The Peace River is located in the northeast corner of British Columbia. It has long been recognized that the river has significant potential to generate electricity and, by 1980, two of three productive sites had been exploited (see map). Since July 2015, BC Hydro, the provincially owned power utility, has been constructing a dam at the third site. This third dam, the Site C project, has become a subject of intense controversy.
In the provincial election held in the spring of 2017, the then-governing Liberals defended their decision to launch the $9 billion project, while the NDP and Green Party opposed completion – the Greens more adamantly than the NDP. The election outcome was 43 Liberal MLAs and 41 NDP, with three Green MLAs holding the balance of power. The province is now governed by the NDP under Premier John Horgan with support from the Greens. One of the new government’s initiatives was to order a quick review of the Site C project. The BC Utilities Commission (BCUC) was given a deadline of November 1. At the time of writing in early November, its final report has been released and the government is reviewing the findings. A decision is expected before the end of the year.
Over the past 35 years there had been two major reviews of BC Hydro’s proposed Site C project. The first was in the early 1980s when the BCUC held hearings on BC Hydro’s application for an Energy Project Certificate – the regulatory requirement at that time. The second and more recent review was that of the Joint Review Panel, which held hearings and in May 2014 provided its report and recommendations to the governments of British Columbia and Canada on the social and environmental impacts of the project.
Despite the passage of time and differing focus and regulatory context of their investigations, what is most striking about these two previous reviews is the similarity of their conclusions and recommendations. Neither review rejected the project on environmental or other grounds. They both set out mitigation and compensation strategies to address land use and environmental impacts. And they both recognized that the project could provide significant benefits. The Joint Review Panel was particularly clear on the benefits:
Despite high initial costs and some uncertainty about when the power would be needed, the Project would provide a large and long-term increment of firm energy and capacity at a price that would benefit future generations … and provide a foundation for the integration of other renewable low carbon sources as the need arises.1
Notwithstanding the benefits the project could provide, both reviews recommended further study and public hearings before authorizing the project to proceed.
In its 1983 report, the BC Utilities Commission recommended that the issuance of an Energy Project Certificate be deferred until BC Hydro could confirm the need for and cost-effectiveness of Site C. It recommended that BC Hydro improve its forecasting procedures, including the use of econometric methods and better treatment of conservation, and investigate other alternatives including planning agreements with Alberta that could increase the firm supply capability of existing resources. It also recommended that the government clarify its industrial development strategy, in particular the role that BC Hydro should play in facilitating the development of new electric-intensive industry.
In its 2014 report, the Joint Review Panel concluded that BC Hydro had not fully demonstrated the need for the project in the timetable it set forth. Like the review three decades earlier, the panel called for improvements in forecasting, further consideration of alternatives and greater clarity on the need for BC Hydro to develop resources in anticipation of major liquefied natural gas (LNG) loads. In its concluding remarks, the Joint Review Panel set out the difficult tradeoff the Site C project entailed:
Site C, after an initial burst of expenditure, would lock in low rates for many decades and would produce fewer greenhouse emissions per unit of energy than any alternative source, save nuclear. These advantages must be set against permanent damages to nature, the interests of First Nations and to the specific local interests described in this report.2
A clear case would be required to justify Site C, and both reviews called for further investigation and follow-up hearings for that case to be made.
Unfortunately, Christy Clark’s B.C. government did not heed the Joint Review Panel’s advice. Despite outstanding questions about need and alternatives, and the vociferous opposition of environmental groups, First Nations and local interests, the government directed BC Hydro to start construction immediately with a target in-service date of 2024.
It is not entirely clear why the government decided to start Site C construction in 2015, before the case for the project could be independently reviewed and confirmed. Unless major LNG projects with large electricity loads were undertaken – an unlikely prospect with the post-2014 decline in oil and gas prices – there was no urgent need for new supply. And there were First Nation and other court challenges to be heard. If the object was simply to get past the inevitable opposition to large projects of this kind, proceeding without a clear, independently confirmed business case only served to inflame those opposed.
Project construction is now well underway; BC Hydro has hired thousands of workers and already spent more than $2 billion of the nearly $9 billion it expects the project to cost. It is in this context that the NDP government established the latest review. It specifically called on the Commission to advise on whether the project is on time and on budget, what the costs to ratepayers of suspending or terminating the project would be, and whether there are alternative portfolios of projects and measures that could provide similar benefits at similar or lower cost.
The Commission advised that there will likely be a one-year delay in the in-service date and the total cost for Site C will likely escalate to $10 billion or more. It estimated that the cost to terminate the project and remediate the site would approach $2 billion. It concluded that suspending the project would be the least desirable option. The choice for the government, it advised, was completion or termination. Based on an assumed $10 billion total cost for Site C and a set of Commission assumptions about export prices, and the cost and relative energy value of alternative resources, it concluded that there was only a small difference (in favour of completion) between the present value cost of completing Site C and the present value cost of terminating the project and pursuing alternative resources as required (in particular, wind, geothermal and demand-side management measures).
This latest review was a seriously constrained process. What normally would take a year or more to do – assess matters of major consequence to the future development of BC Hydro – had to be done within a 12-week period. As the Commission stated, its analysis was only intended to be illustrative in nature. There was no time to examine in any detail the evidence BC Hydro, other parties and the Commission itself put forward on the consequences of completing, terminating or suspending the project. Complicating the process and colouring much of the evidence is the fact that, for many opponents, the issue is that Site C should never have been started in the first place – a valid argument in many respects but irrelevant to the question of what to do now.
Should the project be stopped now that it has been started?
The question the government must address is: What is the best way to proceed given the $2 billion that has already been spent and the additional close to $2 billion, according to the Commission, that would be required to terminate the project and remediate the site to its original condition?
Opponents argue that Site C power is not needed, and if and when it is needed there are lower-cost demand- and supply-side alternatives that could be pursued. As with other megaprojects of this kind, they maintain that costs will likely escalate far above what BC Hydro has estimated. Notwithstanding the close to $4 billion in sunk and termination costs, opponents say it will be better for ratepayers, let alone environmental and First Nation interests, to stop the project. Though that is not what the BCUC concluded, many see the BCUC report as a vindication of their arguments that termination is the better option.
There is widespread agreement that BC Hydro will not need the energy Site C will produce in 2024. Site C power will be largely or totally surplus to provincial requirements for a number of years after the project is scheduled to come into service. And BC Hydro itself has belatedly acknowledged that construction costs will escalate above the estimates it has provided and stood by since the start of construction.
However, the validity of the opponents’ claim that lower-cost alternatives can be developed when needed is much less clear. There may be alternatives that would have been competitive with Site C before the project started, but there is no credible evidence to suggest that is the case given the over $2 billion BC Hydro has already spent on the project and the additional near $2 billion that would have to be spent to terminate the project and remediate the site.
The Commission’s self-described illustrative analysis of a portfolio of wind, geothermal and demand-side management measures suggests that completion and termination would be roughly equal in present value cost. However, the assumptions underlying the Commission’s analysis were manifestly unbalanced – very conservative in its evaluation of the completion option and very favourable and in important respects incomplete in its assessment of its alternative portfolio.
A key issue in the comparison of completion versus termination is the valuation of surplus energy and peak capacity. Site C will be largely or fully surplus to BC requirements for many years – the value BC Hydro can capture from surplus sales is critically important in determining the net costs of the completion option. The Commission rejected BC Hydro’s forecast of spot market prices and the even higher forecast of its own consultants. It argued a more conservative forecast should be used, much lower than those provided by power trade experts and its own technical consultants.
The Commission recognized that peak generating capacity has value, but decided to give no value to the surplus capacity Site C would provide. It wasn’t satisfied that BC Hydro could capture that value in export trades, even though that is precisely what BC Hydro’s trading subsidiary is designed to do.
The Commission further assumed that there would be no premium for the daily and seasonal shaping and the dispatchability Site C offers, even though that is a major comparative advantage of hydro generation with storage as compared to alternative resources – an advantage that trading experts see as increasingly important the more wind and solar are developed in neighbouring jurisdictions.
And the Commission did not consider or account for any value that surplus sales would have in displacing greenhouse gases (GHGs). Oddly, the Commission’s only comment on GHGs was that its alternative portfolio would have lower emissions in the short term, which in itself is misleading because over the longer term the Joint Review Panel concluded Site C would have lower GHG emissions than any other source save nuclear. More importantly it ignores the very significant GHG benefit that surplus from Site C would have in displacing thermal power generation. Depending on unfolding carbon policy, that could add to surplus sales prices; at a minimum it is a very important social benefit to take into account.
All of this served to greatly understate the value of Site C surplus and therefore overstate the net cost of Site C for ratepayers when required to meet domestic loads. At the same time the Commission made a number of assumptions serving to understate the costs of its alternative portfolio. With respect to the demand-side management measures, it only included costs BC Hydro would incur to provide incentives or programs designed to encourage less consumption or to shift consumption off peak. It didn’t include any of the costs customers would incur and, in the case of industrial load curtailments, the costs that workers would bear. It included geothermal resources even though it acknowledged the resource may not be available at the assumed cost. With respect to wind projects, it assumed they would be financed at BC Hydro’s borrowing rate, even though they would more likely be developed by independent power producers with the significantly higher costs of capital they would incur. And it assumed a minimal integration (instantaneous backup) cost for wind – one fifth of what Hydro estimated.
While there are reasons to question some of BC Hydro’s assumptions underlying its assessment that termination at this time would be $7.5 billion in present value more expensive for ratepayers than completing the project, BC Hydro’s general conclusion – it is more cost-effective to complete Site C than to abandon the project – is most likely right.
A simple model of the value of the energy and peak generating capacity Site C will provide suggests the present value of completing Site C in 2024, even if the power is fully surplus for five to ten years and is valued at an arguably conservative set of assumptions,3 would be in the order of $9 to $10 billion. This is $1 to $2 billion more than the BCUC’s estimate of the remaining costs to complete Site C. This plus the avoided termination and remediation cost would suggest ratepayers would be $3 to $4 billion in present value better off completing than terminating the project.
One could, of course, calculate different net benefits or even a net cost with a different set of assumptions. In an unabashed reversal from the conclusion the Joint Review Panel reached in its 2014 report about the long-term benefit from Site C, the former chair of the panel, Harry Swain, has argued that the value of completing Site C would be only $2 billion – far less than the costs BC Hydro would have to incur to complete the project. But to get that result he assumed that Site C would be fully surplus to domestic requirements for 20 years after coming into service, with an export value of $30 per megawatt-hour over that entire period. He didn’t assign any value to Site C’s peak generating capacity and completely ignored the value of Site C after 20 years of operation. It was not a serious or credible analysis.
There are reasons the value of Site C’s output could be lower than $9 to $10 billion (less growth in demand for electricity; falling costs of alternative supply). But there are also many reasons why the value of Site C’s output could be higher, including more demand for electricity from electrification trends than currently forecast, greater value from peak generating capacity, and higher surplus sales prices as a result of a more aggressive carbon tax or other such policies. It would take a one-sided set of pessimistic assumptions to suggest with any degree of confidence that BC Hydro and ratepayers would be better off abandoning the project at this time..
Build Site C – with a stronger intertie and a Peace River Trust
All eyes are now on the government, which faces an extraordinarily difficult decision. If the government proceeds with Site C, it will face the anger of many of its own supporters who are unequivocally opposed to the project. It will run the risk of alienating Green Party MLAs whose support it needs to maintain a majority in the Legislature. And it will be greatly disappointing to those First Nations who are opposed to the project, who will see this as a betrayal of the government’s commitment to reconciliation.
On the other hand, cancelling the project will have immediate adverse impacts on rates, with BC Hydro having to write off close to $4 billion in sunk and termination costs. The Commission was curiously silent on the time period over which these costs would be recovered in the termination case, but there clearly would be no justification to defer cost recovery into the distant future – in effect almost doubling BC Hydro’s deferral accounts that are already widely considered unfair to future customers. Termination would potentially have significant adverse long-term impacts as well, with BC Hydro being forced to develop or acquire what BC Hydro submits would be lower-value, higher-cost alternative sources of supply.
There is no middle ground here, but perhaps there is a strategy that the government could pursue that would not risk billions of dollars for BC Hydro ratepayers and could mitigate some of the environmental and First Nation opposition to the project. That would entail proceeding to complete the project, but taking steps to maximize the economic and environmental benefit it can provide and meaningfully recognize the adverse impacts this project and previous ones have had on First Nations and other communities in the Peace region.
An obvious step to take to enhance the economic and environmental benefit Site C can provide would be to strengthen the intertie with Alberta to enable more trade and coordination with that province. If Alberta and B.C. were a single province, there would be no issue about the need for Site C. Its development, combined with increased intertie capacity, would serve as an important component of the Alberta government’s commitment to phase out coal-fired thermal power production and thereby dramatically reduce GHG emissions in the electric sector.
In the short term, 5,100 gigawatt-hours of surplus energy from Site C could displace coal- and natural gas–fired generation, reducing GHG emissions by some 2.5 to 4.5 million tonnes of carbon dioxide equivalent per year. Assuming a social cost of carbon emissions of just $50 per tonne (and there are those who argue the social cost is much higher), the benefits of those emission reductions would be $125 to $225 million per year. Over the longer term, the storage, energy shaping and peak generating capacity provided by Site C and the rest of the BC Hydro system could provide the backup that wind projects in Alberta will need to ensure reliable supply and mitigate the volatility of Alberta electricity market prices that could otherwise occur as a result of variations in wind conditions. It would reduce the need for Alberta to develop gas-fired thermal backup for wind, enhancing the long-term GHG benefits greater coordination with Alberta can provide.
The federal government is currently investigating opportunities for strategic investments in interprovincial intertie capacity. A serious engagement in that process could add market value to Site C in the short and long term, and contribute significantly to the achievement of Canada’s GHG reduction goals.
The other key step would be to fully recognize and address the unavoidable adverse effects of Site C development, as well as the cumulative impacts of previous hydro development on the Peace River. B.C. could commit to something similar to the Columbia Basin Trust. This provincially funded and locally governed trust was created in recognition of the very significant cumulative impacts of hydro development on the Columbia River.
Instead of cancelling Site C with the very significant costs that would in all likelihood entail for BC Hydro and its customers, the government could direct significant resources to First Nation and other communities to support major investments in education, housing, family and community wellness and infrastructure, with priorities and programs established by the First Nations and local communities themselves.
The goal of a Peace River Trust would be to enable investments in the region that yield long-term benefits as important as what is lost with the dam’s development. A generously funded trust wouldn’t satisfy implacable opponents, but it would offset in meaningful ways the unavoidable adverse impacts of hydro development on the Peace.
Continue reading “John Horgan’s Site C Problem”