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Province of British Columbia
NEWS RELEASE
For Immediate Release
2019EMPR0003-000228
Feb. 13, 2019
Ministry of Energy, Mines and Petroleum Resources
Previous government's BC Hydro contracts to cost ratepayers billions: report

VICTORIA – A newly released report details how the previous provincial government pressured BC Hydro into signing long-term contracts with independent power producers (IPPs) that will cost B.C. customers more than $16 billion over 20 years.

Former B.C. Treasury Board director Ken Davidson delivered his report, titled Zapped: A review of BC Hydro's purchase of power from independent power producers conducted for the Minister of Energy, Mines and Petroleum Resources. It details how the previous government manufactured an urgent need for power while disallowing BC Hydro to produce it, therefore requiring the public utility to buy power from private producers at inflated prices. According to the report, this will ultimately cost the average residential BC Hydro customer about $4,000 over the next 20 years, or about $200 per year.

“British Columbians are paying more on their hydro bills because of the previous government’s choices,” said Michelle Mungall, Minister of Energy, Mines and Petroleum Resources. “Professional staff within government and BC Hydro warned them against that course of action, but that government refused to listen. As a result, these contracts have already cost customers $3.2 billion and are set to cost billions more over the next two decades.”

The report also demonstrates that the power BC Hydro was forced to purchase from IPPs was largely the wrong energy profile. Of the 105 contracts with IPPs since 2002, 71 were from run-of-river projects, most of which can only be relied on during the spring freshet. BC Hydro does not need more power during that time when the demand is low and there is abundance of water available in BC Hydro's reservoirs.

“B.C. didn’t benefit. BC Hydro customers didn't benefit. A small number of well-placed independent power producers benefited, and customers were stuck with a 40-year payment plan,” said Mungall.

The report notes that hydroelectric generation is B.C.’s strength. BC Hydro’s dams are flexible resources that provide clean electricity and can be ramped up and down as necessary.

While there are no quick fixes to the challenges posed by IPP contracts, there is an opportunity to address some of the financial issues when these electricity purchase agreements expire, namely renewing on a market-rate basis. The report offers the following recommendations to government:

  • Ensure prices reflect the real market value: All energy should be purchased at the appropriate market rate or the IPP owner can trade its energy directly with the market, which is currently an option.
  • Eliminate the self-sufficiency mandate: BC Hydro’s energy planning should be able to rely on a reasonable level of Powerex trading to meet its electricity supply obligations, as opposed to relying solely on the electricity generating facilities within the province.
  • Restore the oversight of the BC Utilities Commission: The commission’s full oversight role should be re-established.
  • Improve transparency on the cost of energy procurement: BC Hydro should price all energy at market rates or disclose all instances where energy purchases are not at market rates in an open and transparent way, including to the BC Utilities Commission.
  • Eliminate the Standing Offer Program: BC Hydro has too much non-firm IPP energy to continue acquiring it and it should not have an energy procurement process that remains open. While the Standing Offer Program is currently on hold, it should be eliminated entirely.

These recommendations informed Phase 1 of a comprehensive review of BC Hydro focused on affordability and restoring sound financial and regulatory oversight. The results of the review will be announced on Feb. 14, 2019.

Learn More:

To read the report, Zapped: A review of BC Hydro’s purchase of power from independent power producers conducted for the Minister of Energy, Mines and Petroleum Resources, visit: https://www2.gov.bc.ca/gov/content/industry/electricity-alternative-energy/electricity/bc-hydro-review

Four backgrounders follow.

 
Contact:
 
Kent Karemaker
Media Relations
Ministry of Energy, Mines and Petroleum Resources
250 952-0628
 

 
Province of British Columbia
BACKGROUNDER 1
For Immediate Release
2019EMPR0003-000228
Feb. 13, 2019
Ministry of Energy, Mines and Petroleum Resources
IPP timeline
  • 1985: BC Hydro begins purchasing power from IPPs.
  • 2000-2001: Energy crisis in the United States – wholesale energy traders drove up electricity trading prices by overstating electricity demand. The high rates were viewed as an opportunity for B.C. to invest in clean energy projects and export that power.  
  • 2002: 2002 Energy Plan – provided policy direction to BC Hydro to purchase its energy from IPPs rather than generating the energy itself.
  • 2003: Green Power Generation Call – 16 projects were successful and were projected to generate 1,800 gigawatt hours of energy per year.
  • 2006: 2006 Open Call for Tenders – 38 projects were successful and were projected to generate 6,500 gigawatt hours of energy per year.
  • 2006: BC Hydro files its 2006 Integrated Electricity Plan (IEP)/Long-Term Acquisition Plan (LTAP) with the BC Utilities Commission (BCUC) – included BC Hydro’s plan to rely on Burrard Thermal for planning purposes at 3,000 gigawatt hours of energy per year. 
  • 2007: BCUC Decision on the 2006 IEP/LTAP application – the BCUC decided that BC Hydro should rely on Burrard Thermal for planning purposes at 6,000 gigawatt hours of energy per year. 
  • 2007: 2007 Energy Plan: Vision for Clean Energy Leadership – provided direction to BC Hydro to achieve electricity self-sufficiency by 2016 (which eliminated BC Hydro’s ability to plan to purchase electricity from the market to meet demand); ensure clean or renewable electricity generation continued to account for at least 90% of total generation; establish a standing offer for clean electricity projects; implement a provincial bioenergy strategy; and, replace the energy supply from Burrard Thermal with other resources. 
  • 2007: Special Direction #10 to the BCUC – directed that BC Hydro’s achievement of self-sufficiency should include insurance of 3,000 gigawatt hours of energy per year. 
  • 2008: Standing Offer Program – launched with an offer of fixed pricing based on results of most recent call for small clean energy projects up to 10 megawatts.
  • 2008: Bioenergy Phase 1 Call – supported the 2007 Energy Plan. Four projects were successful and were projected to generate 579 gigawatt hours of energy per year. 
  • 2008: Financial downtown – a turbulent world economy leads to significant economic contraction and the loss of major employers in B.C.’s forestry industry, resulting in a load reduction of 2.5%.
  • 2010: 2010 Clean Power Call – 27 projects were successful and were projected to generate 3,266 gigawatt hours of energy per year.
  • 2010: Clean Energy Act – redefined the role of the BCUC, disallowing it to have a role in approving a number of BC Hydro capital projects and initiatives, including the Northwest Transmission Line, the Bio-Energy Phase 2 Call, the Clean Power Call, the Integrated Power Offer and the Standing Offer Program. Also moved the oversight of BC Hydro’s long-term planning from the BCUC to government.
  • 2011: Bioenergy Phase 2 Call – the call focused on large-scale biomass projects and resulted in four projects that were projected to generate 754 gigawatt hours of energy per year.
  • 2012: Self-sufficiency – Government amends the definition of self-sufficiency so that BC Hydro must be electricity self-sufficient during average water conditions. The previous definition required self-sufficiency during historically low inflows, or what is known as “critical water” conditions (a change of 4,100 gigawatt hours per year).  
  • 2013: BC Hydro Integrated Resource Plan – approved by government. In the plan, BC Hydro recommends managing the costs associated with BC Hydro’s IPP portfolio and selecting the most cost-effective plan to meet customers’ needs within the context of the Clean Energy Act. 
  • 2013: Standing Offer Program – project capacity increased from a maximum of 10 megawatts of capacity to 15 megawatts, and annual volume increased from 50 gigawatt hours of energy per year to 150 gigawatt hours per year.
  • 2015: Memorandum of Understanding – Government directs BC Hydro and the Ministry of Energy, Mines and Petroleum Resources to enter into a memorandum of understanding with the Clean Energy Association of BC, the industry association representing the interests of independent power producers. 
  • 2017: Standing Offer Program – BC Hydro stopped taking any applications under the program.
  • 2018: Standing Offer Program – BC Hydro announces it will not issue any additional electricity purchase agreements under the Standing Offer Program pending the results of government’s Comprehensive Review of BC Hydro.
 
Contact:
 
Kent Karemaker
Media Relations
Ministry of Energy, Mines and Petroleum Resources
250 952-0628
 

 
Province of British Columbia
BACKGROUNDER 2
For Immediate Release
2019EMPR0003-000228
Feb. 13, 2019
Ministry of Energy, Mines and Petroleum Resources
IPPs
  • BC Hydro has been purchasing electricity from IPPs since the mid-1980s.
  • As of January 2019, BC Hydro had over 130 electricity purchase agreements with IPPs, which represents over $51 billion in future financial commitments.
    • Of those contracts, 105 were signed since 2002 and represent future financial commitments of $47 billion.
  • The cost of energy purchased from IPPs has increased dramatically over time. IPPs currently make up about 25% of BC Hydro’s electricity supply and about 32% of total planned costs.
  • Current prices for the energy from IPPs are significantly higher than the cost of generation from BC Hydro’s heritage assets — like the W.A.C. Bennett or Mica dams — and Site C, as well as projected domestic and export market price forecasts.
    • The cost of heritage generation is estimated to be $33 per megawatt hour. In comparison, the cost of IPP energy is about $100 per megawatt hour on average (F17-F19).  
  • Total annual energy acquisition costs are forecasted to increase from $1.3 billion in fiscal 2019 to $1.7 billion by fiscal 2024.
  • Beginning in 2002, the previous government manipulated BC Hydro’s energy planning process by providing a clear direction to BC Hydro to not increase its own generating capacity and to not rely on imported power to achieve government’s goal of self-sufficiency.
  • As a result, government created a false need for more energy that forced BC Hydro to go to market for power from IPPs.
  • IPPs develop and operate projects such as:
    • Run-of-river: using part of natural stream flows and natural elevation changes along the course of a river to generate electricity.
    • Biomass: using organic waste from saw mills and pulp mills to generate heat, steam and electricity.
    • Wind: converting the energy from wind into electricity.
    • Solar: converting the energy from sunlight into electricity.
  • Run-of-river projects are the most common in B.C. — with 73 projects selling power to BC Hydro.
    • Most of these can only be relied on during the spring freshet. The freshet is the snowmelt period from May to July, and BC Hydro has historically had an oversupply of power during these months. This has resulted in the excess energy being sold on the market at very low prices.
 
Contact:
 
Kent Karemaker
Media Relations
Ministry of Energy, Mines and Petroleum Resources
250 952-0628
 

 
Province of British Columbia
BACKGROUNDER 3
For Immediate Release
2019EMPR0003-000228
Feb. 13, 2019
Ministry of Energy, Mines and Petroleum Resources
Report recommendations

The report offers government five key recommendations:

  1. Ensure prices paid to IPPs reflect the real market value.
  2. Eliminate the self-sufficiency mandate.
  3. Restore the full oversight role of the BCUC.
  4. Improve transparency on the cost of energy procurement.
  5. Terminate the Standing Offer Program.

Recommendation #1: Electricity purchase agreement renewals

  • All energy should be purchased at the appropriate market rate (recommended to be Mid-C).
  • Mid-C is the price at which energy is traded at the Mid-Columbia hub and is the accepted commercial value of energy available for export from British Columbia at any point in time.
  • The IPP owner also has the option of trading its energy directly with the open market, which is currently an option.

Recommendation #2: Self-sufficiency mandate

  • The self-sufficiency mandate should be eliminated.
  • Self-sufficiency means that BC Hydro must meet its electricity supply obligations solely from electricity generating facilities within the province.
  • BC Hydro’s energy planning should be able to rely on a reasonable level of Powerex trading and not reflect the need for insurance energy.

Recommendation #3: BCUC

  • The 2010 Clean Energy Act reduced the scope of the BCUC’s mandate and removed much of its ability to fulfill that mandate. This included eliminating the BCUC’s independent oversight over BC Hydro’s Standing Offer Program, Clean Power Call, Integrated Power Offer and Bioenergy Phase 2 Call for Power.
  • All changes made through the Clean Energy Act should be reversed, and the BC Utilities Commission’s full oversight should be re-established.

Recommendation #4: Transparency

  • BC Hydro should price all energy at market rates, also known as Mid-C rates.
  • If BC Hydro is told to buy energy at a price above Mid-C, the rationale for the purchase should be recorded as “government direction.”
  • BC Hydro should disclose all energy purchases that are not at Mid-C to the BCUC.

Recommendation #5: Standing Offer Program

  • BC Hydro has too much non-firm IPP energy to continue to acquire it. It should not have an energy procurement process that remains open.
  • While the Standing Offer Program is currently on hold, it should be eliminated entirely.
  • To terminate the program, government will need to make a legislative or regulatory change, as the program is prescribed in legislation.
 
Contact:
 
Kent Karemaker
Media Relations
Ministry of Energy, Mines and Petroleum Resources
250 952-0628
 

 
Province of British Columbia
BACKGROUNDER 4
For Immediate Release
2019EMPR0003-000228
Feb. 13, 2019
Ministry of Energy, Mines and Petroleum Resources
Calculations

The previous government manufactured an urgent need for 8,500 gigawatt hours per year of firm energy that BC Hydro did not need.

How did the author of the report arrive at this figure?

The report points to various government directions and policies that changed BC Hydro’s Energy Planning criteria.

Gigawatt hours per year: 2,500
Reason: Removal of BC Hydro’s ability to rely on imported power from the market

Gigawatt hours per year: 3,000
Reason: Requirement for “insurance” electricity

Gigawatt hours per year: 3,000
Reason: Restriction of energy from Burrard Thermal

Total gigawatt hours per year: 8,500
Reason: Net increase of firm energy required

The previous government will cost BC Hydro customers about $16.2 billion over 20 years for energy that BC Hydro did not need.

How did the author of the report arrive at this figure?

  • This figure is based on the electricity purchase agreements resulting under the five calls for power that BC Hydro issued to meet government’s direction that it purchase energy it did not need.
  • Amount of energy BC Hydro acquired based on government directions: 9,500 gigawatt hours of electricity
  • Average cost of IPP power: $110 per megawatt hour
  • Estimated market value of the surplus energy: $25 per megawatt hour
  • The result: $16.2 billion overpaid by BC Hydro over 20 years
  • Math: Incremental cost of energy over buy ($85 per megawatt hour) multiplied by the amount of energy in the electricity purchase agreements (9,500 gigawatt hours per year) equals $808 million per year (or $16.2 billion over 20 years)
 
Contact:
 
Kent Karemaker
Media Relations
Ministry of Energy, Mines and Petroleum Resources
250 952-0628
 

 
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