of the policies in the plan will create an additional 4,000 GWh per year of electricity demand over currently projected load growth in order to meet legislated GHG reduction goals, which require a 40% reduction in GHG below 2007 levels by 2030. The increase is equivalent to increasing BC Hydro’s current capacity by approximately 8%.
In May 2019, the B.C. government passed the Zero-Emission Vehicles Act (“ZEV Act”), which requires automakers to meet an escalating annual percentage of new light-duty ZEV sales and leases, with the following mandated milestones: 10% of light-duty vehicle sales by 2025; 30% by 2030; and 100% by 2040.
Zero-Emission Vehicles Act
In addition to ensuring a greater availability of zero-emission vehicles at more affordable prices in the province, the ZEV Act will provide a regulatory backstop to help ensure that provincial GHG reduction targets are met. With the passage of the ZEV Act, B.C. joined a growing number of jurisdictions with ZEV standards, including Quebec, California, and nine other US states, and became the first jurisdiction in the world to legislate a 100% ZEV target.
Together with potential LNG-related load, these prospective sources of increased electricity demand in B.C. have led many industry observers to speculate that B.C.’s state of electricity surplus, projected by BC Hydro to last until 2032, may in fact end much sooner, creating opportunities for IPPs to help meet the increased demand.
Revitalized B.C. Environmental Assessment Process Incorporates Indigenous Considerations at All Stages
In March 2018, the B.C. government launched the process for revitalizing the province’s environmental assessment (“EA”) process, which was followed by the introduction of Bill 51 – Environmental Assessment Act in November 2018. On December 16, 2019, the new legislation (“New EAA”) came into force. The New EAA introduces significant changes to the provincial EA process, including the creation of an early engagement process and prescriptive measures to meet the B.C. government’s commitment to implement the United Nations Declaration on the Rights of Indigenous Peoples (“UNDRIP”). Under the revitalized EA process, Indigenous considerations are incorporated at all stages of the EA review process.
Some of the key Indigenous-related changes to the EA process include the following:
- Indigenous participation in EAs will no longer be driven by reference to the strength of their claim; rather, potentially impacted Indigenous nations will identify themselves during the early engagement phase;
- the Minister may enter into agreements with Indigenous nations for the purposes of conducting any aspect of an EA;
- an Indigenous nation can enter into an agreement with the Minister to conduct the entire assessment on behalf of the provincial government (substitution) provided certain conditions are met; and
- Indigenous knowledge must be applied to decision-making in EAs.
Finally, as an affirmation of the principle of “free, prior and informed consent” (“FPIC”) contained in UNDRIP, participating Indigenous groups will have the opportunity to communicate their consent, or lack of consent, at two decision points in the EA: (1) at the EA readiness phase, to exempt the project from an EA and go straight to permitting, or terminate the process; and (2) whether to issue an EA certificate for the proposed project. In the event consensus cannot be achieved, a dispute resolution mechanism will be available under the Dispute Resolution Regulation, expected to be released in mid-2020. Although ministerial discretion is maintained in respect of all final project approvals, the decision must take into account and provide reasons where consent has not been obtained or decisions do not align.
B.C. Embraces Reconciliation with The Declaration On The Rights Of Indigenous Peoples Act
On November 28, 2019, B.C.’s Declaration on the Rights of Indigenous Peoples Act (“DRIPA”) received Royal Assent. It is the first legislation to be passed in Canada that directs government to implement UNDRIP into law. DRIPA is intended to form the foundation for B.C.’s work on reconciliation. Its three stated purposes are to (i) affirm the application of UNDRIP to the laws of B.C.; (ii) contribute to the implementation of UNDRIP; and (iii) support the affirmation of, and develop relationships with, Indigenous governing bodies. As a framework piece of legislation, DRIPA provides that the province:
- must, in consultation and cooperation with Indigenous peoples, take all measures necessary to ensure the laws of B.C. are consistent with UNDRIP;
- must prepare and implement an action plan to achieve the objectives of UNDRIP and prepare an annual report outlining its progress in implementing the action plan; and
- may, for the purposes of reconciliation, enter into agreements with Indigenous governing bodies in relation to the exercise of a statutory power of decision.
The B.C. government has stated that DRIPA is not intended to immediately affect or change any existing laws; rather, it is intended to be forward-looking, with a gradual and incremental implementation process as laws are introduced or amended in consultation with Indigenous peoples and stakeholders, including business, industry and local government. Accordingly, DRIPA is not expected to result in any immediate changes to the common-law duty to consult framework or to existing regulatory frameworks.
Despite assurances from the province that DRIPA will support economic development through greater certainty for investment while creating a strong inclusive economy, DRIPA’s text and the implementation of UNDRIP into B.C. laws gives rise to numerous questions. Foremost among those is how the principle of FPIC will be interpreted and applied. Several UNDRIP articles address Indigenous land and resource rights, including requirements for states to seek or obtain FPIC from Indigenous groups, including “prior to the approval of any project affecting their lands, territories or resources, particularly in connection with the development, utilization or exploitation of mineral, water or other resources” (Article 32(2)). The B.C. government has repeated its position that it does not view FPIC as equivalent to an unqualified veto right. However, consent could notionally become the standard in certain circumstances, whether through the use of the agreement mechanism under DRIPA, through legislative amendments, or as a condition to granting a project approval. The agreement tool includes express contemplation of a negotiated consent requirement prior to a government decision on matters affecting an Indigenous group. The provincial government’s philosophy towards FPIC under the New EAA, as described above, provides a potential model for applying FPIC in other provincial legislative and regulatory regimes. However, the agreement mechanism under DRIPA and the agreement and decision-making processes under the New EAA all remain discretionary approaches on the part of government. Therefore, the manner and extent to which FPIC is applied will largely depend on the B.C. government’s willingness to allocate certain responsibilities and authority to Indigenous groups, which could be highly contextual.
Although DRIPA is intended to provide the B.C. government with discretionary and incremental approaches in implementing UNDRIP, DRIPA is significant because it imposes an increased level of accountability on the provincial government to make good on its promises. Expectations will be amplified by the unqualified requirement for the government to “take all measures necessary to ensure the laws of B.C. are consistent with” UNDRIP. Such ambitious requirements could expose the government to scrutiny and legal challenges, setting it up for potential failure with regard to the adequacy of its implementation efforts. The challenge for the provincial government going into 2020 will be to advance its commitments through the development of an action plan and priorities in a way that does not stifle investment or create additional uncertainty. To do so, it must manage the enormous expectations that it has created while striking a balance between competing interests.
What to Expect in 2020
Completion of BC Hydro Review
As noted above, Phase 2 of the Review will focus on ensuring BC Hydro is well positioned to maximize opportunities flowing from shifts taking place in the global and regional energy sectors, technological changes, and climate action and to help achieve the electrification goals set out in the CleanBC plan. A final report with recommendations is expected to be completed in early 2020.
Integrated Resource Plan Due in Early 2021
BC Hydro is long overdue in updating its IRP – the long -term plan to meet the province’s future electricity demand through conservation, generation and transmission, and through upgrades to existing infrastructure. Last prepared in 2013, the IRP has been delayed in order to take into account the Review and the province’s emerging energy roadmap, and is now expected to be released in February 2021.
Despite the frozen state of power procurement in B.C. right now, there are a number of forces that could materially reshape the load resource balance in the province, including:
- the large-scale electrification called for under the CleanBC initiative is projected to require an additional 4,000 GWh of energy by 2030 over and above projected demand growth;
- the potential for another major LNG project whose energy needs will likely need to be powered by electricity to align with CleanBC imperatives; and
- the fact that BC Hydro’s forecast of an energy surplus until 2032 is predicated on the achievement of demand-side management savings of over 3,400 GWh of energy, when such targets have historically proven difficult to achieve.
BC Hydro will have to address these contingencies as part of Phase 2 of the Review and the preparation of its IRP.
LNG – Still More to Come?
Despite obtaining regulatory approval for a size increase and extended export license, the all-electric Kitimat LNG project faces uncertainty following the recent announcement by Chevron Canada that it will sell its 50% interest in the project. Stay tuned in 2020 to see who acquires Chevron’s stake and whether the project continues to move closer to FID, which its current proponents estimate will occur in 2022 or 2023.
EPA Renewals: On Hold
Given the BCUC’s decision that it is unable to determine if long-term EPA renewals are in the public interest until updated information is available on BC Hydro’s energy needs and supply alternatives, the fate of long-term EPA renewals will depend heavily on the load-resource forecast being prepared for the IRP due in early 2021.
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