The public-private power debate
COMMENT: Patrick Brethour didn't dig deeply enough in this examination of private power in British Columbia. Let's take a look at some of his points.
1. "Plutonic can build its plant more cheaply than B.C. Hydro could hope to do," says Plutonic's Donald McInnes.
A. There's no foundation for this argument. The single largest cost, apart from the fixed asset itself and its construction, is the cost of borrowing, and BC Hydro's borrowing rate is lower than that of any IPP. Managed properly, the tendency of public projects to get fat and inefficient can be controlled (okay, I concede that's a challenge). But where they exist, additional costs with public projects generally go to things that in the end have a public benefit - greater environmental monitoring, workplace safety, quality control. Irrespective of the reason, additional costs in the public sector in the end go to employment. Not a bad thing.
2. "All the options for green power, critical if B.C. is to have a prayer of meeting its goals for reducing emissions of greenhouse gases, are expensive."
A. BC generates very little of its power from fossil fuel sources. Reducing emissions from power generation in BC is a straw man argument. We need to reduce emissions from a host of other activities, notably transportation, but not from electricity generation. We do, however, need to ensure that we don't add any fossil fuel generation sources.
Nevertheless, conservation is the least expensive form of new generation, it's as clean as power gets, and it has no infrastructure or environmental impact. For this reason, the provincial government's target that by 2020 fifty percent of new power in BC will come from conservation, is to be applauded.
New green power sources do not reduce BC's greenhouse gas emissions.
3. Brethour lets Plutonic's McInnes set up the final argument. Unfortunately, it's a gem of reductio ad absurdum, and not a little bit whiny. "It's very two-faced, this debate. I don't know what the naysayers would have us do - live in a cave, or continue to rely on imported coal-fired power for God's sake."
A. So that's it. We rely on coal-fired power, or we live in caves. Or we go with the BC private power model. Darn hard choice, Mr. McInnes.
Let's get the perspective in perspective. BC relies on its huge hydroelectric capacity, not on imported coal-fired power. BC does buy some coal-fired power, but it's not what we rely on.
And caves as the only other alternative? I think NOT. We'd have to import or build enough caves, for starters, and the greenhouse gas implications and environmental impacts would be devastating. The scale would dwarf the oilsands. So that's not going to work.
Or perhaps we could change the private power model. How about developing new projects as publicly owned entities? Not as an ideological point, which is what Mr. Brethour has suggested, but in the economic interests of the people of BC. We could hire private builders to build them, just like Plutonic is doing. The green energy is created. The jobs are created.
5. Matt O'Brien of Connor Clark & Lunn pointed at the one big benefit that private energy investment gets in BC - a risk free deal. "Too much deregulation is too much of a good thing - the vagaries of the free market..."
A. If BC's IPPs had to find their own customers and market their own power in the province, there wouldn't be a private penny invested here. Reason number one: they're producing the most expensive power in North America. Who'd buy it? Well, that's where government-ordered subsidies come in. BC Hydro has to buy this power because government policy requires it. In no other environment would this scenario work for private investors.
It's for this reason that the other straw man argument is without substance. IPPs are not producing power for the "US market" or a "market" at all. Energy markets wouldn't touch this stuff. IPPs in BC are producing for BC Hydro, and no-one else.
As to what's in the economic interests of the people of BC...
To generate new green power in BC, BC Hydro's marginal cost would likely be close to what it is paying the IPPs. And all of BC Hydro's costs, don't forget, are from revenues paid by electricity ratepayers in BC - you and me.
When an IPP is paid, any surplus over cost is return-on-equity, or profit, that accrues to private shareholders. If it were BC Hydro developing the project, that surplus would accrue to British Columbians, in one form or another.
British Columbians would own the facility. So at the end of the amortization period, when the net cost of power from the project plummets, British Columbians would be beneficiaries of that cheap power, as we are of the heritage assets in BC. Instead, with an IPP owning the fully paid-off facility, the cost of power remains the market price for electricity, and it's all gravy for shareholders.
The public-private power debate
PATRICK BRETHOUR
Globe and Mail
November 2, 2007
VANCOUVER — Electricity in Alberta is a roller coaster of a free market, with entrepreneurs able to ride the hourly ups and downs in prices. British Columbia's take on private electricity is more of a merry-go-round: slow moving, predictable and just a little boring.
But boring works nicely, when it comes to projects with half-century life spans costing a half-billion dollars. The wild ride of Alberta held little attraction for Matt O'Brien, president of Connor Clark & Lunn Infrastructure Ltd., as he looked at where to make the firm's first investment in a power project.
"You're taking quite a bit more risk investing in new capacity in Alberta than you are in B.C. in the current context," says Mr. O'Brien, whose firm announced its debut in B.C. last week with an investment in the 150-megawatt Harrison Hydro project in the south of the province.
Both B.C. and Alberta are counting on billions in private capital to create much-needed generation capacity, but the two provinces have taken far different approaches. In B.C., any investment is taking place under the wing of B.C. Hydro, which remains a Crown corporation and centres on giving investors price guarantees for up to 40 years, usually on run-of-river hydroelectric projects.
For Connor Clark & Lunn, too much deregulation is too much of a good thing - the vagaries of the free market translate into higher risk that is ill suited for debt repayment and amortization periods stretching over decades. Or to put it more bluntly, projects that can make money in B.C. won't pass muster in Alberta, because the cost of capital is higher.
The guaranteed price granted to these independent power projects is substantially higher than what B.C. consumers pay, and far greater than the operating costs of B.C. Hydro's existing network of large hydroelectric projects. The many opponents of the independent power projects - and even some supporters - like to paint those prices as a gold rush. After all, if it costs B.C. Hydro a half cent to produce a kilowatt-hour of power, and private producers are paid 8 cents, isn't that a windfall? (Or rip-off, take your pick.)
The answer is a resounding, if somewhat complex, no. The first mistake that opponents make is to suppose that the cost of electricity is higher because of who is building the projects - private companies - instead of what they are building, green power. The simple fact of the matter is that all the options for green power, critical if B.C. is to have a prayer of meeting its goals for reducing emissions of greenhouse gases, are expensive, with the limited exception of geothermal energy.
Donald McInnes, vice-chair and chief executive officer of Plutonic Power Corp., oozes frustration when he hears the all-too-familiar accusation of a sweetheart deal. Yes, Plutonic will be paid an average of 8 cents for each kilowatt-hour it produces, above the 6 cents that B.C. Hydro can charge consumers. But inflation will take a bite out of that gap every year, with Plutonic's price rising by only half of the CPI annually. Besides, he says, Plutonic can build its plant more cheaply than B.C. Hydro could hope to do.
Mistake No. 2 is the notion that private companies are itching to export B.C. power to the United States, a wildly off-base accusation. Again, the facts fall a little short of the conspiracy theory.
The minimum term of a contract - during which no exports are allowed at all - is 15 years. Companies would, in theory, be allowed to export power after that, but there's no indication anyone wants to. Transmission capacity is one issue, but even more important are the implacable demands of the balance sheet. High debt loads and risky price swings aren't a good match. Tellingly, the length of contracts has grown in the most recent bidding round, with most firms opting for a 30- or 40-year term, compared with a typical 20-year term in the previous round. Those aren't the actions of companies looking to hustle electricity out the back door.
So, why the public furor in British Columbia over private power investment? Part of the explanation certainly has to do with the environmental effects of run-of-river projects, a legitimate enough point but one that skirts the hard question of what could take their place.
But there seems to be a wider objection, a latent hostility to the idea of any involvement of the private sector - particularly stunning since B.C. is taking a far more hands-on approach than laissez-faire Alberta. It's all very frustrating for Mr. McInnes, who says he can't understand the hostility to a limited role for business when there is such a pressing need for investment. "It's very two-faced, this debate. I don't know what the naysayers would have us do - live in a cave, or continue to rely on imported coal-fired power for God's sake."
Posted by Arthur Caldicott on 02 Nov 2007