sqwalk.com: Weather, demand blamed for income dip at BC Hydro

Weather, demand blamed for income dip at BC Hydro

Scott Simpson
Vancouver Sun
October 23, 2004

COMMENT:This is the same unoriginal refrain from BC Hydro - we're running out, we're a net importer, we need to build more generation capacity. Come on, Mr. Elton. Let's go over the basic arithmetic again. [1]

In BC, we presently use about 55,000 GWh per year according to BC Hydro. This will rise to about 58,000 GWh in 2013. With "heritage" hydro and thermal capacity, plus existing and new contracted capacity, plus conservation and efficiencies, our generation capacity will exceed consumption until 2013. This is pretty much as it is laid out in BC Hydro's 2004 Integrated Electricity Plan

The "net importer" story that Mr. Elton and Energy and Mines Minister Richard Neufeld never seem to tire of telling, is a different story. The government expects a revenue stream from BC Hydro. In the 2004/2005 budget, it budgeted for about $400 million to net back to provincial coffers. How Hydro does this is clever, it's good busines, and it usually ends up with BC being a net importer of electricity, but an overwhelmingly successful winner on the bottom line, year after year.

This is how it works. During the nght, generation continues in Alberta, Washington and elsewhere.[2] The power generated does not have much of a market, so BC Hydro buys it cheap, and at the same time reduces the water flowing over BC's dams, reducing hydro generation in BC. Big blocks of power are acquired at low rates. More power, often, than can be used. And BC's valuable reservoirs are saved, like giant batteries.

During the day, demand for power goes up, and BC Hydro then opens the floodgates, allowing the our pent-up reservoirs to generate electricity that will then fetch a premium in the market - particularly in California.

For example, in August 2004, Powerex exported 540 GWh at an average price of $61.17 per MWh. In the same month, Powerex imported 449 GWh at $44.05/MWh. In the screaming energy market of January 2001, Powerex exported 303 GWh at $597.89 and imported 647 GWh at $173.[2] (National Energy Board electricity import and export stats). This only tells part of the story - the US/BC import/export part. The interprovincial trades are not disclosed for public scrutiny. Overall, BC Hydro reports in their 2003 Annual Report that in fiscal 2003, Powerex paid an average $47/MWh and sold power for $62/MWh.

Powerex now trades upwards of $6 billion of "energy products" a year, and had revenues of $1.9 billion in fiscal 2003.

It is a management decision whether to use the reservoirs or to purchase and import power. Mr. Elton is pleading a dry year, and increased industrial demand, as part of his explanation as to why the 2004 figures are not as good as those from 2003. However, the report indicates that the reservoirs this year are sitting at 98% of their average storage capacity, compared to 94% a year ago. Hardly seems like there's a pressing need to hold back on the water.

Increased demand from industrial users is probably a positive thing, reflective of a healthy economy. On the other hand, there are two points: 1. industrial users get such a deal on power, at about $30/MWh, that those low rates encourage wasteful use. Jack those industrial rates up, and the industrial users will have all the incentive they need to invest in more efficient technologies and processes. 2. According to the BC Hydro 2nd quarter report, the cost of power purchases was about $60/MWh - twice what industrial users pay. What is wrong with this picture? If this discrepancy it to be fixed, be prepared for a large whine from the industrial lobby.

Mr. Elton and Mr. Neufeld and just about everyone in between keep telling the "net importer" story as if we need to import power to meet British Columbian demand. It's much like the story BC Hydro has told people on Vancouver Island for the last four years: "The lights will go out" unless GSX and VIGP are built. Mr. Neufeld delivered a similar message earlier this week.

These are gun-to-your-head messages, highly emotive, and come from authorities we should be able to trust. So, when BC Hydro moves from "net importer" to "need more capacity", the people of BC are inclined to defer, to aquiesce.

Not us. There were no weapons of mass destruction, the emperor was wearing no clothes, and BC does not need to rush into more big dams, big fossil fuel generation, or rapid expansion of contracts with independent power producers.

Long before we jump to more big box generation projects, we must ensure that industrial users are paying fair costs for the power they use. And we must have full public debate about the appropriate role of energy trading in public energy and fiscal policy. - Arthur Caldicott

NOTE1: BC Hydro's use of numbers has always been a minefield of qualifications, caveats, exceptions, footnotes, and sometimes stuff that's just plain wrong. In its demand/supply scenarios, a fudge factor called "line losses" is often deployed to tip the balance in favour of whatever Hydro is trying to prove. In its forecasts, exaggerated growth rates, unrealistic "reference cold days", and other factors combine to make Hydro's case. A rigorous examination of these numbers requires deconstruction of all their assumptions, data inputs, and methods. There's a guy in Cobble Hill, a farmer named Steve Miller. Nobody in British Columbia analyses BC Hydro's numbers better than Miller.

NOTE2:Some of this power is hydro power. But much of it is coal-fired generation, especially from Alberta. BC prides itself on having no coal-fired generation, but in fact we regularly use coal-fired power, and make money from it, continuously. It's just that the coal is not being burned in BC.

NOTE3:This export price of $61/MWh compares to about $58/MWh that residential customers in BC pay to BC Hydro (57 cents a kilowatt hour), or about $30/MWh that large industrial customers in BC pay, or about $24/MWh that Hydro estimates its cost to produce hydro-electric power. Or $89/MWh that Hydro calculated it would cost to produce electricity from the Vancouver Island Generation Project at Duke Point.

Depleted reservoirs and industry's growing appetite for electricity have cut an estimated $166 million from BC Hydro's projected net income for the current fiscal year, the Crown corporation announced Friday.

Hydro's second-quarter report forecasts net income for the 2004-05 fiscal year at $240 million, down from the $406 million expected in its 2004 annual report.

Hydro reported second-quarter net income of $11 million, compared to $39 million in the same period last year.

The shortfalls stem from an unanticipated increase in electricity demand due to higher consumption in resource industries.

This meant electricity imports -- which cost BC Hydro money -- tripled compared to the second quarter of last year.

Energy costs of $916 million were $119 million higher than the same period the previous year.

"A significant portion of this increased consumption is in the large industrial sector as activity levels have increased in certain resource-based sectors in the province," Hydro reported.

Hydro is preoccupied in summer months with storing water in its reservoirs, in anticipation of winter demand, and tends to rely on imported electricity to defer full use of reservoirs.

Aggravating the situation is a somewhat dry year with below-average snowpack that left reservoirs at less than full capacity.

The costs associated with increased imports were so great that they exceeded the additional revenue Hydro took in from a 7.23 per cent that took effect April 1, the crown corporation reported.

In a speech on Friday to the Vancouver Board of Trade, Hydro CEO Bob Elton emphasized that his belief that British Columbia should be self-sufficient when it comes to electricity supply.

Two decades ago, he said, Hydro was flush with surplus electricity after the construction of a series of large dams, and able to export a surplus

But he said the benefit of that legacy is winding down to the point that the province is now in what he called a "slight" deficit position.

"Over the years we've let that surplus erode to the point that we are more or less in balance. The question is, should we allow that slight deficit we have today to build?" Elton asked.

"I believe we should not. We should aim for self-sufficiency for domestic needs, because that will improve our ability to develop a variety of electric sources within the province and will also add to our sense of energy security.

"We will make the case to our regulator that we believe British Columbia will be self-sufficient in electricity to meet domestic needs."

In a subsequent interview, he said Hydro will work towards that objective by making "more regular calls" to independent power producers for private sector generation projects to contribute to the province's electricity grid.

"We will certainly increase our purchases from independent power producers. We will have more regular calls. I think doing them once a year at a reasonable size is a good way of doing it."

Hydro is committed to making 50 per cent of future private sector purchases from so-called clean energy sources such as run-of-river hydro and wind power, he said.

"About two years we started to have more calls [for tenders for private sector generation]. We will continue to do that. It's not going to get any more tilted towards imports."

Those sources tend to be intermittent providers of electricity, and Hydro's commitment to security of supply means also seeking large-scale generation projects.

Those could include major hydroelectric projects such as the proposed Site C dam on the Columbia River, or gas fired generation plants such as one that is still under consideration for Vancouver Island.

"In the past few years it has actually been cheaper for us to buy on the market but I think we recognize there is a risk to that strategy so we agree that long term, we want to see more made in B.C. generation."

He said it is difficult for Hydro to maintain consistent performance in its budget, quarter to quarter because of the corporation's dependence on t the weather.

But he said over time the situation evens out.

Mark Veerkamp, executive director of BC Citizens for Public Power, said that if British Columbia wants to continue to enjoy its legacy of low-cost power, Hydro's best option is public sector investment.

He said the cheapest electricity in North America comes from sectors where public investment in generation has dominated.

"Our focus isn't big or small, it's making sure we can capitalize on the efficiencies that public power can provide," Veerkamp said. "We've seen the benefit for future generations in the public investment that was made 20 or 30 years ago. I think we need to look at now as the tipping point where we need to invest again for the sake of future generations."

Meanwhile, a lawyer who acts for independent power producers said Hydro's second quarter results show that British Columbia is dependent on imports for "at least" 10 per cent of the province's energy needs.

"This dependence is the result of poor planning and decisions made in the 1990s," said David Austin.

"The problem wasn't created overnight and it can't be fixed overnight."

Earlier this week, independent producers released a study showing that the costs of green energy derived from private sector projects already operational in B.C. is the same as what Hydro is paying for import power.

The independents go on to say private power generation works out cheaper for B.C. than imports, once taxes and levies going back to government are removed.