"Zapping" Back: Clean Energy BC Responds to Critical Review of BC Hydro's Purchase of Power from BC IPPs

In a document released March 21, 2019 (the “Response”), the Clean Energy Association of BC (CEBC) has responded to a critical report released in February that alleged that BC Hydro, in entering into agreements to purchase energy from independent power producers (IPPs) in British Columbia, “bought too much energy, paid too much for the energy it bought, and undertook these actions at the direction of the Government”.

The “Zapped” Report

The Response aims to rebut various assertions made in a recently released report commissioned by BC’s Minister of Energy, Mines and Petroleum Resources, entitled “Zapped: A Review of BC Hydro’s Purchase of Power from Independent Power Producers” (“Zapped”). In Zapped, author Ken Davidson strongly critiques the procurement of power from IPPs by BC Hydro and lays the blame squarely on the government policies, legislation and directives that Zapped concludes had driven misguided energy practices.

Zapped asserts that while BC Hydro began purchasing power from IPPs in the mid-1980s at low volumes and without impacting market prices, this practice evolved in the early 2000s, starting with the 2002 BC Energy Plan, which directed BC Hydro to purchase energy from IPPs rather than constructing its own power-generation facilities, and continuing with the 2007 BC Energy Plan, which mandated (1) that at least 90% of all energy generated in BC be from “clean”, renewable sources and (2) that the province become self-sufficient, meeting power demands from facilities within the province. Zapped states that the 2007 BC Energy Plan also directed BC Hydro to price energy procured from IPPs at set prices based on its most recent power call, rather than by market value. When combined with various government directives to BC Hydro to change its energy planning processes in a manner that, according to Zapped, “created the appearance of an urgent need” for 8,500 GWh per year of new firm energy, Zapped concludes that BC Hydro was left with no option other than to meet inflated power demand by procuring energy in earnest through electricity purchase agreements (EPAs) with IPPs at non-market rates that delivered non-firm energy in excess quantities.

Zapped also alleges that the BC government had been advised by early 2009 that energy prices could be expected to drop as gas production volumes increased from shale gas and fracking sources and that industrial load was declining, but that it nonetheless proceeded with procurement of energy from IPPs at a premium Zapped concludes was “far in excess” of what would have been sufficient to incentivize IPPs. According to Zapped, BC Hydro could have avoided purchasing 8,500 GWh of energy per year—which Zapped concludes it does not need—had the government responded properly to market changes and directed BC Hydro accordingly.

Zapped also critiques BC’s 2010 Clean Energy Act, which exempted a number of major capital projects and programs, including the Site C dam and the power calls and standing offer program pursuant to which BC Hydro entered into EPAs with IPPs, from the need for approval by the British Columbia Utilities Commission (BCUC), the regulator tasked with balancing energy ratepayers’ interests in receiving reliable energy at fair rates with service providers’ interests in earning a fair return on their investments. Zapped contends that “the effect of this change was to move the approval of all the projects into the unfettered control of the Government, without the independent oversight and protection for ratepayers typically provided by BCUC.” Simultaneously, Zapped claims, the Clean Energy Act severely limited the ability of the BCUC to approve rate proposals, since it required the BCUC to approve rates sufficient for BC Hydro to recover the costs of energy procurement from IPPs that the BCUC had not had the opportunity to approve.

Zapped draws three overarching conclusions: that BC Hydro bought too much energy and energy with the wrong profile, that it paid too much for the energy it bought, and that it undertook these actions at the direction of government without BCUC oversight.

Zapped pegs the financial impact of the EPAs entered into with IPPs as a result of the government directions critiqued in the report at an estimated $16.2 billion over 20 years—the period during which Zapped estimates BC Hydro is unlikely to require all of the purchased energy—with an estimated annual impact of $808 million per year or approximately $200 per year per residential ratepayer over that term. Moreover, Zapped claims that even if energy demand grows such that the additional load is required, BC Hydro will lose an additional ~$6.8 billion selling energy to ratepayers at rates lower than the rates BC Hydro has contracted to pay IPPs for that energy.

Zapped also critiques the inflation protection mechanisms in EPAs with IPPs, which in some cases provide full Consumer Price Index (CPI) protection to the applicable IPP. This is notably the case for the 60-year EPAs for the Forest Kerr, Volcano, and McLymont Creek hydroelectric projects, for which Zapped states that the estimated impact of inflation risk could potentially add another $1 billion in estimated costs over the next 20 years and incremental inflation risk over the balance of the EPA terms of approximately $7 billion.

Report Recommendations

While Zapped notes that there is no quick fix to the problems it identifies, it sees opportunities to address them when EPAs expire by renewing the EPAs on a market-rate pricing basis. In the case of EPAs that relate to projects offering intermittent energy, Zapped recommends that BC Hydro offer to renew EPAs only at the applicable “Mid-C” rates (the price at which energy trades at the Mid-Columbia power trading hub), and for terms of only five to ten years. This would constitute a significant shift from the EPA renewals BC Hydro has engaged in to date, which Zapped states have considered the IPP’s cost of service and rate of return in rate-setting.

Rather than engage in bilateral negotiations with IPPs, Zapped recommends that BC Hydro determine a single commercial proposal to present to all IPPs upon EPA renewal. Although it states that the province faces a projected energy surplus until sometime in the 2030s, Zapped recommends that BC Hydro renew all EPAs if it can align future energy prices under the EPAs to Mid-C rates and rely on Powerex Corporation (BC Hydro’s electricity marketing subsidiary) to trade excess power in the interim at Mid-C rates.

If IPPs feel they can get a better price for their energy than Mid-C rates, Zapped asserts that they have the option to trade energy directly in the market, but that the costs of shaping and firming energy would then fall on the applicable IPP.

To the extent that an IPP cannot meet its operating costs at the Mid-C rate, in an effort to control site remediation, Zapped recommends that BC Hydro take into account potential liquidation scenarios in its commercial arrangements with IPPs, offering to purchase at a pre-set percentage of original cost the assets and undertakings of any failing projects that do not result in sales to third parties.

In the case of biomass EPAs, Zapped recognizes ancillary benefits, such as support for the forestry sector and communities and use of wood waste, that would be lost in the case of a project failure, and therefore suggests that current biomass EPAs will likely need to be renewed at a rate above Mid-C in the short term. Zapped therefore suggests that the policy rationale for what the report considers non-commercial terms may need to be the subject of a government directive and the renewal terms exempt from BCUC oversight for a period.

Zapped also recommends:

  1. Reversing the “self-sufficiency” mandate that Zapped says interfered with BC Hydro’s energy planning processes, allowing a reasonable level of trading by Powerex and not requiring “insurance” energy availability.
  2. Terminating BC’s Standing Offer Program by legislative action.
  3. Improving transparency of non-commercial transactions involving BC Hydro that are mandated by government, to avoid the potential for provincial expenses to be “buried” in BC Hydro and passed on to ratepayers in rate increases. Zapped recommends that BC Hydro be required to disclose any difference between Mid-C and contracted energy rates and any case where the business case supporting procurement of energy is not commercial. As part of this, Zapped recommends transparency with respect to any Impact Benefit Agreements entered into between BC Hydro and First Nations that relate to energy procurement.
  4. Reinstating the full oversight mandate of the BCUC and reversing the changes implemented through the Clean Energy Act.
  5. Caution with solar and wind energy projects. Zapped concludes that it is unlikely that wind and solar energy can be generated in a competitive manner in BC under current conditions, and that BC Hydro holds sufficient “green certified” energy to meet limited trading opportunities with California. As such, it recommends scrutiny of any business case for new IPP projects on the basis of producing green-certified energy for export.

As a whole, Zapped constitutes a sharp rebuke of government policies, legislation and directives with respect to BC Hydro’s energy planning and purchasing practices from the early 2000s onward. If its recommendations are implemented, Zapped is likely to have a significant impact on the renewal terms and process for EPAs reaching the end of their terms. Its impact is already being felt: BC Hydro swiftly followed up Zapped’s release by announcing that its Standing Offer Program has been suspended indefinitely as of February 14, 2019, and its publication coincided with the release of the Phase 1 Final Report of the Comprehensive Review of BC Hydro by the Ministry of Energy, Mines and Petroleum Resources.

CEBC Response

Not surprisingly, Zapped’s conclusions and recommendations elicited a strong response from participants in BC’s IPP community, including CEBC. In the Response, CEBC sets out to rebut a number of assertions in Zapped, which it dismisses as “a political document designed to make news headlines.” In particular, the Response critiques the three figures factored into Zapped’s calculation that EPAs entered into with IPPs since 2007 will cost BC ratepayers an unnecessary $16.2 billion over 20 years: Zapped’s estimate of 9,500 GWh per year of “unnecessary” and “forced” energy demand, its use of the Mid-C rate to calculate the cost of that surplus energy, and the duration of that surplus volume.

The Response counters Zapped’s allegation that the 2007 BC Energy Plan was intended to create the appearance of an energy shortfall, pointing instead to statements and figures indicating that the self-sufficiency mandate in the plan was a response to high levels of importation of energy at spot-market prices over the years preceding the plan and a determination that acquisition by BC Hydro of an additional supply of “insurance power” beyond projected load growth would be prudent. The Response argues that the calls for IPP energy in 2008 and 2009 were based on BC Hydro forecasts of load growth at the time (which the Response claims remained bullish through 2010) and that BC Hydro, like many utilities, businesses and financial organizations, did not and could not have foreseen the dramatic and long-lasting impact of the 2008 financial crisis on load growth in BC. As EPAs entered into after August 2010 totalled only 40% of the 9,500 GWh “unnecessary” energy figure used in Zapped to calculate the impact on ratepayers, the Response suggests that the calculated impact is considerably inflated.

The Response also counters assertions in Zapped that the 2007 BC Energy Plan required BC Hydro to close down the Burrard Thermal Generating Station and that the plant was as clean or cleaner than gas generation relied on in California today, stating that the plan only mandated reduced use of the plant and that the aging facility was outdated, inefficient and expensive to operate, in addition to producing higher greenhouse gas emissions than the average plant.

The Response also critiques Zapped’s use of Mid-C rates to calculate the amount by which Zapped alleges BC Hydro has overpaid for the energy it has agreed to purchase under EPAs with IPPs, claiming that volatile spot prices such as Mid-C are not used by utilities or other relevant industry players as the basis for building new electrical generation projects, since they provide none of the assured return on capital necessary to obtain financing to build an energy project; instead, competitive calls are issued and long-term EPAs are entered into with the lowest bidders to ensure security of supply and price for the utility and return on capital for the energy project. The prices arrived at by this competitive process, the Response emphasizes, are market rates. The Response points out that the Mid-C rate was not used as a comparator for the Site C project or other new projects and asserts that it is not used by the BCUC, Canadian Environmental Assessment Agency or other utilities. Accordingly, the Response claims the use of Mid-C rates as a measure of overpayment by BC Hydro for IPP power is misguided and that, in any event, the $25/MWh Mid-C price used in Zapped is too low, given that it is less than half of the $54/MWh forecasted average Mid-C price between 2020 and 2040 suggested by BC Hydro’s Mid-C forecasting.

Lastly, the Response argues that on the basis of both historical and forecast surplus figures from BC Hydro, Zapped inflates the province’s actual and expected energy exportation. The Response asserts that between 2009 and 2018, the total of the actual net exported energy surplus based on BC Hydro figures was 15,531 GWh, versus the 95,000 GWh estimated in Zapped, and that between 2019 and 2028, the forecast total exported surplus, after deducting Site C, is expected to be 7,925 GWh, versus Zapped’s estimate of  95,000 GWh, which is 12 times higher. Cumulatively, the Response estimates that surplus energy exports will amount to only 12% of Zapped’s estimate.

In light of its critique of these three measures used to calculate the estimated $16.2 billion overspend claimed in Zapped, the Response claims that the estimate is “totally incorrect and unfounded”.

The Response also appends responses to Zapped with respect to BC’s wind power and solar power industries. The wind response argues that Zapped failed to consider the “current economic and technical reality” that it claims has led costs for utility-scale wind and solar energy to decline to a price below most other alternatives, while the solar response claims that Zapped’s dismissal of BC’s solar energy industry and potential is “misleading and unfounded”.

While the Response does not attempt to rebut all of the claims or recommendations made in Zapped, its focus on the figures factored into Zapped’s assertion that the actions, agreements and policies it critiqued would cost BC ratepayers an unnecessary $16.2 billion over 20 years provides a detailed counter-argument to one of Zapped’s most headline-grabbing conclusions.

BC Hydro BC government rates Power hydroelectricity Energy BC Utilities Commission BCUC Standing Offer Program SOP Clean Energy Association of BC CEBC Zapped Independent Power Producer IPP Ministry of Energy, Mines and Petroleum Resources Clean Energy Act Site C electricity purchase agreement EPA

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