BCSEA is participating intensively in the Utilities Commission’s inquiry into the costs of Site C and the alternatives. Here is an update. We encourage feedback by email to firstname.lastname@example.org.
BCSEA takes a sustainable energy approach to Site C. Our goal is to ensure that cost-effective clean renewable electricity is available to displace fossil fuels in BC (“low carbon electrification”). Meeting BC’s share of Canada’s Paris climate action commitments will require not only aggressive demand-side management (DSM) but also substantial amounts of new clean electricity. This new clean electricity will have to be as low in cost as possible in order to out-compete fossil fuels.
BCSEA is participating fully in the inquiry. Our objectives are that the inquiry findings be accurate and credible. We made a submission on the proper methodology for answering the financial questions. Now we are scrutinizing all the relevant evidence filed by BC Hydro, Deloitte LLP (hired by the Commission), and interested parties. We are working with Dr. Mark Jaccard to file expert evidence on the value of dispatchable capacity and the amount of clean electricity needed for BC to meet its share of Canada’s Paris commitments.
The inquiry question is not whether Site C should have been approved in 2014. The question the Utilities Commission is charged with answering is whether it would be cheaper to meet BC’s future electricity needs by:
- completing Site C, or
- terminating Site C and acquiring other supply-side and demand-side resources, or
- suspending Site C for up to seven years and then either
- re-commencing and completing Site C, or
- terminating Site C and acquiring other supply-side and demand-side resources.
It is the responsibility of the BC government to make a decision on the future of Site C after it receives the Commission’s report on the financial consequences of the options.
BCSEA says the Government should take into account not only the financial consequences of the three options but also other important factors that are beyond the scope of the inquiry, including environmental implications and First Nations rights. For the purpose of financial analysis (e.g., sunk costs), it is assumed that the choice of options will be made as of December 31, 2017.
Several financial facts are fairly well established:
- The Site C budget was for $8.335 billion in December 2014 when cabinet made the Final Investment Decision. This is called the FID budget. The FID budget includes construction expenses, interest during construction, and “cost contingencies” that can be applied where needed.
- The FID Budget also reflects the government’s December 2014 decision to substantially reduce the payments from BC Hydro to the government for the use of the government’s equity capital to build Site C. This makes Site C cheaper for BC Hydro’s ratepayers but more costly for the government (taxpayers). The merits of this accounting decision are relevant to the overall merits of Site C, but the government has placed this outside the inquiry’s scope.
- The FID budget does not include Site C costs of about $0.5 billion prior to FID, which are part of the sunk costs of Site C.
- In addition to the FID Budget, there is a “project reserve” of $440 million.
- By the end of 2017, $2 billion will have been spent on Site C, before FID and from FID to December 31.
- BC Hydro estimates the cost of winding up Site C contracts and remediating the site would be at least $1.0 billion. Deloitte has a slightly higher estimate of $1.2 billion.
- BC Hydro’s estimate is $1.2 billion for the cost of putting the Site C construction into suspension for up to seven years (not including the cost of then terminating Site C and acquiring alternative resources or the cost of then re-commencing and completing Site). Deloitte’s estimate is $1.4 billion.
- Both BC Hydro and Deloitte say that re-commencement of Site C after a period of suspension would have to be budgeted again as a new project. BC Hydro’s estimate is the cost of completion after suspension would be $1.7 billion higher than the cost of completing Site C by carrying on construction after December 31, 2017. Deloitte doesn’t provide an estimate of the extra cost of completing Site C after a suspension.
- The combination of $2 billion in sunk costs and $1 billion in costs of termination and remediation gives the Site C portfolio a $3 billion head start over a Without Site C portfolio of alternative resources.
The likely cost of completing Site C is in dispute. BC Hydro’s evidence is that despite problems with the Main Civil Works contractor and tension cracks on the left bank, it will complete Site C on time and within the $8.335 billion FID budget (excluding the $440 million “project reserve” fund). Deloitte LLP says the construction problems are serious, and it will be challenging for BC Hydro to finish the project on time and on budget. Deloitte says if the problems aren’t resolved there could be a cost overrun of up to 50%, but it doesn’t say how likely this is. Nor does Deloitte provide its own estimate of the cost of completing Site C. More financial evidence is expected to be filed, and BCSEA will scrutinize it closely.
BC Hydro has filed the results of a comprehensive analysis of portfolios with and without Site C. This evidence is that completing Site C is by far the least expensive option. Hydro’s analysis is that terminating Site C and acquiring other resources would cost ratepayers $7.3 billion more than completing Site C in net present value (NPV) numbers (i.e. costs and benefits out to 2084 discounted by year and summed).
It is not surprising that scrapping the $2 billion already spent and spending another $1 billion for termination/remediation would make the purchase of a portfolio of alternative resources more costly to ratepayers than completing Site C. Site C’s dispatchable capacity and energy was already less expensive than any other supply-side resource before construction began (except for some resources like Revelstoke 6, which Hydro already intends to build). The Without Site C portfolio has to include costly capacity resources to firm up and shape the energy provided.
What is more important, and more contentious, about BC Hydro’s portfolio analysis results is that completion remains less costly than the alternative even under assumptions that are unfavourable to Site C. For example, Hydro’s evidence is that the alternatives portfolio would cost $6.8 billion NPV more than the Site C in the event of a 15% Site C cost overrun (project reserve plus 10% of FID budget) and low future load increases. If this analysis is accurate it means that even if Site C went 50% ($4.2 billion NPV) over FID Budget it would still cost ratepayers some $3 billion NPV less than cancelling Site C and acquiring alternative resources. BCSEA will closely scrutinize this analysis.
More than a hundred interested parties have made submissions to the inquiry. BCSEA’s initial submission focused on the importance of a proper portfolio analysis and didn’t attempt to provide financial input before seeing BC Hydro’s evidence. However, some of the submissions provide financial information and analysis relevant to the inquiry questions, for example, the cost of alternative energy resources. BCSEA is carefully examining these submissions, and expects to comment on this and other evidence in its final submission.
The following are some general questions and answers on where things stand at this mid-point in the inquiry.
What about the load forecast? Will BC need the power from Site C? Yes. BCSEA has examined BC Hydro’s July 2016 load forecast. Even after taking the LNG load out of the forecast and adding the aggressive conservation and efficiency measures that BCSEA advocates, BC Hydro’s load will continue to increase in future years, driven slowly by population growth and economic growth and driven rapidly by low-carbon electrification. While load growth has been slow in the years since the economic crash of 2008, it is a myth that Hydro’s load has “flat-lined.”
What about suspending Site C? Suspending Site C is really two options: suspension followed by termination and acquisition of an alternative portfolio, and suspension followed by re-commencement and completion. Not surprisingly, BC Hydro’s evidence is that suspension, termination and acquisition of an alternative portfolio would have the much same large negative financial impact on ratepayers as immediate termination and acquisition of an alternative portfolio.
BC Hydro’s evidence is that ratepayers would lose less money by suspending and then completing Site C (if that was feasible, which is not confirmed) than by suspending and then terminating. This is because the eventual completion of Site C, even at a higher cost than completing it now, would still be much less costly than a portfolio of DSM and clean renewable resources without Site C.
Aren’t wind and solar power coming down in cost? Yes, the cost of wind and solar power have declined and are expected to continue to decline especially for solar power. Even so, Site C is a substantially less expensive source of dispatchable capacity and energy, particularly in light of the $3 billion in sunk costs and termination/remediation costs, which must be added to any Without Site C portfolio. The sunk costs will be costs to ratepayers whether or not Site C is built; and the termination/remediation costs will be incurred if Site C is cancelled.
What about geothermal generation? BCSEA strongly supports the development of geothermal generation opportunities in B.C. and looks forward to geothermal generation being added to BC’s portfolio of clean and renewable electricity resources. However, it is clear that completion of Site C, even with cost overruns, would provide dispatchable capacity and energy at a lower cost than geothermal generation.
What about Site C’s environmental and agriculture impacts? The environmental impact of the construction and operation of the Site C dam and reservoir is a major factor that the BC government will have to weigh in the balance when it decides whether to complete, suspend or terminate Site C after receiving the Commission’s inquiry report. These issues were canvassed by the 2013 – 2014 federal-provincial Joint Panel Review and are outside the current inquiry’s scope.
What about infringement of Aboriginal Rights and Title? BCSEA maintains that Site C should not proceed unless the impacts on Treaty 8 and other First Nations’ Aboriginal Rights and Title have been properly addressed and accommodated. The courts are responsible for determining the Aboriginal Rights and Title issues. This applies to all electrical generation projects in BC, not just Site C.
What’s next for BCSEA and the inquiry? We anticipate that BC Hydro will file additional evidence in response to the Deloitte reports, but we don’t know exactly when. On September 20, the inquiry panel will publicly issue its preliminary report to the BC government. We expect that the preliminary report will summarize the evidence and submissions. However, we don’t know whether the panel will express tentative conclusions.
On September 23, BCSEA will make a presentation to the inquiry panel at the community session in Vancouver, and another on October 11 in Victoria. These sessions are open to the public; people are encouraged to register to attend and must register if they wish to make a presentation.
On October 11, BCSEA will file a final written submission providing its review of the evidence and recommendations for the inquiry panel’s findings on the inquiry questions.
On October 13, BCSEA and other invited participants will make an oral presentation to the inquiry panel at the Commission’s hearing room in Vancouver. On November 1, the panel will provide its final report to the government and, hopefully, immediately make it public.
Conclusion. In its August submission to the inquiry panel, BCSEA said that the inquiry’s three-month timeframe, mandated by Cabinet order, is unrealistically short given the complexity and importance of the financial consequences of the three Site C options. We said the aggressive time constraint will challenge the Commission’s ability to produce an accurate and credible result. Nevertheless, we will do what we can to contribute to a successful outcome for the inquiry.