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The economic and policy aspects of small hydro development in British Columbia Croll, Geoffrey Edward George 1990

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THE  ECONOMIC AND P O L I C Y A S P E C T S BRITISH  OF S M A L L HYDRO D E V E L O P M E N T I N  COLUMBIA  by  GEOFFREY B.A.Sc.,  EDWARD GEORGE C R O L L  The U n i v e r s i t y  A THESIS  SUBMITTED  of  British  Columbia,  IN PARTIAL F U L F I L L M E N T OF  THE REQUIREMENTS  FOR T H E D E G R E E O F  MASTER OF A P P L I E D  SCIENCE  in  THE  F A C U L T Y O F GRADUATE  (Department  We  of  Civil  Engineering)  OF B R I T I S H  September,  ©  STUDIES  a c c e p t t h i s t h e s i s as conforming to the required standards  THE UNIVERSITY  Geoffrey  1986  Edward  COLUMBIA  1990  George  Croll,  1990  In presenting this thesis in partial fulfilment of the  requirements for an advanced  degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and  study. I further agree that permission for extensive  copying of this thesis for scholarly purposes may department or  by  his or  her  representatives.  be  granted by the head of  It is understood  that  copying  publication of this thesis for financial gain shall not be allowed without my permission.  Department of  C i v i l Engineering  The University of British Columbia Vancouver, Canada Date  DE-6  (2/88)  October 6, 1990  my or  written  ABSTRACT  Small energy  and  sector  in  hydrppower i t has the  considerable  review for  reasons  and  in  i n developing  for this  the  situation purchase  hydro  producers  price,  one  development.  for  their  British  been v e r y  and  amount  established, be  based  costs next  be  on  competitve the  issues.  them  projects.  on  by  project  The  market,  price  the  Furthermore,  that,  20  a  levelized  to  initially  purchased  at  utility's  develop,  energy  small  hydro  and I  framework  would be purchased  ii  than  B.C.  evidence t o support absence rates  and  that  capital period, costs  of  avoided  rather  of  an  should  c o s t s of  the than  a l l future  O n t a r i o ' s , whereby  industry  a competitive bidding process.  less  hydro  development should take a  similar  the  vast  small  purchase  year  approach,  when  is  thesis  a policy  costs,  two-stage  later,  In t h i s  i n the  energy  s m a l l hydro  the  there  progress to  offered  a m o r t i z i n g the  average  private  Columbia's  is clearly  avoided  over  of  of the main i s s u e s i n v o l v e d i n  suggest  utility's  determined  scheduled  basing  I  the  little  propose  electricity  offered.  by  source  more t o economic  Hydro's avoided c o s t , but t h e r e i s l i t t l e the  a  Although  are r e l a t e d  i n B.C.  as  developed  Ontario.  f a c t o r s than t o t e c h n i c a l  energy  small  U.S.  r e s o u r c e , t h e r e has  The  political  many advantages  been s u c c e s s f u l l y  interest  s m a l l hydro date.  offers  full has  avoided had  a  energy  is  cost  and  chance  to  a t market v a l u e o r  through  TABLE OF CONTENTS  ABSTRACT  i i V  LIST OF TABLES LIST OF FIGURES  vi  ACKNOWLEDGEMENTS  v i i  CHAPTER 1 : INTRODUCTION  1  CHAPTER 2 : BACKGROUND ON SMALL HYDRO DEVELOPMENT  4  2.1 : D e f i n i t i o n o f Small Hydro 2.2 : V i r t u e s o f Small Hydro 2.3 : American Experience 2.3.1 : P u b l i c U t i l i t i e s R e g u l a t o r y P o l i c i e s A c t .. 2.3.2 : Independent Power I n d u s t r y 2.3.3 : Washington S t a t e 2.4 : Canadian Experience 2.4.1 : Canadian H y d r o e l e c t r i c I n d u s t r y 2.4.2 : O n t a r i o Independent Power Program 2.4.3 : A l b e r t a Small Power Program 2.4.3.1 : Small Power I n q u i r y 2.4.3.2 : Small Power Development Program CHAPTER 3 : SITUATION IN B.C  27  3.1 : Government P o l i c i e s 3.2 : B.C. Hydro's P o l i c i e s 3.3 : Progress t o Date CHAPTER 4 : PRICING HYDROELECTRIC ENERGY 4.1 : General P r i n c i p l e s o f Energy P r i c i n g 4.2 : B.C. Hydro's Energy Costs 4.3 : Avoided Costs 4.3.1 : Avoided Costs o f S i t e C 4.3.2 : D i f f e r e n t Accounting f o r S i t e C Costs 4.4 : Suggested Avoided Cost P r o f i l e 4.5 : Comparison w i t h B.C. Hydro's O f f e r CHAPTER 5 : VALUE OF SMALL HYDRO POWER 5.1 5.2 5.3 5.4  : : : :  4 4 8 8 11 12 14 14 16 22 22 25  D i s c u s s i o n o f B.C. Hydro's Purchase Rate Firm C a p a c i t y o f Small Hydro R i s k and R e l i a b i l i t y Windfall Profits  iii  27 28 32 35 35 38 44 46 48 56 58 63 63 65 70 72  CHAPTER  6  :  ENERGY P R I C I N G  P O L I C Y FOR S M A L L HYDRO  75  6.1 : Suggested Policy 6.1.1 : F i r s t Stage 6.1.2 : Second Stage 6.2 : Policy Rationale CHAPTER  7  :  75 75 78 79  SUMMARY AND C O N C L U S I O N S  7.1  :  Conclusions  7.2  :  Suggestions  85 85  for  Further  Research  86  REFERENCES  89  APPENDIX  1  :  Background  on  PURPA  APPENDIX  2  :  Ontario  APPENDIX  3  : Alberta  APPENDIX  4  :  B . C . Hydro's  IPP  APPENDIX  5  :  Energy  of  APPENDIX  6  :  Price  Hydro's Small  Costs  Small  Power  Adjustment  92 Power  for  iv  Rates  Inquiry  Energy Site  Purchase  Purchase  C Firm  ..  95 97  Policy  102 100  Energy  109  LIST  OF T A B L E S  TABLE  1  :  Hydropower  Capacities  TABLE  2  :  Hydropower  Additions  TABLE  3  :  B . C . Hydro's  TABLE  4  :  Site  TABLE  5  :  Energy  TABLE  6  :  Comparison  Value  C Project Pricing of  of  5 in  U.S.  Under  Energy  Specifications Rates Energy  PURPA  40 and  Costs  1989-1999 Purchase  v  10  47 62  Rates  64  LIST  OF FIGURES  FIGURE  4.1  :  B . C . Hydro's Marginal  FIGURE  4.2  : Site  C Project  FIGURE  4.3  :  Site  C Levelized  FIGURE  4.4  :  Site  C Cash  Flows  -  70  Year  Depreciation  .  52  FIGURE  4.5  :  Site  C Cash  Flows  -  20  Year  Depreciation  . . . .  53  FIGURE  4.6  :  Different  FIGURE  4.7  : Avoided Cost  FIGURE  4.8  :  20  Year  Cash  Value  Cash  Profiles Rates  vi  Energy  41  Flows  49  Flows  Accounting Costs  Purchase  of  50  for Site  C  (1992-2021) Starting  in  55 57  1992  59  ACKNOWLE DGEMENTS  I would l i k e to thank Dr. S.O. (Denis) Russell for his guidance, encouragement, and i n s p i r a t i o n . I am g r a t e f u l to Glen McDonnell of Sigma Engineering Ltd. for his help and ideas and Roger Bryenton, formerly of Energy, Mines and Resources Canada, f o r h i s a s s i s t a n c e and i n f o r m a t i o n . I would a l s o l i k e t o t h a n k D r . W . F . C a s e l t o n and D r . P e t e r Nemetz of the Commerce F a c u l t y for their valuable input and D r . Alan Russell for his encouragement. I am g r a t e f u l to Dr. Peter Lusztig, David Devine, and the M.B.A. Office for their a s s i s t a n c e i n p e r m i t t i n g me a c c e s s t o t h e M . B . A . p r o g r a m .  help  I would a l s o l i k e and i n f o r m a t i o n .  to  thank  B . C . Hydro  personnel  for  their  Thanks to my f a m i l y a n d f r i e n d s for their never-ending encouragement, s u p p o r t a n d i n t e r e s t i n my w o r k . I am g r a t e f u l for the financial support of the Natural Sciences Research Council, the Delta West Group, and CrolTech Resource Development. Most of all I would like to thank my b e a u t i f u l wife, Susan, for her steadfast love, support, and p a t i e n c e . Thanks for s h a r i n g my v i s i o n and g o a l s and h e l p i n g me m a k e t h e m a reality.  vii  CHAPTER 1 : INTRODUCTION  The  I began my  graduate research  first  that  solutions as  was  continue to  ones, be  leadership  role  conception,  (1) a  in  all  phases  and  of  technical  my  research  benefiting  government  plants  of  factors  The  and  second was  that had  s o c i a l b e n e f i t s ; and  (2)  in British hydropower  the  economic,  multiple  concepts  i n d u s t r y got construction serving  local  a  new  larger  of  scale  In  individual  needs.  control  comeback.  political,  phases  formed the  f a c t , the  of  an  basis  of  B.C. the  Canadian  private  electrical  i t s s t a r t around the t u r n o f the c e n t u r y w i t h  were abandoned, as assumed  idea.  Columbia. generation  i n t o p r i v a t e small hydro development i n  i s not  of  Later  small  power  projects.  After varying  hydro  generating  they were c o n s o l i d a t e d ,  larger u t i l i t i e s ,  plants and  small  and  began  many  hydro  is  building making  degrees of success i n the U.S.  1  the  most of them p r o v i n c i a l ,  distribution However,  a  approval  Small s c a l e h y d r o e l e c t r i c power p r o d u c t i o n by sector  take  that  i n the  These two  well  facility:  were p r o j e c t s  small  involved  find  society  w i l l i n g to  engineered  f o r development  development  engineering project.  to  an  p r o v i d e s a good v e h i c l e f o r e x p l o r i n g and  prepared  operation.  generating  significant potential sector  be  s o c i a l problems as  many economic, environmental, and  Private  i n mind.  projects  financing,  construction,  hydroelectric  concepts  Engineers should be  design,  regulation,  and  i n order t h a t  built.  two  should  t o economic, p o l i t i c a l ,  technical  small  engineers  with  and  a in  Ontario,  there  i s now  considerable  interest  Columbia's v a s t s m a l l hydro r e s o u r c e s sector. new to  For  some i t has  opportunity.  British  developed by the p r i v a t e  been a l o n g wait,  f o r others  i t is a  Yet t h e r e has been l i t t l e development a c t i o n  date. The  factors  hold-up  can  rather  than  problems,  similar  managers,  are  be  attributed to  technical  to  many  often  more  t e c h n i c a l ones.  of  for  setting  involved for  small  energy  faced  difficult  purchase  and  to  uneconomic.  Although many of the more a s s o c i a t e d w i t h significance  of  lies  fact  economic and  the  prices,  one  of  The  This  main  p r i c e being  issues offered  Hydro's c o s t of  has  been  one  of  the  issues discussed  many  limited  should primary  h e r e i n are u s u a l l y  to  in  a  of  the  civil  engineering  problems  faced  technical issues,  and  must  be  before  any  civil  e n g i n e e r i n g work can be performed.  2  significant  the  context by that  i s s u e s of s m a l l hydro development i n  first  new  B.C.  thesis  that  policy  the  framework  economics or commerce based r e s e a r c h ,  this  not  solved  and  than  making s m a l l hydro p r o j e c t s t h a t  b a r r i e r s t o development i n  are  of  engineers  resolve  hydro power i s w e l l below B.C.  the  by  types  propose a p o l i c y  i n s m a l l hydro development.  feasible,  engineers  These  political  In t h i s t h e s i s I review what i s happening i n  e l e c t r i c a l generation,  in  economic and  issues.  those  s m a l l hydro development i n B.C.  be  i n having  civil the B.C.  "traditional"  At the same time the  concepts and techniques u t i l i z e d engineering  a l l f a l l w i t h i n the domain of  economics.  T h i s t h e s i s takes the f o l l o w i n g  form:  Chapter 2 reviews  the p r o g r e s s made with s m a l l hydro development of  North  State  America.  because  Alberta  as  of  these  Special  i t s proximity to are  progressive p o l i c i e s situation  i n B.C.  attention  and  the  i s given to  B.C.  and  to  o n l y o t h e r Canadian  i n place.  Chapter  the p o l i c i e s  i n other parts Washington  Ontario  and  p r o v i n c e s with  3 reviews the p r e s e n t  o f B.C.  Hydro.  Chapter  4  d i s c u s s e s the v a l u e of energy and the concept o f avoided c o s t and  suggests  costs. power  a  method  f o r determining  a  utility's  avoided  Chapter 5 examines i n d e t a i l the v a l u e o f s m a l l hydro and  B.C.  proposes a new 7 summarizes my  Hydro's  purchase  price  policy.  p o l i c y t o s e t energy purchase  Chapter  prices.  6  Chapter  c o n c l u s i o n s and suggests a number o f areas f o r  f u r t h e r r e s e a r c h i n t o s m a l l hydro  3  development.  CHAPTER 2 : BACKGROUND ON SMALL HYDRO DEVELOPMENT  2.1  : D e f i n i t i o n of Small Hydro By  "small  hydroelectric capacity. t o 20 MW, under  am  usually  plant  with  less  than  Although  small  hydro  often  B.C.  5 MW  projects  5 MW,  B.C.  Peace  River,  5  megawatts  includes  based  on  various  to  a  (MW)  of  capacities  concerns.  To g i v e  Hydro's next planned will  have  capacity  900  up  of  regulatory,  an i d e a o f the s c a l e of  hydro  MW  i s over  technical,  project,  capacity  10,000 MW. homes.  demands and c a p a c i t y are g i v e n  i n T a b l e 1.  S i t e C on  and  A  example, can s e r v e over 1,000  2.2  referring  Hydro has made a d i s t i n c t i o n between over 5 and  and a d m i n i s t r a t i v e  generating  I  hydro",  Other  5  B.C.'s MW  the  total  plant,  for  examples of power  : V i r t u e s of Small Hydro Looking  advantages  at  to  energy  in  hydropower  renewable  resource,  dependent  for  as  which  i t s energy  such as o i l , gas,  global  and  a  is on  terms,  source  of  important  there energy. in  non-renewable,  coal.  Although  are  a  obvious It  world  is  heavily  depleting  fuels  some p r o j e c t s may  adverse environmental  impacts, hydropower i s n o n - p o l l u t i n g  does  to  not  contribute  unforeseeable advantages  side  the  greenhouse  effects.  Small  effect hydro  with also  over l a r g e r s c a l e h y d r o e l e c t r i c p r o j e c t s .  4  a  have and  all its offers  TABLE 1 : Hydropower C a p a c i t i e s D e f i n i t i o n According t o Capacity: M i c r o Hydro 1 kW - 100 kw Small Hydro 100 kW - 20 MW Medium and Large > 20 MW Hydroelectric Plants Power Demands: T y p i c a l Home Community Farm, Small Business Industry  kW kW/home kW MW  1 kW - 20 approx. 3 10 kW - 50 50 kW - 50  Capacity: S i t e C P r o j e c t (not b u i l t ) G.M. Shrum (B.C.'s l a r g e s t ) B.C. - f i r m hydro c a p a c i t y (1989) - t o t a l capacity Canada - i n s t a l l e d hydro c a p a c i t y (1989) - t o t a l capacity Source: O n t a r i o M i n i s t r y o f Energy (1986) (1989), and Hocker (1989).  Although  a large  plant  energy more economically hydro p l a n t right  are very  circumstances,  than a small  a small  generate  environmentally  cost  acceptable  sites  potential  o f small  has  the cost  hydropower  has l a r g e l y  low c o s t  advantage  of constructing  i n B.C. has r i s e n as many o f t h e  (Sigma and Robinson, 1983, p.1-1).  result,  and, i n t h e  can be as economical o r  developed  many o f t h e r e l a t i v e l y  electrical  one, t h e economics o f a  The r e l a t i v e  l a r g e s c a l e hydro f a c i l i t i e s cost,  plant  MW MW MW MW MW MW  B.C. Hydro  dependent on s i t e c o n d i t i o n s  more so than l a r g e r ones.  low  can u s u a l l y  f  900 2,416 9,500 10,500 57,900 97,000  sites  of large  have a l r e a d y  In contrast, the been  ignored  a r e undeveloped. scale  hydro  and As a  development  decreased r e l a t i v e t o small hydro power i n r e c e n t  5  been  years.  Small capacity the  plants  i n small  supply  large  plants  have  electricity  f o r energy  long  additions  t a k e time  brought  lead  times  and  and  spread operating  hydro p l a n t s  province's  and  contrast, large  system,  leads  add  t o keep  provide  of t h e i r  the  economy  economic  generating  which  t o a jump i n  area.  diversity  over  from  a  wider  I t has been shown  that  can make a l a r g e r c o n t r i b u t i o n t o t h e  than  a  few  large  o f the e l e c t r i c a l  Finally,  benefits  plants  ones  A l a r g e number o f small hydro p l a n t s  system.  In  they  and which o f t e n  range o f time and g e o g r a p h i c a l  the  quickly  i n balance.  to the capacity  t o absorb,  plants  constructing  p.41).  line  rates.  Small  many s m a l l  on  manageable increments, thus h e l p i n g  and demand  incremental can  can be  generation  (Schaffer, can a l s o and  1987, enhance  transmission  small hydro p l a n t s g e n e r a l l y have much  lower  environmental impacts than l a r g e p l a n t s . Small lack  of  hydro  i s not without  energy  reliability,  storage,  lack  susceptibility  of  disadvantages,  questionable economies  t o damage  from  "firm"  of  floods,  which  include  capacity  scale, sediment,  and and  and  greater debris  than l a r g e r p l a n t s . Small  hydro  plants  lend  themselves  well  ownership, which i s i n l i n e with world-wide t r e n d s privatization by  of services  governments  or  other  and f a c i l i t i e s large  6  agencies.  to  private  towards t h e  previously  provided  Development  and  ownership o f s m a l l hydro p l a n t s by independent power producers allows of  f o r management on a s c a l e more a p p r o p r i a t e  the f a c i l i t i e s  than does ownership by government  or l a r g e u t i l i t i e s . developing inability  small  to the scale  B.C. Hydro has not expressed  hydro themselves  t o develop  small  sites  and t h i s  may  agencies  interest i n  be due t o an  cost-effectively  because o f  h i g h overhead and an o r g a n i z a t i o n a l s t r u c t u r e more  appropriate  for large projects. P r i v a t e development o f small hydro p l a n t s a l s o encourages local  e n t e r p r i s e and l o c a l  governments. small  hydro  thereby  hand,  overseas. competition long  design  term  province's  and  construction  can be  the  province's  economic  f o r large  often  o f almost a l l  Most o f t h e equipment and e x p e r t i s e r e q u i r e d f o r  adding - t o  equipment  job creation, a goal  needs  hydro t o be  Independent  and thermal purchased power  f o r the p r o v i s i o n reduction  found base.  plants,  outside  producers  Major  on t h e  other  the province provide  of e l e c t r i c i t y ,  of costs,  i n B.C.,  or  healthy  leading  and can add c a p a c i t y  to a  t o the  system without i n c r e a s i n g B.C. Hydro's debt.  Thus, i t i s easy t o make the case t h a t , wherever they a r e l i k e l y t o be economical, the development o f s m a l l hydro should  be encouraged,  and t h a t  they would be b e s t  owned and o p e r a t e d by p r i v a t e developers, Producers  (IPPs).  be  before  solved  small  However, t h e r e a significant  developed,  o r Independent Power  are a number o f problems t o  number o f p r i v a t e l y  hydro p l a n t s can become a r e a l i t y .  7  plants  developed  They r e v o l v e  around  questions keeping and  such  as:  i n mind  other  "How  the  should  interests  resource  users  this  of  the  including  a  fair  rate  of  produced?"  Before  description  of  A l b e r t a may 2.3  in  the  Energy  with  which s i t e s ? " ,  these  problems  in  the  U.S.,  "Who  and  the  further,  "How energy  a  brief  Ontario,  passage  of  the  Act  (PURPA)  in  1979.  Policies of of  a  s m a l l hydro resurgence  larger 1978.  and  Spawned  by  the  direction  sources  renewable  resources  reduce  dependence  fossil  fuels.  of  on  as  i n how  and  was  wind,  crisis  of  energy a  guaranteed  provided  an  and  most  market  The  efficient  solar,  sources,  the  resources  cogeneration and  a  National  energy  including  hydro,  foreign  power  energy  the  t o f o s t e r development of  PURPA mandated  generated  Utilities  over the f o l l o w i n g decade.  energy,  such  i t s start  PURPA  legislation,  a new  (PURPA)  Public  of  would be developed  domestic  got  package  o v e r a l l i n t e n t o f PURPA was  utility  environment?",  the  1970's, PURPA s t a r t e d i n the U.S.  developer,  P u b l i c U t i l i t i e s Regulatory P o l i c i e s A c t  U.S.  Act  the  Experience  American  component  public,  established for  experience  North  Regulatory  developed,  p r o v i d e some i n s i g h t s .  : The The  be  examining  the  : The American  2.3.1  payment  be  the  s h o u l d g e t the o p p o r t u n i t y t o develop can  resource  and to  notably for  attractive  non-  market  o p p o r t u n i t y f o r entrepreneurs t o e n t e r the f i e l d o f  electrical  power  generally  production.  Established  8  utilities  were  opposed small  t o t h e requirements t o accommodate and buy power from  power producers, and t h i s  b a t t l e s b e f o r e PURPA f i n a l l y and  t h e ensuing  l e d t o some e x t e n s i v e  prevailed.  Background  court  cases  i s given  i n more  Energy  R e g u l a t o r y Commission  legal  on PURPA detail  in  Appendix 1. The was  Federal  responsible  established cost.  implementing  standard  f o r power  and  overseeing  purchases  which PURPA,  at f u l l  avoided  Avoided c o s t was d e f i n e d as "the i n c r e m e n t a l c o s t t o a  utility a  a  for  (FERC),  of e l e c t r i c a l  qualifying  energy which,  facility,  the u t i l i t y  would  1989,  or  Individual  s t a t e s were g i v e n t h e power t o e s t a b l i s h t h e i r own  adopted t h e f u l l  (WSEO,  itself  from  including  source"  generate  purchase  rules,  another  but f o r t h e purchase from  how t o determine a v o i d e d c o s t . avoided c o s t  p.II-1).  Many  standard while others,  New York, s e t a h i g h e r r a t e t o promote  states such as  development.  Although t h e e x p e c t a t i o n s o f PURPA were not q u i t e a  1980 r e p o r t  prepared  f o r FERC  predicted  a total  clear,  o f about  12,000 MW o f c a p a c i t y t o be p r o v i d e d by c o g e n e r a t i o n and s m a l l power p r o d u c t i o n under PURPA by 1995, 3500 MW be from s m a l l hydro of and  total  new c a p a c i t y  added  by t h e end o f the year,  line, Jan.  (Eden, 1985, p.582).  representing 1990).  3,140 MW  under  o f which  The 12,000 MW  PURPA was exceeded  519 hydro of capacity  projects (Marier,  would target  i n 1989  had come on Nov. 1989,  T a b l e 2 shows hydro p r o j e c t a d d i t i o n s under PURPA  from 1980 t o 1989.  9  TABLE 2 : Hydropower P r o i e c t A d d i t i o n s Under PURPA HYDRO PROJECTS ON-LINE  YEAR  No. 1980 1981 1981 1983 1984 1985 1986 1987 1988 1989  8 32 32 73 81 31 111 90 30 31  TOTAL  519  Capacity  (MW)  251 255 275 567 486 43 296 210 419 337 3 , 139  Source: M a r i e r (Jan. 89, Nov . 89, J a n . 90)  This resistance  i s quite  an  accomplishment  t o the l e g i s l a t i o n .  considering  However,  energy s u r p l u s , a corresponding  given  drop i n avoided  the e a r l y the current  costs  due t o low o i l p r i c e s ) , the l o s s i n 1986 o f some tax  incentives  f o r some sources  o f power  and  i n c r e a s i n g environmental o p p o s i t i o n  significant  (including  t o hydro  standard,  While  many  experiment which above  their  the use o f c o m p e t i t i v e  present  bidding  cost to  f o r power purchases from IPPs.  utilities left  As w e l l ,  i t s r u l e s , r e l a x i n g t h e avoided  and proposing  e s t a b l i s h market v a l u e  hydro),  development,  growth has slowed and the i n d u s t r y has c o n s o l i d a t e d . FERC has been modifying  (largely  feel  them w i t h avoided  that long  cost,  10  PURPA  was  a  term c o n t r a c t s many  others,  costly  at rates  especially  those  i n the private  successful  power  i n paving  t h e way  private  power p r o d u c t i o n .  Energy  Office,  successful dollar  industry,  "...nationwide,  independent  PURPA was  f o r t h e development  According  i n stimulating  believe  small,  t o t h e Washington  PURPA  has  t h e emergence  power producing  of  been  very  State  extremely  of a  multi-billion  industry..."  (WSEO, 1989,  p.1-2) . 2.3.2 : Independent Power Donald  Marier,  a  Industry  long-time  industry  "...the growth o f t h e independent energy success power  story  which  generation  independent qualifying  shows  the value  market"  power facilities  industry  1990,  capacity,  (QFs) as  survey  by t h e N a t i o n a l  Commissioner's  well  as  Association  (NARUC) showed  which  the E d i s o n most  Electric  Institute  o f t h e pre-PURPA  post-PURPA  projects,  energy was 25,323 MW U.S.  capacity  example,  there  capacity  enough  power  t o quantify.  of existing  Utility capacity  t o a study by  operating  of n o n - u t i l i t y  as o f December 1986, about 1989,  Total  which attempted t o i n c l u d e  still  the capacity  (Brown, was  (EEI)  i n the  independent  According  a  includes  o f Regulatory  17,189 MW  as o f June 1987 (Brown, 1989, p.22).  i s truly  p.2).  producers n o t covered by PURPA, i s more d i f f i c u l t A  states  of competition  (Marier,  production  observer,  p.22).  installed  In and  as w e l l  as  sources o f 4% o f t o t a l  California,  for  under-construction  c a p a c i t y t o boost t h e output o f independent power producers t o  11  25  percent  1989,  of the state's  total  generating  capacity  (WSEO,  p.1-2). Independent  producers  will  continue  t o be  a  dominant  f o r c e i n b u i l d i n g new c a p a c i t y over t h e next t e n y e a r s . expected  that  i n 1990, f o r the f i r s t  energy i n d u s t r y w i l l  50% o f c a p a c i t y  1997  will  p. 2 ) .  be  from  (Marier,  additions  over  will  generating  capacity  from  now and  generation  (OMOE,  1989,  indicate that  as h i g h  as 3 0  i n t h e U.S. w i l l be b u i l t by  decade  grow a t t r i p l e  through t h e 1990's with  (Brown,  1989, p.22).  the r a t e o f u t i l i t y  independents adding 1989 u n t i l  generation  3 0,000 MW  the year  capacity  to increase  y e a r 2000, o r 7.4% o f t o t a l U.S. c a p a c i t y . c o n t i n u e t o be a s i g n i f i c a n t  The  non-utility  2000  o f new (Marier,  1989, p . 2 ) . The Energy Information A d m i n i s t r a t i o n  projects non-utility  will  FERC e s t i m a t e s  Department o f Energy (DOE) i s p r o j e c t i n g t h a t  generation  Jan.  capacity  t h e next  equal t o t h a t  i n t h e U.S. between  non-traditional  t o 40% o f new g e n e r a t i n g  U.S.  1990, p.10).  The NARUC and EEI s t u d i e s  independents  t h e independent  b r i n g o n - l i n e new c a p a c i t y  brought on by u t i l i t i e s that  time,  It i s  t o 57,300 MW  (EIA) by t h e  Thus, IPPs a r e and  source o f e l e c t r i c a l  energy  i n t h e U.S. 2.3.3  : Washington  State  Washington S t a t e , developed U.S.  B.C.'s neighbour t o t h e south, has more  h y d r o e l e c t r i c capacity  and s t i l l  than  any o t h e r  state  has s i g n i f i c a n t p o t e n t i a l remaining.  12  i n the  Over 170  MW  o f QF g e n e r a t i n g  c a p a c i t y has come o n - l i n e  i n Washington  s i n c e t h e passage o f PURPA, i n c l u d i n g 20 s m a l l hydro p r o j e c t s w i t h a combined c a p a c i t y o f 77 MW The  State  does not s e t avoided  but d i r e c t s them t o estimate that  i n response  Utilities  costs  for its  t h e i r avoided  t o t h e apparent  o f power a t l e a s t  evaluated  environmental  on  a  market  price  impacts,  of  f o r power.  f o r proposals f o r  every two y e a r s .  number  utilities  c o s t and t o a d j u s t  a r e r e q u i r e d t o send out r e q u e s t s  new sources are  (WSEO, 1989, p.1-3).  bases,  The p r o p o s a l s  including  f i n a n c i a l i n t e g r i t y , and f u e l  price,  supply.  Power purchase r a t e s a r e n e g o t i a t e d between t h e u t i l i t i e s and  t h e independent producers.  P r i c e s may v a r y  many f a c t o r s i n c l u d i n g f i r m energy p r o d u c t i o n , c a p a b i l i t y , performance guarantees, of  contract,  and  front-loading  according to  load following  p r o j e c t s t a r t date,  or l e v e l i z a t i o n  length  provisions.  Power purchase c o n t r a c t s a r e thus t a i l o r e d t o s p e c i f i c p r o j e c t characteristics. simplifies incentives certain  the  State  legislation  permitting  process  f o r renewable  and  resources.  power p r o j e c t s a r e allowed  also  streamlines  and  provides  financial  F o r example,  owners o f  t o pay a reduced  business  t a x and a r e exempt from p r o p e r t y t a x a t i o n f o r seven y e a r s . A f t e r t h e passage o f PURPA, avoided initially supply ensued.  high  deficit.  because  c o s t p r o j e c t i o n s were  o f t h e p r e d i c t i o n o f an  In Washington,  By mid-1982, developers  13  a  hydropower  had f i l e d  electrical  "gold  f o r over  rush"  250 hydro  projects. secure  Speculators  rights  electricity did  potentially  in  the  California based  natural  on  California  high  by  utilities  regulatory  the as  other  and  U t i l i t i e s Commission  escalation  the  PUC's  were  forced  pay  the  terms i n  rates  "standard to  decline  much more f o r QF  for o i l  offer"  sign  (PUC)  system,  contracts Due  and  to  with  lags  in  in o i l prices, California electricity  than  it  costs  thermal p l a n t s .  : Canadian Experience  2.4.1  : Canadian H y d r o e l e c t r i c Hydroelectric Canada,  57,000 MW 60%  and  purchase c o n t r a c t  Public  them t o generate a t t h e i r own  for  hydropower  unprecedented numbers of QFs.  response and now  the  baseline  Under  unexpected and  2.4  When  avoided c o s t s dropped of  avoided c o s t s and  were s e t  gas.  utilities  development  sites.  to  resources.  In c o n t r a s t ,  and  attractive  d e f i c i t became a s u r p l u s ,  interest  renewable  on  f i l e d dozens of permit a p p l i c a t i o n s  of  hydroelectric  Although the  representing actually  leading  B.C.  Currently,  generating  i t s approximately 97,000 MW  1989).  Hall,  power i s a v e r y important  especially in  of  Industry  13%  of  U.S. the  has  producer  In of  fact,  capacity,  total  the  hydroelectric  14  1980's, power  (Hocker,  (85,000  capacity), (Eden,  Canada  i n the  about  representing  capacity  energy  energy  has  more hydro c a p a c i t y  nation's  in  Canada  of t o t a l  generates more h y d r o e l e c t r i c  1988) .  source o f  MW  Canada  1989,  and  became  the  world.  More  than  90%  of  provincial  Ontario  29,600 MW  of  f o l l o w e d by  i s the  total  supply  is  utilities  and  capacity  British  out  of  (6,500  Columbia  10,500 MW  of  MW  Hydro's hydro c a p a c i t y  MW.  In  contrast,  Alberta's  Before  the  significant  of  in  they  some  did  very  utilities  providing  Ontario date,  has but  accounts  for  p r i v a t e l y produced However,  to  encourage  provincial  (23,800  MW  hydroelectric hydro 99%  of  l a r g e r than  20  less  than  power the  20%  diverse  the  most  and  flexible  advanced and  and  Alberta  s i t u a t i o n s i n Ontario  and  of  not  climate  private have  of  are  actively I will in detail,  d i s c u s s i o n o f B.C.'s p o l i c i e s t o a l a t e r  chapter.  for  in  the  recently  a larger r o l e to source  a  generators,  play  electricity.  comprehensive  Alberta  15  was  Although  governments  promoting independent power p r o d u c t i o n . the  hydro),  t o 2,400 MW,  comes from p l a n t s  little  and  B.C.  is  with  Although  i s r a p i d l y changing.  a  both  of  capacity.  adopted the view t h a t p r i v a t e power has in  investor-owned  which  9,300 MW  total  Canada.  p r i v a t e power p r o j e c t s past  eight  capacity.  1980's,  factor  by  of t o t a l c a p a c i t y  has  hydropower  6,200 MW  one  of  p r o j e c t s range i n s i z e from l e s s than 1 MW B.C.  provided  l a r g e s t producer of e l e c t r i c i t y  Quebec w i t h 25,000 MW  hydro).  capacity  power  government-owned  utility.  of  Canada's  policy  to  involved  in  first and  examine leave  a  2.4.2  : O n t a r i o Independent Power Program The  Ontario  Government's  been a s t r o n g s u p p o r t e r  M i n i s t r y o f Energy  o f independent power g e n e r a t i o n  r e f e r r e d t o as P a r a l l e l Generation and  Ontario  cooperative policy  on  Hydro,  the  utility,  In 1989, t h e OMOE  generation  that  p o l i c i e s , g o a l s , and r a t i o n a l e .  clearly  Although  bound t o adopt any o r a l l o f t h e p o l i c y appear l i k e l y The  highlights  (also  and N o n - U t i l i t y Generation)  provincial  t o a degree. parallel  (OMOE) has  has  issued sets  been a new  out i t s  O n t a r i o Hydro i s not recommendations,  they  t o i n c o r p o r a t e many key elements o f t h e p o l i c y . of t h i s  policy  and some o f t h e r e l a t e d  issues  are d i s c u s s e d below. Purchase reflect  r a t e s , t h e government has s t a t e d , should  the value  o f t h e power t o t h e e l e c t r i c a l  fully  system and  t h e r e f o r e should be based on avoided c o s t , which i s d e f i n e d as the c o s t t h a t would otherwise generating  the  utilities.  The c a l c u l a t i o n o f avoided  account  short  transmission, costs;  and  these  itself  long  its  costs,  avoided  or  term  distribution,  and s o c i a l  calculates and  power  be i n c u r r e d by O n t a r i o Hydro by purchasing  c o s t s s h o u l d take  costs and  where  from  of  power  c o s t s based  on system  into  generation,  purchases;  measurable.  other  environmental Ontario marginal  Hydro costs  a r e c u r r e n t l y j u s t below t h e average c o s t o f power,  which i s based on h i s t o r i c a l a c c o u n t i n g c o s t s . Electric electricity  consumers  a t reasonable  should  continue  to receive  r a t e s ; t h e development  16  reliable  of p a r a l l e l  generation  should  not i n c r e a s e  costs  t o ratepayers  i n the  s h o r t term and should reduce energy c o s t s i n t h e long term. Ontario will to  Hydro's  methods  for calculating  avoided  be s u b j e c t t o p u b l i c review and t h e r e s u l t s w i l l establish a  generators, capacity  schedule  o f purchase  a l l o w i n g f o r s t a r t - u p year,  f a c t o r o f the generator.  rates  c o n t r a c t d u r a t i o n , and  Although O n t a r i o  o f the review p r o c e s s .  has  i n c l u d e d the p u b l i c review o f avoided  of  the  Preferred  generation delayed  the t a b l i n g  o f the Plan  i t s e l f may take  cost  some p a r a l l e l to  their  review,  generators  criticized  Ontario  for  However, they s e v e r a l times  12 t o 18 months.  and thereby  Hydro has  Hydro  c o s t w i t h t h e review  strategy  f o r the next 15 years.  of t h e p l a n avoided  Plan,  be used  f o r a l l private  agreed t o the review, i n d u s t r y r e p r e s e n t a t i v e s have Hydro's implementation  costs  have  already  and t h e review By d e l a y i n g t h e  t h e purchase  believe Ontario  electrical  Hydro  rate  schedule,  i s attempting  "stymie t h e development o f the independent power i n d u s t r y "  (IPPSO, Sept. 1989, p . 7 ) . All parallel  generators  should have a c c e s s  to electricity  purchase r a t e s on the same b a s i s , r e g a r d l e s s o f energy or and  technology.  This  loan  incentives  potential  generators.  recovery  of c a p i t a l  includes from  making  Ontario  Front-end  front-end  Hydro loaded  loaded  available rates  source  allow  rates  to a l l faster  c o s t s and a r e c u r r e n t l y a v a i l a b l e o n l y t o  renewable r e s o u r c e p r o j e c t s .  17  Parallel that  the  industry  established of  generation  to  in  in  support  preparing  developers.  a  representatives  Ontario  is  competitive  winning  bid  benefits  competitive  bidding  competitive,  and  the  to  not  the  i t s potential  and  industry,  industry known.  is  In  c o s t t o the  t o ensure t h a t they may  b i d d i n g p r o c e s s i n the longer projects  with  stage,  technical If  the  requirements  offer  was  first-come, could  be  selected  greater  MW  of  further  1000  the  Ontario  development MW  a  by  of  the  bids  this  encourages  than  5  added  MW,  process.  would  basis and  of  cap,  avoided be  be  Hydro should 1995.  In  solicitation,  18  on  a  projects such  the  as  system,  seen as a r b i t r a r y . be  the could  based  costs.  chosen  to  the  meeting  criteria  benefits  the In  A l t e r n a t i v e l y , the  of p a r a l l e l g e n e r a t i o n  first  of  b e n e f i t from a  Hydro's  development by the year 2000, depending on results  established,  capacity  s e l e c t i o n system c o u l d  Through t h i s process, 1000  on  to  receive  basis.  reliability,  such a  up  over-subscribed,  first-serve  availability, although  would  delaying  term.  capacity  a l l proposals,  result  s h o r t term, a t no  government proposes a two-stage s o l i c i t a t i o n first  may  support  i n d u s t r y i n the  cost  potential  government recommends a p r o c e s s t h a t  ratepayer,  the  suggest  the development o f the  For  that  bidding  They  argued  sufficiently  discourage  ratepayers.  until  have  yet  bidding  would  Without a developed  minimal  position,  industry  able second be  to  solicit  stage,  a  solicited  for  l o a d growth and  the  on  a  competitive  bidding  process.  utility  holds  Presently,  a  which  solicits  rates  are  formal an  for  Request  unlimited  negotiated  projects  for  Proposals  amount  of  f o r each p r o j e c t  5  over  MW,  (RFP)  process,  capacity.  with  a  the  Purchase  ceiling  at  the  avoided c o s t . of 5 MW  Projects with capacity be  welcome  process  at  any  because  time  they  relatively easily. schedule  with  p r e s e n t l y has or  less  and  exempted  can  be  from  the  integrated  solicitation  into  the  standard  rates  would  these p r o j e c t s are  increases  Ontario  integrated  i n t o the  with the reflect  rate of  standard  cents/kWh  for a  escalated  each year a t the  f o r up for rate  a  to  10  capacity  years  definition  of  costs  generate, t r a n s m i t , facilities) power.  and  (CF)  This  of  was  65%  at  3.97  greater,  (see  to  85%  incurred  electricity  than the  When avoided c o s t s exceed 85%  19  does  and  current o f the  (CPI)  Section  Thereafter,  i s equal  (costs  distribute  rate  set  or  5.2  the of  by using  on  rates  Consumer P r i c e Index  factor). rate  power  which i s h i g h e r  rate  i n - s e r v i c e date  capacity  for  lower purchase  base  Ontario  from the  i s renegotiated.  accounting  factor  the  MW  capacity  Lower  i n c l u d e a c a p a c i t y component, j u s t energy c o s t s . the  that  inflation.  not  1989,  Hydro  system  purchase p r i c e depends on the  lower c a p a c i t y  May  system  r a t e s t r u c t u r e f o r g e n e r a t o r s of 5  a standard  The  apply.  for  In  to  For these s m a l l e r p r o j e c t s a purchase r a t e  an on-going b a s i s . f a c t o r and  and  or l e s s would c o n t i n u e  base  Hydro's  Hydro  to  existing  avoided c o s t accounting  for  costs  of power costs.  (projected  A lower r a t e of 2.54  term i n c r e m e n t a l w i t h a CF three  f o r 1991), r a t e s w i l l  other  rate  One  of  the  renewable r e s o u r c e wood waste. year period This  rate  for  power  offers  a  i s designed  to  the  receive  4.94  encourage,  This  forecasted  reduces the  f a s t e r recovery  t o energy  10-year  and  for  of  have long  10-  greater. assist, resources  over  the  10-  r i s k s to p r i v a t e generators  investment.  lives  or  from renewable rates  and  for a  financially  standard  from renewable resources  expected t o  rate  rate  cents/kWh  from the s t a r t - u p date f o r a CF o f 65%  year period. allowing  The  are  p r o j e c t s , i n c l u d i n g hydro, s o l a r , wind,  These p r o j e c t s  front-loading  projects  2.  fixed  development of n o n - u t i l i t y generation by  short  rate, there  purchases.  i n d e t a i l i n Appendix  options  avoided  i s p a i d f o r energy from  Besides the standard  options  schedule i s d e s c r i b e d  based on  cents/kWh, based on Hydro's  energy c o s t ,  l e s s than 65%.  be  and  This  rate  i s limited  because t h e s e p r o j e c t s  be  relatively  by  are  i n s e n s i t i v e to  changes i n market c o n d i t i o n s . The  industry  has  criticized  the  because t h e purchase r a t e i s roughly c o s t of a new known as  the  utility  purchase  equivalent  by  of  Ontario  higher  the  levelized  cost.  This  levelized  inflation  r a t e over time.  Hydro  on  recovery  of  schedule  t o the  p l a n t over i t s l i f e i n c o n s t a n t  on the b a s i s of paying t h i s r a t e i n i t i a l l y it  rate  plants, the  costs  the of  20  The  other the  cost  and  dollars,  i s computed  then e s c a l a t i n g  accounting hand,  plant  average  from  treatment  allows rates  a in  much the  early  years  private  of  the  generators  project's  payback  levelized  cost  Chapter  plant's would  I  A  their  will  similar risks  costs  to  reducing  the  by  discuss  accounting  treatment  this  in  problem  of  detail  in  more  4.  For  hydropower  development  must be made through releases  sites  projects,  receives  on  large  solicitation  prevent  reduce  period.  versus  life.  a  the  and  basis  small,  standard one  of are  purchase  t h a t may  proponent a t any  time  exempt  Ontario  from  the  rate  successful  from  Ontario  waste money and  time  process  being  by  early  without  e v a l u a t i n g c o s t s and  Hydro. the  To  number any  and  which  a  will  new  one  However, t h e r e  and d e v e l o p e r s  ever d e v e l o p i n g a p r o j e c t .  reviewed  1990  These  applicant  sites,  i s limited to three.  which  Hydro's  be under development by  i s no c o n s i s t e n t b a s i s f o r awarding a s i t e ,  developed  application  bidding.  from monopolizing  of Crown Land s i t e s  i s now  land,  competitive  Instead,  developer  one  Crown  the M i n i s t r y of N a t u r a l Resources,  process.  any  on  process  include  b e n e f i t s of p r o j e c t s and  can This  should  be  techniques  for  methodology f o r  comprehensive r i v e r p l a n n i n g . Total was  installed  approximately  of  parallel  was  hydro.  committed, years  p r i v a t e generation  1200  MW  generation In  (OMOE,  i n 1988.  From 1985  c a p a c i t y was  added,  a d d i t i o n , 273  a l l of which 1989,  capacity  should  p.2).  of  be  developed  The  21  new  t o 1989, 14.5  MW  in  MW  capacity  government  i n the  Ontario 25.5 of  which  has next  estimates  MW  been two that  between  150  developed  has  250  sites,  52,  identified slowed  as  hydropower  the  private  representing  a  recently  as  and  term  that  parallel  Out of  67  these  system and  purchase  of  However,  hydro  the  economic  more of  the  be 150  MW,  have  activity sites  uncertainties  government r e a l i z e s t h a t p r i v a t e  generation  including are  account  specific  the  and  risks  will  contract  government b e l i e v e s utility  could  process.  availability,  share o f the  sector.  because  some major u n c e r t a i n t i e s ,  long  capacity  capacity  economic.  been developed  Although the  t o the  of  being  of the s i t e r e l e a s e  presents  by  considerably  have a l r e a d y  through  MW  profitably  assessed been  and  for a  r i s k s can  ratepayers  of  reliability  l i m i t e d by  provisions.  risks  be  fact small  limited further  As  likely  and  the  relatively  a  result,  independent power  are  generation  t o be  the  production  manageable  and  are outweighed by the p o t e n t i a l b e n e f i t s . 2.4.3  : A l b e r t a Small Power Program  2.4.3.1 : Small Power I n q u i r y Unlike are  other  provinces,  investor-owned.  o p e r a t e s 4,300 MW interest  in  The  have  the  utilities  largest, TransAlta  n o n - u t i l i t y small  (SPPAA) and  lobbied  major  of t o t a l capacity.  s i n c e the e a r l y 1980's. of A l b e r t a  the  Utilities  There has  power  in  Alberta Corp.,  been a growing  production  in  Alberta  The  Small Power Producers A s s o c i a t i o n  other  p o t e n t i a l p r i v a t e power producers  government t o  develop  22  a  policy  for  private  generation, contract  including terms  for  the  In  1987  the  production. public  alternative  inquiry  by  the  sale  the  Public  findings 1988.  and  The 1)  Boards  of  provisions  their  electric  p r o v i n c i a l government Utilities  Energy Resources Conservation hearings,  pricing  Board  submitted  recommendations  (ERCB). a  to  Board  Alberta  would  Government  facilitate  the  called (PUB)  government  should  and  a  the  in  their  February  following:  adopt  production  for  outlining  Boards' recommendations i n c l u d e d the  the  energy  A f t e r a s e r i e s of  report  the  and  a  of  policy  that  electricity  by  independent producers; 2)  a l l types of power producers projects) 2.5  3)  MW  with  or  individual  less,  from  (including utility-owned  generating  any  power  capacities  source,  should  c l a s s e d as small power producers  (SPPs);  initially,  MW  of  small  interconnected  to  the  capacity system  a  maximum  could  be  without  of  100  affecting  system  of be  power Alberta  reliability  or  i n c r e a s i n g c o s t t o consumers; 4)  the  price  should and  be that  reliability l e n g t h and  to  be  based price and  paid on  for  small  long-term should  utility  vary  availability  of  s t a r t i n g date of the  23  power  generation  avoided  according the  power,  contract;  costs  to  the  and  the  5)  s m a l l power g e n e r a t i o n or  when  first,  should  be reviewed a f t e r 1994,  100 MW i s i n t e r c o n n e c t e d ,  so t h a t  i t s value  whichever  occurs  t o the e l e c t r i c i t y  system  can be f u l l y assessed and t h e p r i c e s reviewed. Fixed cost  prices  (i.e.,  taking  equivalent  fixed  determined shown the  on l e v e l i z i n g escalating over  the  the u t i l i t i e s '  rate life  and of  3, would  and vary  remain  depending  The Boards o r i g i n a l l y  separate  prices  f o r firm  fixed  avoided  calculating a  contract  f o r 10, 15, and 2 0-year c o n t r a c t s .  contract  power.  an  rate)  i n Appendix  begins. be  based  were  These p r i c e s ,  f o r the duration  on which  year  the  recommended  that  there  and  an  as-available  of  contract should  (secondary)  However, they l a t e r determined t h a t t h e p r i c e s  should  i n i t i a l l y be equal and any necessary adjustments c o u l d be made when t h e program i s reviewed. The  report  a l s o s a i d l a r g e r n o n - u t i l i t y power producers,  with c a p a c i t i e s greater  than 2.5 MW,  regulatory  and n e g o t i a t e  requirements  should  continue  contractual  t o meet  terms  with  the u t i l i t i e s u s i n g the p r i n c i p l e s and methods o u t l i n e d i n t h e report.  These i n c l u d e u s i n g the avoided c o s t as a c e i l i n g f o r  energy purchase p r i c e . larger  projects  A more complex r e g u l a t o r y  i s necessary  to  minimize  adverse t e c h n i c a l o r economic impacts. against  using  determine default  the  concept  front-loaded  of  o f such producers  represents  24  potentially  The Boards recommended  levelizing  fixed prices  any  process f o r  avoided  costs  to  f o r non-SPPs because t h e a significant  financial  risk and  to  the  consumer.  details  of  the  recommendations are o u t l i n e d i n Appendix  2.4.3.2 : Small In  the  to  the  "Small  June 1988.  report,  producers  using  biomass.  The  renewable  program small  the  Power Research  T h i s program was  assessment of  Boards'  views  3.  Power Development Program  response  announced in  Further  Alberta  and  Development  designed  fuel  to help  sources  facilitates  of  small  power g e n e r a t i o n  government  small  wind,  be  able  to  power  hydro,  p r o j e c t s so  could  Program"  and  that  carried  the  out  in  the near term. Under  the  utilities  to  projects  less  number  of  sell  power  than  2.5  larger  cents/kWh. set  program,  SPPs from  MW  pilot  are small  hydro,  in capacity projects)  (except  at  a  1995  forward  come on-stream  year  sooner.  program.  terms.  supported developed  addition  to  by  of e l i g i b l e  system  or  the  the program, other 1994  at  prices  program began i n October 1988 MW  biomass  for a  limited  rate  of  the  of  1994,  Inquiry of  renewable r e s o u r c e s  to  are  typically  renewable  not  eligible  f o r 15  energy  or  set and  out  in  report.  interconnected comes  first.  be The  i s expected t o run u n t i l  whichever  25  the  20  projects  small power p r o j e c t s c o u l d  small power p r o j e c t s are end  with  5.2  the g o a l  utilities  These c o n t r a c t s are  In  by  Electric  with  or  fixed  t o the p r e s e n t  encouraging s m a l l power p r o j e c t s u s i n g  the  wind  T h i s p o l i c y i n e f f e c t b r i n g s the p r i c e the  f o r the year  for  contract  to  125 the The  benefits  and p o t e n t i a l c o n t r i b u t i o n  deferring  large  generating  plants,  of small will  power,  be  including  assessed  at  that  time. In November 1989, the government announced changes t o the program t o f u r t h e r paid  benefit  for electricity  given  a  with  choice  from  between  inflation.  small  The  a  SPPs  power was  fixed  program  s o l a r and peat power g e n e r a t i o n . price  reflects  the p o t e n t i a l  increased  price  was  producers.  guarantees  SPPs  cents/kWh  thereafter.  cents/kWh  i n 1990,  utility which  time  Board. for  also  environmental  cents/kWh escalating  then  the p r i c e s  In a d d i t i o n ,  will  small  be power  include  i n t h e purchase  benefits The  of  tax  rebated small  rebate and  program,  passed  producers  income  fixed price and  option  starts  at  with  on t o power  to receive  large generating u t i l i t i e s .  26  4.64 The  f o r 10 y e a r s ,  after  the  paid  consumers.  the same  6.0  inflation.  Public  Utilities  producers would be  tax  using  1995,  prices  s e t by  to  until  escalates  t o pay these  were  escalating  extended  The i n c r e a s e  price  SPPs  eligible  t h e u t i l i t y companies' income t a x r e b a t e program.  the  the  The  and  i s required  5.2  and  or a p r i c e  renewable r e s o u r c e s t o generate e l e c t r i c i t y . option  The  by  Under  utilities is  This  will  allow  income t a x treatment  as  CHAPTER 3 : SITUATION IN  3.1  : Government P o l i c i e s B.C.  result has  B.C  Hydro's  of  four  interest  in  encouraging  IPPs  p r o v i n c i a l government  directives.  goals  the  in  encouraging  is  The  a  direct  government  development  of  private  power: -  i n t r o d u c e more competition production  i n t o the  electrical  industry;  e x p o r t of e l e c t r i c i t y by the p r i v a t e s e c t o r ; -  improve e f f i c i e n c y and  -  encourage p r i v a t e s e c t o r investment i n power production  Jack  Davis,  has  electricity projects  Minister said  demand  instead  corporation,  will  intends  to  rely  provide  increased  of  of  that  much  will  be  B.C.  Hydro.  remain the as  Energy,  much  as  Credit New  Party,  production recently  are  there  are  Party  that  Mines, the  growth  private  While  B.C.  the  Petroleum in  B.C.'s  sector Hydro,  power  a  Crown  player,  the  possible  on  marketplace  the  f o r both  the  government  domestic  to and  1990). goals  of  the  some i n d i c a t i o n s t h a t  (NDP)  and  dominant  stated  t o some extent. stated  by  power g e n e r a t i o n  these  Democratic  of  met  e x p o r t markets (Lewis, A p r i l 5, Although  system;  (Swoboda, 1990).  B.C.  Resources,  reduce c o s t s of the  would  also  support  Mike Harcourt, NDP  27  prefers  ruling the  Social  opposition  private  leader smaller  o f the  power NDP,  generation  p r o j e c t s over l a r g e ones, be  permitted  costs, 8, 3.2  only  including  and export of f i r m e l e c t r i c i t y  i f the  social  sale  and  price  covered  environmental  would  a l l long-term  c o s t s (Lewis,  April  1990). : B.C. To  Hydro P o l i c y  meet  these  government  objectives,  B.C.  Hydro  has  announced a p o l i c y of encouraging p r i v a t e power development i n four separate areas: p r o j e c t s areas not  connected  developed  f o r the  projects for  of  5 MW  domestic  generally  export market, or  potential  lies.  Engineering in  as  the  this For  and  connected  projects t o the  purposes  to projects  f o r the the  less For  referring system  Resource  t o the main power supply g r i d ) ,  use.  integrated  f o r non-integrated areas  under  of  example,  provincial  this  of  and  system  paper,  connected the  1983  study  government,  "Small  System,"  5 MW  I to  small by  am the  hydro Sigma  Hydropower over  600  p o t e n t i a l s m a l l hydro s i t e s under 20 MW  r e p r e s e n t i n g over  1400  MW  approximately  of capacity.  Provincial  a  projects  integrated  5 MW  i s where most  over  (those  Sigma estimated t h a t  g e n e r a t i n g a t o t a l of 430 MW  80  sites  c o u l d be developed by the p r i v a t e  s e c t o r a t o r l e s s than the c o s t of B.C. C project.  identified  P r o j e c t s of 5 MW  Hydro's proposed  or l e s s are a l s o e l i g i b l e  Site for a  s t r e a m l i n e d r e g u l a t o r y and a d m i n i s t r a t i v e p r o c e s s , i n c l u d i n g a s t a n d a r d purchase  rate  and  g e n e r a l approach t o p o l i c y  contract, evaluation.  28  which a l l o w s f o r a more  B.C.  Hydro  electricity facility  defines  generated  which  independent  by  an  i s connected  power  independent t o the  B.C.  or  production  as  privately-owned  Hydro  system.  The  u t i l i t y ' s p o l i c y statement on IPPs says i n p a r t : In i t s e f f o r t t o achieve the most economic supply of e l e c t r i c i t y , B.C. Hydro i s t u r n i n g t o IPP's f o r a portion of i t s electricity s u p p l y requirements. Cost e f f e c t i v e independent power p r o d u c t i o n s h o u l d a l l o w d e f e r r a l o f l a r g e r , p o t e n t i a l l y more expensive p r o j e c t s on the i n t e g r a t e d system. (B.C. Hydro, May 1989, p.6) B.C.  Hydro s t a t e s t h a t the b e n e f i t s o f independent  production  power  include:  smaller projects; defer large plants; a l l e v i a t e r a t e shocks; l e s s environmental impact; d i s t r i b u t e d economic  development;  competition; -  enhanced  government revenues;  reduce l o s s e s of s u p p l y i n g power t o n o n - i n t e g r a t e d areas (Swoboda, 1990). For  projects  less  than  5  MW,  B.C.  Hydro  will  invite  proposals  f o r the supply o f e l e c t r i c i t y  through a Request f o r  Proposals  (RFP)  of  generation To  process  is,required,  minimize  i n the up  each  year,  as  t o a predetermined maximum  administration  f a c i l i t a t e the development  spring  and  transaction  costs  total. and  o f independent power p r o j e c t s  29  new  to  under  5  MW  capacity,  price,  be  conditions,  apply t o these p r o j e c t s .  purchase B.C.  standard  rate w i l l  be  including  A c c o r d i n g t o B.C.  set annually  at  a value  Hydro's incremental c o s t of e l e c t r i c i t y .  announced  a t the time  escalation. first the  Purchase  come, f i r s t agreements  of the  RFP  agreements  will  approximately  be  Hydro,  be  reflects  subject to  entered  to  the  The p r i c e i s t o  into  t h e aggregate  equal  purchase  that  i s s u e and  serve b a s i s u n t i l  is  the  the  on  a  c a p a c i t y of predetermined  maximum t o t a l . The c o n t r a c t w i l l have a 20 year term o p t i o n t o renew each year t h e r e a f t e r . to The  initially,  The  first  year,  rate i s currently plus  changes i n the not exceeding To  adjustments  set at  each  Consumer P r i c e  3.0  year  Index  the  project i s required  p r o v i d e a minimum amount of k i l o w a t t - h o u r s purchase  with  (kWh)  cents/kWh  after  (CPI)  per  that  year.  for  the  equal  to  f o r Vancouver,  but  3 percent/year.  secure  a  contract with  B.C.  Hydro,  the  IPP  must  be  able to: 1)  demonstrate,  through  performance  previous  guarantees,  an  experience ability  to  f i n a n c e , c o n s t r u c t , and operate the proposed 2)  meet  the  reliability  standards of supply,  w i t h the B.C.  for and  Hydro system;  30  electricity  s a f e t y , and  be  and/or design, project; quality,  compatible  3)  pay  for  interconnection  costs  m o d i f i c a t i o n s t o e x i s t i n g B.C. Hydro 4)  pay f e e ( s )  t o B.C. Hydro t o a s s i s t  and  required  facilities; i n defraying i t s  c o s t s o f e v a l u a t i n g the p r o p o s a l ; 5)  o b t a i n a l l necessary approvals,  l i c e n c e s , and p e r m i t s  t o comply with a l l r e g u l a t o r y requirements. B.C. Hydro's p o l i c i e s  with  respect  t o IPPs  are presented  in  more d e t a i l i n Appendix 4. There a r e s e v e r a l major d i f f e r e n c e s between t h e under-5MW a  process public  and t h e over-5-MW process RFP  process,  B.C.  Hydro  worth n o t i n g . will  Following  purchase  electricity  from p r o j e c t s g r e a t e r than 5 MW a t r a t e s and o t h e r terms based on  competitive  acceptable of  other  price  and  other and  optimize  B.C. Hydro  provided  will  alternatives. conditions  B.C.  Hydro  benefits  The  for  the  quality i s  will  seek  projects.  The  projects  financial  t o the u t i l i t y  consider  electricity  these  and  purchase will  competitive  be  arrangements  i t s ratepayers.  alternative price structures  f i n a n c i n g arrangements, with a p p r o p r i a t e these  that  and t h e c o s t t o B.C. Hydro i s lower than t h e c o s t available  negotiated which  negotiations,  and/or  guarantees, t o a s s i s t  negotiation  process  is  o u t l i n e d i n Appendix 4. The provides  intent of t h i s  process  i s to negotiate  t h e lowest c o s t t o B.C. Hydro r a t e p a y e r s  31  a price  that  and r e f l e c t s  the  values  of  f i r m and  secondary  energy.  Factors  affecting  price include: -  d e p e n d a b i l i t y and r e l i a b i l i t y o f energy  -  d u r a t i o n of  -  impact on the t r a n s m i s s i o n and d i s t r i b u t i o n system  supply;  (e.g., p r o x i m i t y t o the Lower Performance  guarantees  may  be  Mainland).  required  both f r o n t - e n d and o p e r a t i o n a l , t o B.C. 3.3  : Progress  the to  1989, in  i n the U.S.  allowing  initial  B.C.,  MW.  to  in setting  p r o j e c t sponsors,  evolve  14  sites  on  other  their policy they  f o r under 5 MW 10  released firms,  for seem  For  the  in  May  a l l based  h y d r o e l e c t r i c p r o j e c t s , with  a  total  These p r o j e c t s are s c a t t e r e d throughout  will  be  entered  as of March 1990  p r o j e c t representing  action  from  gradually.  B.C.  into  o n l y one  l e s s than 1%  Hydro  with  feel  most  of  contract, a  o f the  total  that the small  capacity  been signed.  There are s e v e r a l f a c t o r s which may of  risk,  under-5-MW p r o c e s s  While r e p r e s e n t a t i v e s of  agreements  o f f e r e d , had  the  Hydro.  Hydro r e c e i v e d responses from  province.  kW  policy  representing  purchase  62  Ontario  f o r Proposals  c a p a c i t y o f 47.6 the  and  the  Request  B.C.  reduce  Hydro borrowed from l e s s o n s l e a r n e d  over-5-MW p r o j e c t s , f o r the be  to  t o Date  While B.C. utilities  supply;  in  B.C.:  Crown  price land,  f o r power  produced,  environmental  32  account f o r t h i s allocation  concerns,  and  lack of the  regulatory  process.  development of offered  by  generate. too  low  However,  these  B.C.  and  for  many  of  the  economically  f e a s i b l e a t the  projects  being offered  are  standard p r i c e  the  proposed  a standard  whichever  is  initially  aims  energy a t the There  changes i n the  less. to  are  several  3.0  there  been no  t o the  the  The  contract,  the  the  number  problems  cents/kWh r a t e was p r o v i s i o n to  i n - s e r v i c e date o f the  later.  the  price  projects  will  2 0 year set  contract  at  3.0  l i n e and  not hydro and  or  3%  per  a  projects  a  cents/kWh  escalating  o f f e r i n g of of  are  year,  low  and  at  rate  get  the  lowest p o s s i b l e p r i c e .  While the has  limit  the  These s m a l l  Vancouver CPI  Presumably,  be  projects  rate offered.  f o r energy, which i s now  equal to  the  to  f e e l the purchase p r i c e i s  b e g i n n i n g the y e a r the p r o j e c t comes on a rate  obstacle  seems t o  power  representatives  that  main  proposed p r o j e c t s  Hydro  Industry  the  longer  it  with first  this  pricing  announced i n June  escalate  i t with  to  negotiate  receive.  This  especially  developers  when  B.C.  becomes  Hydro  is  a  cause  responsible  be  and  l e s s revenue, i n r e a l terms, the  1991  up or  secure  developer  for for  1988,  inflation  p r o j e c t , which c o u l d  takes  policy.  a  will  concern  for  delays.  The  e s c a l a t i o n r a t e , which does not s t a r t u n t i l  one  year a f t e r  the  in-service  date,  3%  per  year,  yet  inflation  has  the  cost  of  past  25  is  also  e l e c t r i c i t y has (Synex,  1990,  is  set  at  averaged  5.7%  escalated  4.5%  p.3).  The  3.0  a  maximum per per  year  and  year f o r the  cents/kWh  33  of  figure  years less  than  B.C.  Hydro's  value  purchase r a t e s i n O n t a r i o ($1990) cents/kWh inflation is  raised  and A l b e r t a o f 3.97  of the c o n t r a c t .  or not t h i s  is a  s m a l l hydro p r o j e c t s under 5 MW. will  now  examine  electricity,  r e s p e c t i v e l y , which e s c a l a t e  over the l i f e whether  of f i r m  the  cost  of  fair  and  lower than  ($1989) and  4.64  a t the r a t e o f  Thus, the  question  pricing policy for  To answer t h i s q u e s t i o n , hydroelectric  detail.  34  energy  I  i n more  CHAPTER 4 : PRICING HYDROELECTRIC ENERGY  4.1  : P r i n c i p l e s of Energy P r i c i n g The  characteristics  transmission  are  such  of  electricity  t h a t the  i n d u s t r y i s most  operated when a monopoly i s granted  and  distribution  efficiently  t o an e l e c t r i c a l  utility.  As a r e s u l t , t h e r e i s no f r e e market f o r e l e c t r i c a l energy  and  the  not  utility  possible producer,  nor  is  a  monopsonist.  feasible  to s e l l  f o r an  In  IPP,  power t o any  most  cases  especially  o t h e r buyer.  it  a  is  small  power  Rates thus  have  t o be s e t by p r o c e s s e s o t h e r than the f r e e i n t e r p l a y of market forces. -  Most people would agree on the f o l l o w i n g p r i n c i p l e s : the  rates  low  as p o s s i b l e f o r maximum b e n e f i t  customers,  f o r power  and  they  from  each  should  project  should  t o the  certainly  be  be  as  utility's no  higher  than the u t i l i t y ' s avoided c o s t ; -  the  r a t e s p a i d f o r the power s h o u l d  high  to  attract  developers,  allow  be  sufficiently  them  to  finance  t h e i r p r o j e c t s , and encourage them t o i n n o v a t e ; the r i s k s a s s o c i a t e d w i t h the development,  financing,  and  be  operation  of  each  project  should  a l l o c a t e d between the d e v e l o p e r and the Difficulties from  the c a p i t a l  necessitates  a  i n d e c i d i n g on  fair  fairly  utility.  r a t e s of payment  arise  i n t e n s i v e nature of hydro developments which  long  term  energy  35  purchase  contract to  secure  the  financing;  the  different  developments  and  those  monopoly  the  purchase  setting  on of  rates  by  of  a  methods major  of  for  utility;  energy,  competition  financing the  which  i n the  utility's  precludes  the  marketplace; and  the  u n c e r t a i n t i e s a s s o c i a t e d w i t h the long-term h o r i z o n s contracts,  including  inflation,  private  interest  o f power  rates,  taxes,  c o n s t r u c t i o n and o p e r a t i n g c o s t s , e t c . The demand f o r e l e c t r i c a l energy v a r i e s c o n t i n u o u s l y . a utility must be In  cannot meet the demand, some o f i t s e l e c t r i c a l "shed",  North  If  resulting  America,  reluctant  to  shed  i n a power c u t - o f f  standards are h i g h loads  except  and  under  or a  brownout.  utilities  a r e most  emergency  conditions.  Thus,  t o meet the c o n t i n u o u s l y v a r y i n g l o a d s t h e u t i l i t y  have  enough  capacity  to  meet  the  peak  load  demand  must  and  enough  electrical  system  " s t o r e d " energy t o keep meeting the energy demands. Since  each  has the " r i g h t " the  customer  connected  t o use any  to  the  amount o f e l e c t r i c a l  energy up t o  c a p a c i t y o f the c o n n e c t i o n , the customer has a " c a l l " on a  certain  amount  of  generating  capacity,  which  in  d e d i c a t e d t o h i s o r her use, whenever t h e y want i t . a cost  t o supply t h i s  cost  f o r supplying  cost  i s passed on  peak c a p a c i t y  the  actual  t o customers  i n North America, who  amount  of  i n Europe  energy and  is  There i s  as w e l l  as a  used.  This  large  customers  pay a demand charge based on t h e i r peak  demand as w e l l as an energy charge. the  capability,  theory  With thermal g e n e r a t i o n ,  peak demand charge depends on the c o s t  36  o f the  generating  and  transmission  energy  charge  generation split  depends  (the  is  not  facilities  ( u s u a l l y the  on  the  clear  cut,  but  T h i s adds t o the c o m p l i c a t i o n s p l a n t s t h a t supply The length  amount  variable costs).  so  for  With hydro power, the  cost  the  the  developer.  same  purchase c o n t r a c t a  fuel  principles  apply.  of s e t t i n g f a i r r a t e s f o r  only p a r t of the  Obviously,  of  the  used  small  load.  rate offered for e l e c t r i c i t y  of  f i x e d c o s t s ) , and  and  should the  long-term  also  risks  contract  reflect  the  assumed by  the  with  guarantees i s worth more than energy bought on  performance  a temporary  or  the  financial  and  t e c h n i c a l r i s k s of power p l a n t c o n s t r u c t i o n and  operation,  the  "spot"  basis.  utility  If  benefits  a  developer  because  it  takes  is  on  able  to  lower  its  risk  for e l e c t r i c i t y  over  exposure. There are many d i f f e r e n t ways t o pay a long-term c o n t r a c t . a higher off  his  rate  i n the  capital,  operating  and  C l e a r l y , a s m a l l d e v e l o p e r would  e a r l y years t o s e r v i c e h i s debt and  and  could  maintenance  example, the  rate could  be  i n the  paid  off  then accept costs  be  first  set 20  only,  lower in  such t h a t  years  of  a  maintenance  the  same  utility the  net  present  f o r the  utility  costs,  provided value  as  same d u r a t i o n .  i n such an  that the  37  on  later  years.  For  capital  costs  could  contract,  the value  payment of  However, t h e r e  arrangement  pay  r a t e s , based  and,  renewal, the r a t e would be decreased t o r e f l e c t o n l y and  prefer  in that  the  upon  operating stream  power are  has  to  the  risks  to  p l a n t may  not  operate l o n g  enough f o r the  utility  c o s t e l e c t r i c i t y promised i n the While the from the too  several  produce power not  be  for  The  financially  or  corners  in  design  develop  a  site  to  In  the  maintenance  considerations  operating  of  a little  paying  less  in  in  forsake  the  design  future.  and  : B.C.  are  many ways  energy based  future costs.  firm  an from  costs, and to  it  be  its  may  ratepayers expectation reliable,  Hydro's Energy Costs  There  into  not  leading  f o r more e f f i c i e n t ,  4.2  costs or  cut  not  capital  Thus,  l o n g - l a s t i n g p r i v a t e s e c t o r development.  of  either  discouraged  stage,  and  value  will  may  is  f o r power, w i t h the  future,  can  operational  for a u t i l i t y  more u p - f r o n t  which  be  set  developers  reduce  to  the  long run  i n the  to  cost  Developers  potential,  term  that  failing,  as  or they may  tempted  costs  advantageous i n the t o pay  increased  attempt  may  low-  price i s  Projects  project  construction.  developers  higher  the  is  resource,  be  purchase  short  u t i l i t y ' s avoided  i t s maximum  of the  innovating.  of  technically,  i n the  arise.  the  risk  and  i f the  may  l e s s than  built.  e f f i c i e n t use  possible,  problems  from the  future.  u t i l i t y ' s customers b e n e f i t  lowest r a t e s  low,  to benefit  on  of  valuing  historical  Future c o s t s can  long-term c o s t s . energy  and  be  energy. costs,  38  energy.  can Firm  is  t h a t based  e i t h e r short-term  Long-term c o s t s  secondary  and  There  be  the on  marginal  broken down  energy  can  be  expressed  i n terms of a " c a p a c i t y " component and  an "energy" component. discussion  of  i n terms  Because of a l l these d i s t i n c t i o n s ,  energy  costs  must  first  define  the  of any  type  of  energy. B.C.  Hydro  essentially  has  three  sets  of  h i s t o r i c a l average c o s t s , short-term marginal term m a r g i n a l (in  1989  costs.  dollars)  electricity primarily  is  on  than  reflect  the  instead  we  other  costs  S i n c e B.C. historical  today's  costs  generate,  that  production  based  less  to  (note  distribution).  I t now  Hydro  4.4  cents/kWh  and  distribute  discussed  not  include  long-  below the  are  cost  of  Hydro's average c o s t o f p r o d u c t i o n  capital  of  should  do  prices:  c o s t s , and  transmit, costs  and  replacement  value  B.C.  power  costs costs,  additional  examine  the  that  are  average  power  marginal  to  considerably  costs the  may  not  system  and  costs  of  producing  power  is  based  power. The  short-term  incremental next kWh  marginal  production  p l a n t or,  costs  i n other  to  the  words, the  o f e l e c t r i c i t y w i t h the e x i s t i n g  their  short-term  values  m o d i f i c a t i o n s as w e l l as and is  value  for  of  in-service  date  evaluating  B.C.  short-term  evaluating potential  price  short-term will  or  B.C.  Hydro  "spot"  is willing  basis.  i n c r e a s e over time,  The  to  pay  short-term  power  39  extra  project purchases  Thus,  f o r power value  as a r e s u l t of i n f l a t i o n  the  Hydro uses  c o o r d i n a t i o n agreements with o t h e r u t i l i t i e s . the  of  c o s t t o produce an system.  on  of  and  this on  a  energy also i n  r e a l terms as B.C.'s energy s u r p l u s d i m i n i s h e s .  The v a l u e o f  t h i s energy r i s e s  from 1.8 cents/kWh i n 1989 t o 4.9 cents/kWh  in  dollars)  1999  shows  ( i n 1989  the  displaying Hydro's  effect the  of  same  assumed  as shown  inflation figures  long-term  i n T a b l e 3.  on  the value  i n nominal  average  Figure  of  dollars  annual  4.1  energy using  inflation  by B.C.  rate  of  4.5%.  TABLE 3 : B.C. Hydro's Marginal Value o f Enercrv (cents/kWh i n constant 1989 d o l l a r s ) Year  Value o f Electricity  1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 and on  1.80 1. 80 1.80 1.90 2 . 00 2 .30 2.20 2.80 3.40 4.20 4.90 5.00  Firm Capacity  Firm Energy  0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0. 48 0.48  1.70 1.70 1.70 1.80 1.90 2.20 2 .10 2.70 3.30 4.10 4.40 4.50  Source: B • C H . 's "Value of E l e c t r i c i t y "  Although i t inflation  and  Secondary Energy 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.30 1.50 1.70 1.90 2.00  (August 1989)  i s u s u a l l y customary t o i g n o r e t h e e f f e c t s o f  work  with  real  dollar  figures,  mostly w i t h nominal d o l l a r s f o r s e v e r a l reasons:  40  I  will  work  FIGURE 4.1 : B.C. Hydro's Marginal Value of Energy Source: BCH's "Value of Electricity" (August 1989)  -  it  is  useful  to  v a l u e s change due  illustrate  how  to i n f l a t i o n  costs  and  energy  over a l o n g p e r i o d  of  time; Net  Present  and  a  Values  nominal  calculated  calculated  discount  with  real  rate  dollars  with  nominal  are  equal  and  a  dollars to  real  those  discount  rate ; B.C.  Hydro's  constant d o l l a r  figures  u s i n g an assumed long-term r a t e o f The cost  calculated  inflation.  long-term v a l u e of power i s a time-weighted  of  Plan.  are  future This  projects  i s B.C.  generation.  B.C.  electricity  i s 5.0  included  in  B.C.  Hydro's p r o j e c t e d  Hydro's  long-term  cents/kWh  in  Hydro's  value of  levelized  1989  dollars.  Resource  future  value  power  of  There  is a  energy,  secondary energy, which  i s not guaranteed and as such i s worth  Firm  can be r e l i e d  firm  d i f f e r e n c e between f i r m  slightly  which  average  energy  capability  during  an  they c a l l  and  less. i s the  assured  energy  hydro g e n e r a t i n g p l a n t over one y e a r . firm  upon,  of  extended  i t s system period  the c r i t i c a l  as  B.C.  the annual  of below  period).  output  average  i n kWh  of  Hydro d e f i n e s energy  a  the  available  streamflows  In o t h e r words, f i r m  (what energy  i s the minimum annual output o f a hydro p l a n t under  extremely  low  into  streamflows.  Firm  components and p r i c e d  energy  can  accordingly:  42  be  broken  down  two  1)  Dependable This  is  Capacity valued  measured  in  on  the  $/kW/year,  e q u i v a l e n t cents/kWh. bases  the  value  opportunities about  0.1  basis  of  for  and  capacity  on  surplus  ($1989).  peak  capacity,  expressed  In the s h o r t  their  cents/kWh  of  term,  in B.C.  recent  Hydro  marketing  capacity  The  the  which  value of  is  capacity  i n the long term i s based on the c o s t o f adding more peaking  capacity  to  existing  the  projects)  2)  and  (but not more t o t a l system this  energy  (at the Mica  0.5  T h i s i s the v a l u e of the energy component, which  B.C.  ($1989).  Dependable  Energy  is  Revelstoke to  cents/kWh  cost  and  output)  equivalent  Hydro c a l c u l a t e s by s u b t r a c t i n g t h e v a l u e o f c a p a c i t y from t h e i r t o t a l  long-term v a l u e o f e l e c t r i c i t y .  i n c r e m e n t a l v a l u e of f i r m cents/kWh B.C.  energy i s e s t i m a t e d a t  The 4.5  ($1989).  Hydro d e f i n e s i t s v a l u e of f i r m e l e c t r i c i t y as the sum  of  the v a l u e s o f f i r m c a p a c i t y and f i r m energy. Secondary energy i s the energy t h a t i s a v a i l a b l e over and above  firm  Secondary  energy  energy  may  when  water  not  always  "guaranteed" o r r e l i e d upon. e s t i m a t e d t o be 2.0  cents/kWh  conditions be  are  available  and  favorable. cannot  be  I t s long-term v a l u e i s p r e s e n t l y ($1989).  43  Figure  4.1  shows the  long-term  value  of  firm  and  secondary  energy  in  nominal  dollars. The v a l u e o f small hydro "dependable"  i t is.  available  when  "capacity  value".  available  independent  corresponds  i t i s required. I f , on  o f t h e nature  energy  value,  with  output  o f s m a l l hydro  the  o f system  i s available.  : Avoided When  a  of this  other  nature output  requirements,  then  the value  T h i s i s termed  plants  has  the  c o s t s o f t h e system  capacity  i s always  hand,  o f s m a l l hydro  no  i s r e l a t e d t o how  t h e energy  Output  (Sigma,  is  a t t h e time  t h e "energy  power,  value,  d i s c u s s t h i s concept i n more d e t a i l 4.3  output  i s , whether  t o the marginal  the output Because  That  energy  often  value". o n l y the  i s attributed 1983, p.2-6).  t o the I  will  i n Chapter 5.  Costs utility  purchases  power  from  an  independent  producer,  i t d i s p l a c e s the c o s t o f a c q u i r i n g power from  sources.  The avoided c o s t i s the c o s t t h a t would otherwise be  incurred  i f the u t i l i t y  purchase  from  producers,  another  the  had t o generate  utility.  utility  can  By delay,  planned new g e n e r a t i n g f a c i l i t i e s costs. of for  In t h e absence  electricity, setting  a  producers, and t h i s  buying at  power  least  itself from  or  small  temporarily,  and " a v o i d " t h e i r  associated  o f a c o m p e t i t i v e market f o r t h e supply  avoided price  t h e power  other  c o s t s would  f o r purchasing i s the accepted  44  seem  t o be a f a i r  power  from  basis  independent  s t a n d a r d i n t h e U.S. and  Ontario. also,  The purchase  i n theory,  Hydro has needs  economically  recently  at  achieved  of power a t a u t i l i t y ' s  adopted  efficient.  a policy  the  "lowest  total  "by  setting  the  avoided c o s t i s  To  this  o f meeting  resource ceiling  cost"  future  and  price  end,  this  for  all  B.C. energy  can  be  resource  a c q u i s i t i o n s , r e g a r d l e s s of o r i g i n ,  a t the avoided c o s t of  new  electricity"  1989,  can  be  (B.C.  Hydro, November  a problem, however, i n a c t u a l l y  p.13-3).  determining  There  avoided c o s t s ,  e s p e c i a l l y long-term c o s t s . Long-term avoided costs  plant, from  a  costs  means.  long-term  may  theoretical  a l l potential  complicated their  avoided  B.C.  avoided  be  "proxy"  future  Hydro, costs  based  on  plant,  an  projects,  the  specific  aggregate  or  f o r example,  on  a  other  of more  p r e s e n t l y bases  time-weighted,  average  l e v e l i z e d c o s t of f u t u r e p r o j e c t s . Determination simple and  load  inflation, beyond  avoided  easy t o understand  a c c u r a t e and future  of  realistic  on  difficult.  next  the  other.  The  only  cost  be  hand, and  Given  project estimates  relatively reasonably  uncertainties  development,  requirements,  planned  should  on the one  demands, technology  environmental  the  costs  interest  that  planned formulas  project.  precision  may  be  or  i s simple  computer models do  not  45  have  i n that t o be  is  reasonably Thus, I  avoided c o s t s on the c o s t o f the  T h i s method  costs  any  r e l i a b l e w i l l be those of the next p l a n t t o be b u i l t . suggest b a s i n g long-term  rates,  etc., determining with  in  next  complicated  used.  It i s  accurate  i n t h e sense  that  guesses  s i z e , how expensive, and when w i l l t o be made about a multitude B.C.  Hydro's  next  such  as what  type,  what  they be needed, do not have  of future plants.  major  generating  facility  is  well  documented: i t w i l l be the 900 MW S i t e C h y d r o e l e c t r i c p r o j e c t on  t h e Peace R i v e r  as  e a r l y as 1999 (note  generating likely  i n Northern  capacity  be b u i l t  that  at  first  the a d d i t i o n  the e x i s t i n g  and c a p a c i t y  s e v e r a l o t h e r e x i s t i n g hydro 4.3.1  B.C. which c o u l d  come  on-line  o f up t o 240 MW o f  Keenleyside  additions  Dam  will  a r e planned f o r  sites).  : Avoided Costs of S i t e C The  cost  o f b u i l d i n g B.C. Hydro's next  p l a n t , S i t e C, i s i n c l u d e d power.  Table  4  shows  large  generating  i n B.C. Hydro's long-term v a l u e o f Site  C  project  costs  and  we  can  determine t h e avoided c o s t s o f S i t e C as f o l l o w s . Capital corporate inflation costs  costs  include  overhead, during  estimated  interest  construction.  during  construction construction,  B.C. Hydro's  include: -  operation  and maintenance;  insurance; administration grants  and general  ( i n l i e u of property  i n t e r i m replacement c o s t s .  46  costs,  expenses; taxes);  fixed  and  operating  TABLE 4 : S i t e C P r o i e c t S p e c i f i c a t i o n s and Peak  Capacity:  900  MW  Firm Energy Output/yr.:  4570 GWh  Average Energy Output/yr.:  4710  T o t a l C a p i t a l Cost: Annual F i x e d  GWh  $2053 M i l l i o n  Cost:  Annual V a r i a b l e Cost:  Costs  ($1989)  $33  Million  ($1989)  $17  Million  ($1989)  L e v e l i z e d U n i t Energy Cost: 4.71  cents/kWh ($1989)  Assumptions: Discount Rate = 12.85%, I n f l a t i o n Rate = 4.5%, P r o j e c t comes on l i n e i n 1999, 7 y e a r c o n s t r u c t i o n p e r i o d , 70 year l i f e . Source: B.C.H's "20 Year Resource P l a n " ( A p r i l 1989) "Value o f E l e c t r i c i t y " (August 1989) and Appendix 5.  Generating  facilities  are  exempted  pay  income t a x .  basically fees, by  the  the  from paying  i s 0.4  of  the  Peace and  school  Variable  consist  which  on  operating  cents/kWh.  B.C.  costs  River  r e q u i r e d t o pay should  system  Hydro does  f o r a hydro  of  Water r e n t a l o f the  the  water  fees  are  not  plant rental  charged  province's  a thermal p l a n t ' s v a r i a b l e o p e r a t i n g  include p r i m a r i l y fuel costs.  Hydro, c o s t s  and  energy p o r t i o n  p r o v i n c i a l government f o r use  In c o n t r a s t ,  It  tax  Columbia  and  water.  costs  would  However, a thermal p l a n t i s not  f o r the a i r i t consumes. be  noted  that  such as grants  since  the  province  i n l i e u of taxes and  47  owns  B.C.  water r e n t a l  fees  are  not  transfers  back t o  c i t i z e n s who B.C.  really  Hydro  ratepayer  costs  the  and  a  government  are a l s o B.C. passes  in  true  economic  (and,  i n turn,  Hydro's customers).  these  types  of  costs  i t i s the  total  d i r e c t cost  sense  but  back t o  the  However,  directly  t h a t w i l l u l t i m a t e l y determine the v a l u e  to  o f IPP  on  the  life  of  4.2  the  project  assumed t o be operation. , assumed t o  incurred  be  stated takes  fixed  incurred  power, f o r  dollars.  at the  variable end  of  costs.  expected Capital  beginning of  and  c o s t s of S i t e C and  as  a levelized  total  of  constant  life  over  the  70  year  costs  first  operating  each year,  are  year  costs and  of are  rise  cost  and  determines  dollars.  life  f u t u r e p r o j e c t s are life  fixed  In  of  other  and the  an  o f the  and  of the p r o j e c t , and,  inflation,  the  other  r a t e over the  capital  V a l u e of a l l c a p i t a l  at  i t takes cash flows,  project.  Levelized  operating  annual the  Net  and cash  48  rate  cost  in  Present  spreads i t flows  i n nominal d o l l a r s , which c o s t and  It  using a discount  operating  i n Year 1 as the l e v e l i z e d  usually  project.  variable  equivalent  words,  S i t e C are shown i n F i g u r e 4.3 off  the  the  inflation.  c o s t s over the  out  a t the  over  the  : D i f f e r e n t Accounting f o r S i t e C Costs The  net  costs  i n nominal  Annual  the r a t e of 4.3.2  show these  to  ratepayer  purposes o f t h i s paper I w i l l t r e a t such items as r e a l Figure  since  e s c a l a t e a t the  for  start rate  Discount Rate = 12.85% Inflation = 4.5% Year 1 in 1989$  2.0 -< 1.9 -) 1.8 -> s  s /  \  / \ /  Capital Cost  Variable Costs Fixed Costs  Year Fixed Costs  \//A  Var. Costs  N/N  FIGURE 4.2 : Site C Project Cash Flows  Capital Cost  5.0  Discount Rate = 12.85% 4.5  Inflation Rate = 4.5%  4.0 -  s  Year 1 in 1989$ NPV = $2645 M  3.5  3.0 -  =  2.5  Levelized Costs 2.0  1.5 -  n  1.0 -  /  \  / s  /  7\  0.5  $222 M  -  K  ' s /  0.0  'I  10  20  30  I'T i  40  ' \ \/ ' \ s / i  r  I  r  i  I  /  ^  i  ]  /  \  \  /  /s 1  i  f  \  /  i  i V  50  Year K XI  s ' ' s  Levelized Cost  FIGURE 4.3 : Site C Levelized Cash Flows  I  i  I  |  60  t  i  "  I  l  I  i  f  70  of  inflation  over the  life  of  the  l e v e l i z e d c o s t s i n determining However, expenditures  the by  levelized  B.C.  costs  are  then pay  amortized  cost  70  years,  expenditures interest cost,  the  (after  assuming  life  rising  a  1989).  government agency c o u l d  shown  in  afford  depreciation  4.5.  costs  costs.  f o r the  capital  i s s u i n g longI f the  project,  capital  70  years,  r a t e each year  depreciation. high,  but  depreciation as  t o account  a  declining,  (sinking  shown  only  Real  in  large  fund)  Figure  4.4  utility  f o r c o s t s over such  use  costs In  stop  a much s h o r t e r i n 20  this  after  years,  case, year  depreciation  f o r example,  interest  20,  payments  leaving  only  3 0-year  depreciation  term  i s more  reasonable  for  as and  rising  o p e r a t i n g c o s t s f o r the remainder of the p r o j e c t ' s l i f e . to  or  way.  off capital  Figure  the  uses  actual  pay  initially  costs,  A p r i v a t e company would term, paying  of  However,  a l o n g time frame i n t h i s  Hydro  represent  at a constant  constant  operating  McDonnell,  To  straight-line  c o n s i s t of  payments,  and  not  o f f the loan over time.  over  would  does  Hydro would borrow by  the c a p i t a l c o s t s are d e p r e c i a t e d for  B.C.  t h e i r long-term avoided  Hydro f o r power.  c o s t of the p r o j e c t , B.C. term debt and  project.  A  20  several  reasons: the  effects  negligible, a t 12%  of d i s c o u n t i n g e.g.,  beyond t h i s  cash flows d i s c o u n t e d  are o n l y worth 10%  51  time span back 20  of t h e i r f u t u r e  value;  are  years  Year F^Cost  Y//\  Var.Cost  Depr.  ^  FIGURE 4.4 : Site C Cash Flows - 70 Yr. Depreciation  int.  Year SSS]  FbcCost  V7A  Var.Cost  Depr.  FIGURE 4.5 : Site C Cash Flows - 20 Yr. Depreciation  R\^i  Int.  -  the  risks  uncertainties  become  incalculable,  rates,  inflation,  from now -  and  e.g.,  and  who  power  this  knows  demand  time  what  will  span  interest  be  1  year  l e t alone 20 y e a r s ;  o t h e r sources o f power may t h a t may the  beyond  be s i g n i f i c a n t l y  environment,  be developed i n the  future  cheaper o r l e s s harmful t o  rendering  the  present  project  o b s o l e t e and uneconomic; B.C.  Hydro  than  25  does  not  years,  issue  bonds  reflecting  f o r terms  investors'  greater  maximum  time  horizon. Dividing  the  total  annual  costs  by  the  average  energy output g i v e s an annual u n i t energy c o s t . Hydro bases unit  costs  average  some  firm  costs  on  firm  Although energy  B.C.  output,  f o r i n d i v i d u a l h y d r o e l e c t r i c p r o j e c t s a r e based  energy  includes than  i t s long-term u n i t  annual  capability. secondary  energy  Average  energy  output.  B.C.  and  annual  i s thus  energy  slightly  Hydro e s t i m a t e s the  on  output greater  levelized  u n i t energy c o s t f o r S i t e C as 4.71  cents/kWh i n 1989  dollars.  This  escalates  rate  rate  starts  o f f at  4.71  and  at  the  of  i n f l a t i o n over the l i f e of the p r o j e c t . These levelized  three cost,  d e p r e c i a t i o n term  methods 70-year -  of  cost  accounting  depreciation  are shown  in  54  term,  F i g u r e 4.6,  for  Site  and which  C  -  20-year shows  FIGURE 4 . 6 : Different Accounting Costs for Site C  nominal annual u n i t energy c o s t s with A l l three The  cash flows have the same  calculation  Hydro's "Value  reports of  discount  70  and  expenditure  not  cash  Net flows  Resource  (August  12.85%  a  uses  Plan"  1989)  and  Present  dollars.  Value  (NPV).  data  from  B.C.  (April  1989)  and  including  long-term,  an  assumed  average  annual  4.5%.  20-Year D e p r e c i a t i o n in  would be  represent  which  a  p a i d up  l i n e s are based on  greater  front.  a c t u a l expenditures  by  proportion  As  levelized  the u t i l i t y ,  actual of  costs  they do  c o s t s t h a t are passed onto the r a t e p a y e r .  choosing  measure, but  realistic  reflection  be  f o r s e t t i n g a purchase r a t e they  I suggest t h a t the 20-Year D e p r e c i a t i o n of S i t e C s  avoided  the do not  Thus, f o r  between d i f f e r e n t p r o j e c t s , l e v e l i z e d c o s t s may  appropriate not.  Year  profiles  costs  represent  "20  of  i n f l a t i o n r a t e of  capital  these  Electricity" rate  The  of  year 1 i n 1989  an are  l i n e i s the most  costs  f o r comparison  with p r i v a t e sector p r o j e c t s . 4.4  : Suggested Avoided Cost As  avoided  discussed cost  which the cost  of  propose  on  earlier,  B.C.  i t s short  long-term  costs  and are  future  p r o j e c t s as  that,  for  the  Profile Hydro  long-term  based  marginal costs  purposes  (STMC)  on  of  and  56  bases  marginal  the  costs  average  shown i n F i g u r e s  independent power purchases, avoided term  presently  4.1  setting  c o s t s be  in  levelized  and a  its  4.7.  price  based on  I for  short-  the c o s t of the next p l a n t .  FIGURE 4.7 : Avoided Cost Profiles (1992-2021)  The  cost  of  the  next  depreciating the c a p i t a l plant's  plant costs  should  be  over t h e f i r s t  calculated  by  20 years o f t h e  life.  An avoided c o s t p r o f i l e can then be generated as shown i n Figures 1998  4.7 and 4.8.  Avoided  costs  a r e based  and then jump up t o S i t e C's avoided c o s t s  on STMC up t o i n ,1999.  This  avoided c o s t p r o f i l e can be used t o s e t r a t e s f o r s m a l l power p r o j e c t s t h a t come o n - l i n e up t o t h e time a t which t h e avoided plant  begins  operation.  does come o n - l i n e ,  When t h e next  a new p r o f i l e  major  plant  finally  would be generated based on  the next scheduled p l a n t . A utility  should  be w i l l i n g t o pay an IPP a r a t e t h a t has  a NPV equal t o o r l e s s than t h e i r avoided c o s t stream over the same  period.  B.C.  recently said be  based  costs 1989, in  Hydro  has  adopted  this  approach  t h a t the c e i l i n g p r i c e t o be p a i d  on t h e " e q u i v a l e n t  f o r t h e same b l o c k p.1-3-9).  present  value"  of e l e c t r i c i t y "  and  an IPP should  of t h e i r  "avoided  (B.C. Hydro,  For example, f o r a 20-year c o n t r a c t  Nov.  starting  1992, t h e NPV o f t h e purchase p r i c e over t h e 20-year p e r i o d  would be equal t o the NPV o f the avoided c o s t s  over the same  period. 4.5 : Comparison w i t h B.C. Hydro's O f f e r As 1992,  an example, l e t ' s  which  service  look a t a p r o j e c t coming on l i n e i n  i s the e a r l i e s t  i fa  a small  developer signed  a  58  hydro p l a n t  c o n t r a c t today.  could To  be i n keep  FIGURE 4.8 : 20 Year Purchase Rates Starting in 1992  administrative developers, for  costs  B.C.  projects  being  less  than  a  small  Figure  at  4.8.  for  both  itself  and  potential  20  year  contracts  purchase  rate  presently  Hydro i s o f f e r i n g standard  offered  escalating  low  3%  per  This  5  MW.  The  power  year,  i s the  as  producer  is  shown  nominal  in  3.0  cents/kWh, dollars  p r i c e f o r a l l energy, both  in  firm  and  to  B.C.  secondary. Over the  20-year  Hydro of the annual  compared stream  period  B.C.  to  a  ( i n 1992  producer would only be would c o s t  of  the  contract,  purchase p r i c e i s 2 5.6  output  avoided c o s t  life  NPV  of  repaid  NPV  kWh  of  cents/kWh  Thus, the  receiving a l i t t l e  utility  per  4 6.9  dollars).  Hydro t o produce  ( i f the  cents  the  i t s own  average for  small  the  power  over h a l f o f what i t power over the  i t s capital  costs  same  within  20  y e a r s as the p r i v a t e producer must). To  make the purchase r a t e e q u i v a l e n t  r a t e over the rate  of  5.0  20  years,  cents/kWh  (assumed t o be  4.5%)  fixed  6.6  B.C.  rate  of  Hydro of the  equal.  Of  f a c t o r s such as transmission  i t would have t o s t a r t and  escalate  at  the  as shown i n F i g u r e cents/kWh  could  avoided c o s t and  course,  t o the  the  firmness  rate and  may  be  4.8.  60  out  at a  of  cost base  inflation  Alternatively, a  offered.  The  NPVs  to  purchase r a t e would now have  reliability  c o s t s , but the general  rate  avoided  to  be  adjusted  be for  o f energy supply  principle s t i l l  applies.  and  As its  shown  i n Figure  4.8, B.C. Hydro would  pay more  avoided c o s t f o r power i n the e a r l y y e a r s o f t h e c o n t r a c t ,  but would pay c o n s i d e r a b l y proposed This off  rate  l e s s i n the l a t e r years.  i s front-loaded  proposed  compared  r a t e would allow  small  Thus, the  t o t h e avoided  costs.  hydro d e v e l o p e r s  t o pay  t h e i r c a p i t a l c o s t s over the term o f t h e c o n t r a c t . Using  this  same  technique  o f matching  purchase p r i c e t o the NPV o f the avoided  t h e NPV  of the  stream  f o r the  cost  same time p e r i o d ,  a purchase r a t e schedule c o u l d  as  5 i n nominal d o l l a r s .  shown i n T a b l e  This  new  small  hydro  adjustments, Site the  C.  projects  that  This  would  i s equivalent  ensures t h a t  be  a l l small  pushing  Site  increasing  rate  gradual,  to  ensure  levelized  5  also  long-term  suggested c e i l i n g the  includes costs  rates  suggested  The  costing  on  B.C.  is  Hydro's to their  base  rate  of  than what B.C. Hydro would be o f f e r i n g .  Alberta's  3.97  i s higher  1989 r a t e o f 3.72 and c o n s i d e r a b l y  61  The  These r a t e s a r e lower  1989  r a t e o f 4.64 cents/kWh i s a l s o h i g h e r  of  first.  cents/kWh e s c a l a t i n g a t i n f l a t i o n o f f e r e d i n O n t a r i o than t h e suggested  cost  development  which would be e q u i v a l e n t  rates.  before  with the e f f e c t  that  based  p r i c e f o r IPP power.  point  as p o s s i b l e .  w i t h lower c o s t s i t e s being b u i l t  Table  than  helps  rate,  projects  first,  C as f a r i n t o the f u t u r e also  a  avoided  hydro  same o r l e s s than S i t e C are b u i l t  increases  a t which  receiving  to the f u l l  be developed  rate  each year up t o the time S i t e C comes on l i n e ,  of  than  higher  1990 base  than t h e suggested 1990  rate. on  In both O n t a r i o  levelized  avoided B.C.  avoided  costs  Hydro's  could rates  and A l b e r t a , however,  costs, be  not  quite  accounting  different  are d i s c u s s e d  r a t e s are based costs,  than  B.C.  i n more d e t a i l  and  Hydro's.  i n t h e next  chapter.  TABLE 5 : Enercrv P r i c i n g Rates  1989 -  1999  ( i n cents/kWh i n nominal d o l l a r s ) 20 Year Contract Starting i n Year  Suggested Schedule (20 y r . Depr. of Avoided P l a n t ' s C a p i t a l Costs) Base Rate Esc.@Infl  1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Discount  3 .72 4.10 4 . 52 4.99 5.49 6.02 6.58 7.20 7.79 8.35 8.84  Fixed Paymt 4.93 5.44 6.00 6. 62 7.28 7.99 8.72 9.54 10.34 11.08 11.72  Rate = 12. 85%,  Schedule Based on B.C. Hydro's L e v e l i z e d Long Term C o s t s Base Rate Esc.@Infl 3 .14 3.46 3 . 83 4 .23 4 . 68 5.16 5.66 6.23 6.79 7.31 7.75  I n f l a t i o n Rate  62  =4.5%  their  Fixed Paymt 4.16 4.59 5. 08 5.62 6.20 6.85 7.51 8.27 9.00 9.69 10.28  CHAPTER 5 : VALUE OF SMALL HYDRO POWER  5.1 : D i s c u s s i o n o f B.C. Hydro's Small Hydro Rate Not  o n l y i s t h e v a l u e o f B.C. Hydro's s m a l l hydro  purchase the  rate  lower  methods  suggested  For  less  energy  suggested  25.6  that in  than  Chapter  rate  4,  but  i t  of  B.C.  energy  based on is  also  Hydro's  own  The n e t p r e s e n t v a l u e s o f d i f f e r e n t  purchase  c o n t r a c t s a r e compared  coming o n - l i n e  ceiling  o f t h e proposed  the value  ceiling price.  projects  costs,  than  outlined  significantly  20-year  Offer  prices,  i n Table  6.  i n 1992, t h e NPV o f B.C. Hydro's  based  on t h e i r  levelized  long-term  i s 39.8 cents/kWh, which i s 56% h i g h e r than t h e NPV o f  cents/kWh o f t h e i r s m a l l hydro p r i c e o f f e r .  then a r i s e s , From  The q u e s t i o n  "What i s t h e b a s i s f o r t h e 3.0 cents/kWh o f f e r ? "  discussions  with  B.C. Hydro  representatives, i t  appears t h e 3.0 cents/kWh f i g u r e i s n o t based on any hard data or  rigorous calculations,  greater  than  approximately  their 2.0  but r a t h e r  estimated cents/kWh  i s an a r b i t r a r y  short-term and  less  marginal than  the  number  costs of long-term  l e v e l i z e d c o s t which was about 4.0 cents/kWh when t h e purchase price  was  proposed  The 3.0 cents/kWh  i t for inflation  come  costs.  set.  figure  was  first  i n 1988 and t o date t h e r e has been no p r o v i s i o n f o r  adjusting will  first  on-line  up t o t h e time  o r f o r changes  F o r example,  i n April  the f i r s t  projects  i n B.C. Hydro's  marginal  1989 B.C. Hydro's  long-term  v a l u e o f power was s t a t e d as 3.8 cents/kWh i n 1988 d o l l a r s and  63  in  August  dollars. energy, price.  1989  i t was  changed  Although t h e r e was no The  adjustment value  was  of  this  to  a 32%  made t o rate  5.0  cents/kWh  increase the  in  1989  i n the v a l u e of  small  is clearly  hydro less  purchase than  B.C.  Hydro's p r e s e n t avoided c o s t s f o r energy.  TABLE 6 : Comparison  of Purchase Rates  Net P r e s e n t Values of 20-year C o n t r a c t s Cents per kWh o f Annual Output i n Nominal D o l l a r s ( i n S t a r t i n g Year $) Contract Starting i n Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999  A Proposed Rate 35.0 38.6 42.5 46.9 51.6 56.6 61.8 67.7 73 . 3 78.6 83 . 1  B BCH Ceiling  C BCH Offer  D Firm Energy  E Second. Energy  29.5 32.6 36.0 39.8 44.0 48 . 5 53.2 58.6 63.8 68.7 72.9  25. 6 25.6 25.6 25. 6 25.6  27. 4 30.1 33.3 36.7 40.5 44.6 48.8 53 . 6 58. 1 62.2 65. 6  13.5 14.6 15.8 17.1 18.5 20.4 21.9 23 . 8 25.7 27.4 29.1  A : Proposed Rate based on 20 Yr. d e p r e c i a t i o n o f avoided plant costs B : Rates based on B.C. Hydro's s h o r t and long-term marginal c o s t s , long-term c o s t s a r e l e v e l i z e d C : B.C. Hydro's Under 5 MW o f f e r D : Rates based on B.C. Hydro's v a l u e o f Firm Energy o n l y E : Rates based on B.C. Hydro's v a l u e o f Secondary Energy only NPV  o f O n t a r i o o f f e r o f 3.97 = 37.3  cents/kWh s t a r t i n g  NPV  o f A l b e r t a o f f e r of 4.64 = 43.6  cents/kWh s t a r t i n g i n 1990  64  i n 1989  There  are  reluctance First,  to  they  capacity  several pay  full  reasons avoided  b e l i e v e power  cost  from  small  hydro  want t o pay  "windfall  has  power.  little  firm  I w i l l now  i s unreliable.  Third,  they  as p o s s i b l e f o r p r i v a t e power t o reduce  consumer and  profits"  hard data has  5.2  power source  as l i t t l e  the c o s t t o the  secondary  hydro  producers  the  mostly  small  Hydro's  t h e r e i s the p e r c e p t i o n t h a t buying power from s m a l l and  i t as  for  B.C.  Second,  "risky"  treat  explain  energy.  is  and  to  at  the  not  allow  consumers'  developers expense.  been p r o v i d e d t o support  this  to receive However,  corporate  no  stance.  examine each of these t h r e e p o i n t s i n more d e t a i l .  : Firm C a p a c i t y of Small Hydro Most s m a l l hydro p l a n t s are r u n - o f - t h e - r i v e r p l a n t s .  In  o t h e r words, the energy produced from a r u n - o f - t h e - r i v e r p l a n t will  fluctuate  with  season  and  geographical region,  with  the  when  For  production much  of  Energy  seasonal  location.  energy  months  streamflow.  production  variation  example,  is  the  will  in  greatest  the  vary  depend south  during  precipitation  will  the  falls  on  coast winter  as  rain.  A c c o r d i n g t o Sigma's study, energy p r o d u c t i o n c o u l d average i n excess  of  60%  of  installed  year  for this  region  the  weighted  average  identified sized  to  (Sigma, 1983,  i n Sigma's be  at  full  capacity  output study  of and  generation  flow of the p a r t i c u l a r stream.  f o r e i g h t months of  p.1-2). all  sites  assumes  that  in  i s based the  each  c a p a c i t y f o r the Production  65  This  on  region  plant  mean  the  is  annual  f a l l s t o about  40%  of  installed  capacity  precipitation profiles  is  at  during  the  i t s annual  f o r various regions  summer  low.  months  Energy  when  production  i n B.C. a r e shown i n F i g u r e  A6-2  i n Appendix 6. The  production  regions  profiles  are d i f f e r e n t  precipitation  o f the n o r t h  because  a  greater  and  In c o n t r a s t t o the south  production  rates The  are  impact  i n the  coast  winter  of spring  o f the  stream  sites,  months  runoff  interior  proportion  f a l l s as snow, which i n t u r n a f f e c t s  patterns.  regions.  coast  the  lowest  f o r these  i s reflected  flow  two  i n the  h i g h e r p r o d u c t i o n r a t e s which reach maximum v a l u e s d u r i n g June and  July.  The i n f l u e n c e o f the s p r i n g f r e s h e t i s dominant i n  the i n t e r i o r , where many o f the s i t e s r e a c h maximum p r o d u c t i o n c a p a c i t y d u r i n g the same month attain  a  second  precipitation months,  maximum  during  has not y e t turned  typically  production  (June).  will  December  fall  to  the  The n o r t h c o a s t late  t o snow.  to  about  March, 25%  and  fall During  when  the  the winter  average 40%  sites  of  monthly installed  c a p a c i t y f o r i n t e r i o r and n o r t h c o a s t s i t e s r e s p e c t i v e l y . Thus, s m a l l full  hydro p l a n t s w i l l  capacity during s i g n i f i c a n t  study, expected  Sigma  defined  annual  energy  a  production  site.  Figure  A6-1  factor  at less  p o r t i o n s o f t h e year.  "firmness  maximum p o s s i b l e p r o d u c t i o n hours/year) , and t h i s  be o p e r a t i n g  factor",  of a plant  (installed  66  6  shows  In i t s i s the  d i v i d e d by the  capacity  can be e s t i m a t e d  i n Appendix  which  than  i n kW  x 8760  f o r any  estimated  given  firmness  factors  for different  regions  i n the p r o v i n c e .  the f i r m n e s s f a c t o r i s h i g h e r f o r c o a s t a l s i t e s of  0.6) than f o r t h e i n t e r i o r s i t e s In  i t s IPP purchase  rate  In g e n e r a l , (average  value  (average v a l u e o f 0.5).  schedule,  O n t a r i o Hydro uses  monthly " c a p a c i t y f a c t o r " , which i s determined  a  by d i v i d i n g t h e  t o t a l kWh d e l i v e r e d i n a month by the maximum p o s s i b l e monthly production  (maximum monthly kW d e l i v e r e d x t h e number o f hours  i n t h e month). receive  full  receive  a  P r o j e c t s with a c a p a c i t y f a c t o r o f 65% o r more  avoided  rate  costs while p r o j e c t s  based  on  with  the s h o r t - t e r m  less  than  incremental  65%  energy  costs. Note t h e d i f f e r e n c e between average percentage a  of i n s t a l l e d  percentage  installed  of  output expressed as a  c a p a c i t y and f i r m  average  outputw.  capacity of Site  energy  expressed as  F o r example,  C i s 900 MW,  while  i t s average  the  annual  output would o n l y be 60% o f the maximum p o s s i b l e output o r : 60% x 900 MW x 8760 hours/year = 4710 GWh p e r y e a r but i t s f i r m annual annual  energy  output would be 97% o f i t s average  output:  97% x 4710 GWh per year = 4570 GWh p e r y e a r .  Although vary  with  the output  streamflow,  o f many s m a l l  and as a r e s u l t  hydro little  projects  would  o r no c a p a c i t y  v a l u e would be a t t r i b u t e d t o t h e i r output, t h e r e would be some plants  with  firm  capacity  and  67  the energy  of  these  plants  should  be  valued  accordingly.  s t a t e d t h a t i t "needs energy, 1989,  Regardless,  B.C.  the value of  component o n l y .  B.C. values  has  not c a p a c i t y " (B.C. Hydro, Nov.  p. 1-3-16) and i t i s p o s s i b l e t o determine  the energy  Hydro  Hydro  of  has estimated  capacity  respectively  as  i t s short-term  0.1  (see Table  3).  cents/kWh  and  and  long-term  0.5  cents/kWh  Subtracting the capacity values  and u s i n g o n l y estimated f i r m energy v a l u e s f o r avoided c o s t s , the  NPV  of  cents/kWh, offer  a  20-year  still  6) .  produced  the NPV o f t o t a l  than  annual  output,  produced  was  penalize average energy  those output  small  firm  response  Peterson,  t o questions  output  was  secondary, just  Under t h e s e c o n d i t i o n s ,  c o s t data, t h e 3.0 cents/kWh  energy.  B.C.  this  and 50%  p r o j e c t s with  i s 97% o f t h e average  Ken  energy  over  Thus, the 3.0 cents/kWh r a t e would  hydro  as f i r m  energy  price  would be 26.9 cents/kWh,  u s i n g B.C. Hydro's l e v e l i z e d  o f f e r might be reasonable.  i s 36.7  i n o t h e r words 50% o f t h e t o t a l  i n a g i v e n year energy  1992  the standard  I f firm  s l i g h t l y h i g h e r than the p r i c e o f f e r . and  in  The NPV o f secondary  span i s 17.1 cents/kWh.  h a l f o f average energy  starting  considerably higher  (see T a b l e  same time  contract  than  In c o n t r a s t , S i t e  energy  Hydro's  about  more  50% o f C's  firm  output. Director  the f i r m  of  energy  Planning,  in  capability  of  s m a l l hydro i n B.C., s t a t e d , " . . . i t ' s probably w e l l under 50%" (McDonnell, output  1990,  o f B.C.  p.4).  Hydro's  Yet, as  702 kW  an  Clayton  68  example, Falls  the  plant  average i n Bella  Coola  is  i n excess  80%  of  i t s installed  capacity,  t o 60% f o r S i t e C (McDonnell, 1990, p . 4 ) .  contrast  performance  of  representative that  of  small  the  Clayton  o f a l l small  hydro  can have  Falls  plant  hydro p l a n t s , firm  energy  in  While the  may  not  be  i t does demonstrate  c a p a b i l i t y meeting o r  exceeding t h a t o f l a r g e r s c a l e p r o j e c t s . B.C. prefer total  Hydro has a l s o  projects annual  capable  energy  stated  i n i t s RFPs t h a t  of supplying  delivery  more  than  i n the months  they  would  50% o f  their  o f November  A p r i l , when t h e i r e l e c t r i c i t y demand i s h i g h e s t . above,  small  majority  hydro  sites  on the south  o f t h e i r power d u r i n g  Hydro  should  supply  t h a t matches t h e i r demand.  In Hydro  be  i t s standard  requires  energy  willing  this  per year.  including  This  this  assuming t h e p l a n t should  contract  t h e developer  Hydro's d e f i n i t i o n , By  t o pay  coast  As mentioned  would  produce a  time p e r i o d .  more,  not  for projects  Thus,  less,  under  would  be,  B.C.  f o r power  5 MW,  t o d e l i v e r a minimum  amount  to  according  B.C.  amount o f to  B.C.  the f i r m energy c a p a b i l i t y o f t h e p l a n t . provision  i n the c o n t r a c t ,  B.C.  Hydro i s  has f i r m energy c a p a b i l i t y and thus,  they  be w i l l i n g t o pay f u l l p r i c e f o r t h i s energy.  Thus, t h e r e  i s evidence t h a t small hydro p l a n t s have f i r m  energy c a p a b i l i t y , but how much and what k i n d would be t y p i c a l of a s m a l l hydro p l a n t a r e areas t h a t r e q u i r e f u r t h e r study.  69  5.3  : R i s k and R e l i a b i l i t y When a u t i l i t y buys power from an IPP, i t does not assume  any  of the construction  or operating  r e q u i r e d t o pay f o r power produced. run t h e r i s k s producing  o f t h e p r o j e c t being  energy  contracted. contract  Some  o f these  provisions  flow i n s u r a n c e . the  i n the quantity  risks  such  risks  o f independent  public  delayed,  does  abandoned, o r not  or quality  f o r which i t  can be m i t i g a t e d  through  guarantees  and low  The O n t a r i o government, f o r example, b e l i e v e s  adopted t h e view t h a t the  and i t i s o n l y  However, t h e u t i l i t y  as performance  power p r o d u c t i o n  outweighed by t h e b e n e f i t s .  to  risks  and  The A l b e r t a Small  small the  a r e manageable and Power  Inquiry  power p r o j e c t s pose l i m i t e d electrical  system,  and  risk  only  by  encouraging t h e development o f such p r o j e c t s i n t h e near term would  they  projects,  be a b l e  to properly  production,  the  (Meade,  been  California utility,  60%  t o note t h a t 35,370 MW  of nuclear  J a n . 1989).  generators  term.  i n c r e a s e t h e v a l u e o f IPP power.  i t i s interesting  have  i n the longer  t o t h e r i s k o f a n o n - u t i l i t y p r o j e c t not b e i n g  and 73,130 MW U.S.  o f small  c o u l d reduce i t s r i s k exposure f o r energy  and t h i s should  In r e g a r d  fired  t h e impacts  i n c l u d i n g r i s k and r e l i a b i l i t y ,  Overall, the u t i l i t y  completed,  assess  power planned  cancelled  since  by u t i l i t i e s i n  t h e passage  In 1986, P a c i f i c  of coal-  o f PURPA  Gas and E l e c t r i c ,  a  reported that firm capacity of n o n - u t i l i t y  had an average c a p a c i t y f a c t o r o f 95% as opposed t o  f o r t h e average  utility  base  70  load  plant  (Meade, J a n .  1989) .  Thus, t h e a s s e r t i o n t h a t  independently  produced power  i s l e s s r e l i a b l e than u t i l i t y produced power i s q u e s t i o n a b l e . Admittedly, question  of r e l i a b i l i t y  research. small  t h e s m a l l hydro r e s o u r c e  However,  hydro  plants  i s a valid  from may  F o r example,  perform  expected,  negligible. project itself to  o f power.  integrated  geographical low  flows,  area,  reliable  effect  on  more  perspective,  many  than  hand,  the  would  equivalent  system  would  might  hydro p l a n t s  be  spread  be  200 o r 300 MW  the u t i l i t y  Because s m a l l  grid  an  o r l e s s d i d not  a large  as planned,  problems,  over  find  connected a  wide  o r r o u t i n e maintenance a t t h e  However, low flows  f o r example, would  Hydro's c a p a c i t y .  system  requires  t h e chances o f more than a few e x p e r i e n c i n g  operating  same time i s low. system,  the  I f , on t h e other  short  one t h a t  i f a p l a n t o f 5 MW  was not completed  the  total  be more  l a r g e one. as  a  i s unproven, and t h e  i n j u s t t h e Peace  simultaneously  affect  Thus, r i s k and r e l i a b i l i t y  from a system p e r s p e c t i v e  as w e l l  River  35% o f B.C.  must be examined  as on a p r o j e c t - b y - p r o j e c t  basis. Asked  t o i n d i c a t e the basis  Hydro as t o t h e r e l i a b i l i t y producers, many  Mr. Peterson  o f these  plants  streamflow r e c o r d s . " that  with  little  s m a l l hydro p l a n t  f o r the skepticism  of firm  energy  from  o f B.C.  small  responded, " I t ' s p r i m a r i l y a f a c t a r e on streams  (McDonnell,  1990, P.4)  o r no streamflow  data  can not be proven,  71  that  have  no  hydro that  reliable  While i t i s t r u e  the r e l i a b i l i t y  i t i s not true  of a  that i t  means the assume the  plant  will  hydrological  reliability  of  be  unreliable.  studies  would  streamflows  m i l l i o n s o f d o l l a r s developing 5.4  : Windfall The  a  developer  for  produce  and  t o reduce the  performed  before  a  to  safe  determine  developer  a small hydro  to  invested  site.  of w i n d f a l l p r o f i t s i n the p r i v a t e s e c t o r i s  issue  can  avoided c o s t  be  i s probably  Profits  question  contentious  It  a  utility  power  still  at  to or  tackle. less  than  make a l a r g e p r o f i t ,  p r i c e p a i d t o the  perhaps examine i t s own  If  private  a  utility's  instead  of t r y i n g  developer, the  cost e f f i c i e n c y .  a  B.C.  utility  should  Hydro i s not  in  a p o s i t i o n t o d i c t a t e r a t e s of r e t u r n t o the p r i v a t e s e c t o r . B.C. does  Hydro does not  not  pay  school  producers  do.  cents/kWh  (McDonnell,  energy,  larger  a  taxpayer,  who  power than typical  tax,  School  the  project,  would  accrue  would  go  operating  to  to the  costs  the  p.3).  a  a  For  about  through  off  d e v e l o p e r would o n l y r e c e i v e 17%  72  the  about  given  0.5  block  accrue  to  example,  contract 28%  of  various  i n t e r e s t charges,  paying  to  private  of the  from p r i v a t e l y produced  20-year  government  some p r o j e c t s  i t earns;  revenues  power.  inflation,  on  amount For  the  produced  banks as and  alone  of  and  revenue  ratepayer,  over  cents/kWh e s c a l a t i n g a t  the  taxes  percentage  i s also  income tax,  on  1990,  from u t i l i t y  IPP  pay  31%  principal,  (McDonnell, 1990,  for  paying the  a 4.0  revenues  taxes, would  go  while p.4).  25% to the This  corresponds t o no  cost  a  return  overruns,  on  construction  Thus, the government and winners. is  not  I f the  after-tax  to  bail  out  however, B.C.  that  i s not  or  water  Hydro has  immediately  assuming shortages.  the  "windfall"  operate as planned, the  the  assumed much of the r i s k and, If,  delays,  taxpayers appear t o be  p l a n t d i d not  required  15%,  income of  developer;  the  public  developer  has  i n r e t u r n , expects compensation. a cost  overrun  required,  i t is  or b u i l d s a the  plant  ratepayers  who  pay. As form For  well,  or  another  example,  provincial rates.  most  Canadian  while  B.C.  IPPs  Hydro  government,  Although  no  utilities are  has  not  are  subsidized  (Passmore,  its  loans  resulting in  1987,  lower  there  (Nickerson,  Hydro  contributions  has  government  also in  received "aid  of  p r i v a t e producers and playing  field,"  the o p p o r t u n i t y  financial  construction."  utilities  i t seems only  are  there  i s no  data  price offer.  a standard  p r i c e , p r o v i s i o n s should  escalation  of  the  s e r v i c e date of the  73  the that  "level  IPPs are  given  to  support  B.C.  Hydro's  concept  of  be made f o r :  with  plant;  from  a  to B.C.  given  Although I agree w i t h the  rate  cost  profit.  under 5 MW  -  borrowing  competing on that  the  1989).  Thus,  appropriate  t o earn a h e a l t h y  In c o n c l u s i o n ,  not  by  is a  the government f o r assuming t h i s r i s k  one  p.14).  guaranteed  slightly  money changes hands,  in  inflation  up  to  the  in-  -  changes  in  the  rate  corresponding  to  changes  in  the  u t i l i t y ' s avoided c o s t s ; -  standard and  While  rate  adjustments  for  firmness,  reliability,  r i s k exposure.  some p r o j e c t s  may  lack  firm  energy  and  be  potentially  u n r e l i a b l e , good p r o j e c t s t h a t can demonstrate f i r m energy reliability  should  not  be  penalized  r e c e i v e a f a i r r a t e f o r t h e i r power.  74  and  should  be  eligible  and to  CHAPTER  6.1  6  :  ENERGY  PRICING  POLICY  FOR  SMALL  HYDRO  POWER  : Sucrcrested P o l i c y From the above g e n e r a l concepts and the e x p e r i e n c e i n t h e  U.S.,  Ontario,  general  and  policy  producers.  Alberta,  for  Small  I  energy  hydro  have  developed  purchases  from  purchase  rates  power  a c c o r d i n g t o the f o l l o w i n g proposed two-stage 6.1.1  : First In  a  suggested  small could  stage, the f i r s t  10 y e a r s or so, the  p r o p o s a l s from would-be d e v e l o p e r s and,  the  projects  and environmental purchase  B.C.  Hydro  set  process.  would i n v i t e  to  be  Stage  the f i r s t  proposed  hydro  met  well-defined financial,  utility provided  technical,  requirements, o f f e r them a s t a n d a r d c o n t r a c t  energy.  The  i s reasonable  2 0-year and  contract  beneficial  term  proposed  t o both  the  by  utility  and the d e v e l o p e r . (a) Purchase Rate  Schedule  A  schedule  stage. cost  standard  would  T h i s schedule would be  profile  Present Value The  rate  avoided  with as  the  based  purchase  profile  would  on  rates  the avoided c o s t  cost  be  used B.C. having  over the  be  based  in  the  Hydro's the  the  avoided  same  2 0-year on  first  Net  contract. short-term  m a r g i n a l c o s t s up t o the p r o j e c t e d i n - s e r v i c e date o f the next plant.  After this  p o i n t the avoided c o s t s would be  75  based  on  the  accounting  cost  of  the  next  plant  c o s t s are amortized over the  first  20 y e a r s of  T h i s r a t e schedule should the  in-service  year,  a  assuming  the  capital  operation.  c l e a r l y set a s t a r t i n g rate  contract  duration,  and,  if  for  required  (see below), an e s c a l a t i o n r a t e . The changes  schedule would be in  t i m i n g and  projected  updated each year on  discount  and  inflation  c o s t s of the avoided p l a n t .  the  basis  of  and  the  rates,  T h i s schedule would  be  used t o e s t a b l i s h p r i c e s f o r p r o j e c t s coming o n - l i n e up t o  the  i n - s e r v i c e year of the  new  avoided p l a n t .  After t h i s point  a  avoided c o s t p r o f i l e would be used based on the new  short-term  marginal  scheduled  costs  and  the  avoided  costs  of  the  next  plant. Avoided  costs,  purchase  d e t e r m i n i n g them should public  review  f i n a n c i a l and  by  an  technical  (b) Choice of Two The  subject  t o an  independent  body  the  methods  at  the  thereafter,  or  a  based  on  on-going or p e r i o d i c with  the  developer  some  necessary  Purchase Rates  actual  fixed an  for  resources.  a base r a t e i n the  escalating  the  and  purchase r a t e schedule would o f f e r the  payment schedules:  contract  be  rates,  rate  uniform  assumed  of rate  rate  flexibility  76  of in  first  choice  year of  inflation over  the  life  of  This and  two  operation each  inflation. financing  of  year the gives  managing  risks. would be r a t e , he  For  example,  higher  than  i f the that  might choose the  more f a v o r a b l e  financing  he might choose the  developer  assumed  felt  for  actual  c a l c u l a t i n g the  e s c a l a t i n g r a t e ; i f he terms w i t h  inflation  a  could  front-loaded  fixed secure  contract,  fixed rate.  (c) Rate Adjustments The  rate  standardized  would  be  methods, on  adjusted,  by  relatively  a project-by-project  basis  simple, depending  on a number of f a c t o r s i n c l u d i n g : firmness  and  example,  based  It  should  is  in  be  reliability on  annual  of or  monthly  possible to adjust  operation  power  based  this  on  supply  firm  (for  capacity).  a f t e r the  actual  plant  operating  performance; -  location  of  project  and  associated  transmission  losses;  -  environmental and  social  risks  p r i v a t e developer i n c l u d i n g  assumed by  impacts; changes  in: i n f l a t i o n and  interest rates;  taxes and water r e n t a l s ; r e g u l a t o r y and  environmental requirements;  demand l o a d ; c l i m a t i c events, e.g.,  77  low  streamflows.  Adjustments 6.  Appendix risks  for B.C.  i t was  i n c l u d e the Goods and the  discussed  to  S e r v i c e s Tax may  assume.  f o r low  t o pay  (GST).  decide t o water  penalties  in  a d j u s t the  more  rate  Changes  i n t r o d u c t i o n of the f e d e r a l  Hydro  willing  are  Hydro would  required  developer  B.C.  firmness  detail  downwards f o r  in  taxes  government's  For r i s k s  such as  f o r low  or  the  would  proposed  streamflows,  acquire insurance to  levels,  in  compensate  developer  might  output as the r e s u l t  of  be low  streamflows. (d) C a p a c i t y In  the  first  requirements be no  Requirements phase,  would be  capacity  a l l projects  accepted.  cap.  meeting  the  specified  In o t h e r words, t h e r e would  However, t o p r e v e n t the u t i l i t y  and  the  v a r i o u s government agencies from b e i n g swamped w i t h a f l o o d of proposals,  some r e s t r i c t i o n s  such as o n l y two at  one  time,  or  c o u l d be  p l a c e d on  applications  or t h r e e from any one d e v e l o p e r i n the limiting  the  number  or  total  system  capacity  of  a p p l i c a t i o n s accepted f o r review on a monthly o r annual b a s i s . 6.1.2  : Second After  10  Stage years  or  so  ( f o r example,  when S i t e  l i n e ) , and the IPP i n d u s t r y has e s t a b l i s h e d  itself,  C  is  on-  a standard  r a t e schedule would again be used but p r i c e s would be based  on  the market v a l u e of e l e c t r i c i t y ,  e.g., what i t c o u l d be bought  for  utilities.  from  larger  competitive  IPPs  negotiation  or  other  Assuming  or b i d d i n g p r o c e s s would  78  be  that  a  i n place  for projects Alberta  and  the  deregulation, and  to  that with  For  projects  could  competitive  provide  time t o  the  avoided  B.C.  value  administering  cost.  a  be  electricity for  much  in  the 5  MW  winning  or  under  (or h i g h e s t )  i s competitive process accept  lowest the  cooperation  RFP.  would  the  in  further  i t should  price  lowest  industry  provided  such  for  negotiation  at  undergo  increase  utilities,  t o the  Hydro and  would  unadjusted  utility  energy  required,  utility's  the  or  energy p r o d u c t i o n  Hydro would  market  i f the  bidding  i n which  amount  a  tied  Alternatively,  would  B.C.  p r i c e from an over 5 MW  negotiated  place,  Northwest  example, be  electrical  adjacent  establish  future.  that  U.S.  and  integration  easier  5 MW,  over  the  cost,  cost  may  be  to  not  a  set  proposals  up  did  enough,  in that  the  total  exceed  the  However, because  of  the  expense  and  private developers  of  negotiating  and  process,  i t would  likely  not  be  cost  each  year  e f f e c t i v e f o r small p r o j e c t s . At  this  point  depending  on  necessary  given  MW 6.2  system the  a  capacity  load  cap  may  requirements,  relatively  small  be but  set this  contribution  may  not  be  of  under  5  projects. : Policy The  persuasive  Rationale  main  rationale  argument  Producers i n O n t a r i o ,  put  for  this  forward  two-stage by  namely t h a t the  79  the first  approach Independent aim  should  is  the  Power be  to  develop  a  industry  viable  becomes  have c o m p e t i t i v e ensure  small well  industry.  established,  bidding  fairness,  competition  hydro  for sites  efficiency,  i n the long  run.  Later,  i t could  be  when  possible to  and c o n t r a c t s , which would  and  the  benefits  As p o i n t e d  of  developing  utility.  a hydro  site  or negotiate  rate  out e a r l i e r ,  time consuming and expensive t o prepare a c o m p e t i t i v e for  the  it  is  proposal  a c o n t r a c t with the  These c o s t s can be handled more e a s i l y by a company  t h a t has a l r e a d y developed a few s m a l l hydro p l a n t s , s i n c e by t h a t stage, and  i t would need t o be w e l l o r g a n i z e d ,  w e l l beyond the l e v e l  o f a "Mom  well  financed  and Pop" o p e r a t i o n .  But  they cannot be e a s i l y handled by a s m a l l company a t i t s s t a r t up  stage. Another reason  by  t h e ERCB  best  way  and PUC  i n the A l b e r t a  t o determine  contribution development future  f o r a two-stage p r o c e s s  of small  the c a p a b i l i t y , power producers  i n the short-term  date.  This  process  and would  r e g a r d i n g the f i r m energy c a p a b i l i t y , small  power p r o d u c t i o n  than c o n j e c t u r e . the  public  initial  stage  and  Small  based  i s t h e view taken Power I n q u i r y : the  impact,  and p o t e n t i a l  i s t o encourage  review help  their  the r e s u l t s answer  reliability,  on a c t u a l o p e r a t i n g  at a  questions and r i s k o f  data  rather  The p r o j e c t s a r e s m a l l enough t h a t r i s k s t o electrical  and the r e s u l t s  f i n e tune t h e second stage  system  are  minimal  during  the  o f t h e review c o u l d be used t o  process.  80  To encourage development and g e t t h e s m a l l hydro on the  a firm financial  should  be generous i n  e a r l y stages and o f f e r p r i c e s a t o r c l o s e  t o i t s avoided  costs. and  This  a  i s an accepted  cornerstone  payment other  b a s i s , the u t i l i t y  of  o f avoided  sources  avoided  cost  o f energy  cost  years,  maximum  privately  owned  allows that  cost  period  economic  agreement.  that  strong,  within  should  result  well-financed  infrastructure  of  would  avoided  be a  cost  plant  acceptable 20-year  life  of  i n the r a p i d industry  builders,  the  a  20  for  contract costs  purchase  build-up  with  on  over  pay o f f t h e c a p i t a l  the  hydro  designers,  s u p p l i e r s t h a t should T h i s should  small  the  and u s i n g  project  This  to exploita l l  o f t h e avoided  developments,  The  t h e same o r l e s s than t h e  Basing  costs  and A l b e r t a  i n t h e U.S.  the u t i l i t y  term ensures t h a t a developer c o u l d an  i n Ontario  legislation  alternative. the c a p i t a l  the  standard  PURPA  depreciating  of  industry  of a  supporting  manufacturers,  and  s t r o n g l y b e n e f i t t h e p r o v i n c i a l economy.  a l s o l e a d t o the p r o v i s i o n o f low c o s t  electricity  in the future. Although  i t appears t h a t  many j u r i s d i c t i o n s  are moving towards a competitive o f t h e standard  avoided c o s t p r i c e  PURPA a r e c l e a r l y billion likely  bidding process,  visible  growth  d o l l a r independent power i n d u s t r y . never  have  developed  without t h e PURPA avoided  in a utility  cost  legislation.  81  the benefits  f o r the f i r s t  i n the rapid  i n t h e U.S.  10 y e a r s o f  of the multi-  The i n d u s t r y would controlled  market  The i n d u s t r y i s  now  mature  enough  competitive  to  California  power  to  However, built  of  continue  be  pay  higher to  sponsored  nuclear  completed,  yet  in  projects  capital  the  i n the  the  run  short  dangers  higher at  of  paying  thermal  that  being  paid  were  that  projects such  rest  from  of  Thus,  dramatically long-term  Expensive  utility-  never  higher  or  paying  using  full  full  California  avoided  costs  be  never passed  produced.  society  rates  been s u c c e s s f u l i n the and  is  under  California  paying  as  displace It  mothballed  will  for  time.  plants.  once more r i s e  were  rates  the  in  will  to  PURPA  avoided  costs  "first  stage"  as  an  i s not  example really  a  argument. One  drawback to paying f u l l  depreciation the  of  situation  i n some cases were s t i l l  run.  o f development i n the U.S. the  more  utilities  need  many  producers.  power  and  long  now  costs  for  the  renewable r e s o u r c e s  plants  independent power has  valid  that  could  rates  power  ratepayers  benefit  a  geothermal whose output c o u l d  independent  consumers  Clearly,  of  necessarily  non-renewable  the  contracts  to  under  and  PURPA p r o j e c t s  not  avoided c o s t s than  to  dropped  recognized  and  polluting,  possible that  for  costs  did  i t should  of  prosper  Hydro p o i n t  under PURPA were powered by  that  on  to  utilities  hydro, wind, s o l a r ,  even  B.C.  where .avoided  the  to  environment.  Representatives  required  continue  plant  of  does  the not  utility's operate  avoided c o s t based on  capital for  82  the  costs full  i s the 20  20-year  risk  years  of  that the  contract  and  beyond, so the u t i l i t y  does not  benefit  costs  As  there  lower energy  i n c e n t i v e f o r the good working continue  that  they B.C.  at  price  a  to  can  over the  operate  take  or  the  at  purchase the  f o r one  it  or  begins  if  the  an  option  operation,  owners  of  the  low  20  has  be  plant  in  that i t  To  prices  cost  of  going  market  ensure  after  rate  for  and  power,  a l s o wish t o i n c l u d e an o p t i o n dollar  at  the  end  of  maintain  the  i t to  a  20  contract  operation  to assume ownership i f the  to  the  to  so  years.  energy  shuts down b e f o r e  fail  contract  avoided  the  They may  plant  of  f o r more than  whichever i s l e s s .  contract  well,  have the o p t i o n t o renew the  reflecting only  term  advantage  Hydro should  maintenance  future.  owner of the p l a n t t o m a i n t a i n the  order  will  years,  i n the  from  to  20-year  the  plant,  once  contract  ends,  or  certain  level  of  quality. If full  the  utility  avoided  developer  cost,  should  s u b s i d i e s or tax In  pays a f r o n t - l o a d e d c a l c u l a t e d using  not  require,  nor  early  stage,  although the  "fair"  p r i c e to be  through should  be  should  simplicity  l o c a l c o n d i t i o n s and a  proposed he  method, receive,  on the any  exemptions.  the  on the  the  u n i f o r m r a t e based  negotiation  paid  o f f e r e d t o a l l small  in  important.  be  practice  location, etc.  depend  "custom a  fitted"  standard  power p r o d u c e r s , w i t h  83  Thus,  f o r energy should  probably should  process,  adjustments f o r firmness,  is  rate  standard  A accepted  limit  on  the  number  from one group at any  of  proposals  one time would  that  should  be a  be  safeguard  a g a i n s t one o r two l a r g e r groups t r y i n g t o " c o r n e r t h e market" and would h e l p prevent too many s i t e s b e i n g developed Although capable,  the  aim  would  be  to  encourage  several  w e l l f i n a n c e d groups, no one group s h o u l d be  t o dominate.  84  a t once. strong, allowed  CHAPTER 7 : SUMMARY AND CONCLUSIONS  7.1 : C o n c l u s i o n s Although  British  Columbia  s m a l l hydro  resource  independent  power producers  a  significant  and the development  seems t o be the small hydro p r i c i n g  official  policy  commitment  of  development, adjusting  of the  B.C.  from  provincial Hydro  distribution,  to  to  r e s o u r c e by benefits, The  policy  utility.  independent  seems  potential  progress.  government t o  i t s traditional control  The  electrical  encouraging  w i t h complete  purchaser,  little  many  obstacle  provincial  very  provide  there  the  been  could  of t h i s  practice  Hydro,  has  has  be  major  o f B.C.  Despite power  its  and  private  having  in  the  energy  difficulty  in  r o l e as a m o n o l i t h i c monopoly  over power g e n e r a t i o n , t r a n s m i s s i o n and  i t s new  role  as  and manager o f energy  competitive  producer,  resources. going  centre  around q u e s t i o n s o f f a i r n e s s and e q u i t y , not t e c h n i c a l  issues.  B.C.  difficulties  a  Hydro  contracts  seems  i n getting  t o be doing  f o r the purchase  development  everything  of e l e c t r i c a l  possible to obtain energy  at  minimal  c o s t , w i t h t h e l a u d a b l e aim o f m i n i m i z i n g t h e p r i c e s they must charge for  their  customers.  However, the p r i c e they  s m a l l hydro power i s s i g n i f i c a n t l y  costs  and t h e r e  contend producers  that a  is little  i t would more  evidence be  generous  rate  85  l e s s than t h e i r  to j u s t i f y  better  are offering  to  offer  i n the  this  avoided  rate.  private  early  stages  I  power that  reflects  a c t u a l avoided  costs, to b u i l d  up  t e c h n i c a l c a p a c i t y of the i n d u s t r y without ratepayers.  I  believe  that  in  the  would b e n e f i t more from a capable, private  power  squeezing  industry,  small  than  and  financial  term  the  well-financed, a  and  increasing costs to  long  from  developers  the  competitive  short-term  risk  province  policy  underutilizing  of the  r e s o u r c e or l o s i n g i t a l t o g e t h e r . The  policies  I have suggested  are not  intended  t o be  the  o n l y or the b e s t s o l u t i o n s but r a t h e r t o a c t as a c a t a l y s t f o r further discussion.  Some of the p r e s e n t p o l i c i e s seem t o have  been  a  formulated  problems w i l l  in  vacuum  and  the  resolution  o n l y come with more d i a l o g u e .  a f f e c t e d government bodies, and  B.C.  of  these  Hydro,  r e p r e s e n t a t i v e s from the  the  small  hydro i n d u s t r y should s i t down and hammer out a p o l i c y t h a t i s equitable  to  a l l p a r t i e s and  that w i l l  maximize the  benefits  of d e v e l o p i n g the s m a l l hydro r e s o u r c e . 7.2  : Suggestions There are  which  further  f o r F u r t h e r Research  s e v e r a l areas research  of small hydro p r i c i n g  would  shed  light  on  some  policy  in  unanswered  questions: 1)  Firm  Capacity  and  Energy c a p a b i l i t i e s  of small  hydro  plants; 2)  Risks  and  Reliability  of  IPPs  i n general  and  hydro power i n p a r t i c u l a r ; 3)  Competitive  B i d d i n g and N e g o t i a t i o n  86  Processes.  small  Information used  to  pricing  gained  develop  a  research  fair  and  into  these  equitable  areas  small  could  hydro  be  energy  policy.  Although  I j u s t mentioned them i n p a s s i n g ,  policy issues w i l l success  from  the f o l l o w i n g  undoubtedly be f a c t o r s a f f e c t i n g t h e f u t u r e  o f s m a l l hydro development:  4)  Site  Allocation  implications which 5)  on  (who  Crown gets  land  and water  the o p p o r t u n i t y  licensing to  develop  sites);  Environmental  Impact of s m a l l hydro p l a n t s and other  resource planning issues; 6)  Regulatory  These l a s t the  Ministry  Although  will  Energy,  under-5-MW  and money  research  determining regulation  technical  a t t h e moment by  Petroleum  a r e supposed  Resources. to  have  i n d i c a t i o n s are that  Requiring  the developer  feasible into  small  these or  not  hydro  policy the  projects  a  i t will t o spend  i n the a p p l i c a t i o n and a p p r o v a l  whether  process  uneconomic.  issues  may  benefits  of  assist  in  additional  ( i f t h e r e a r e any) outweigh t h e c o s t s .  Although developers  and  projects  complicated.  q u i c k l y make  Further  Mines,  r e g u l a t o r y process,  become more more time  f o r small hydro p r o j e c t s .  t h r e e i s s u e s are under review of  the  streamlined  Process  at  most  of  this  time  improvements  the  problems  a r e economic  facing and  and i n n o v a t i o n w i l l  87  small  policy  help  hydro  related,  the industry  survive  i n t h e long  term.  Although  not complete,  I  suggest  the f o l l o w i n g two areas: 7)  Capital cost  Cost  Reductions  construction  such  and use  as  designing  f o r low  o f a l t e r n a t i v e low  cost  m a t e r i a l s and equipment; 8)  Operational designs  By  reducing  hydro  Efficiency  and  capital  can become  a l t e r n a t i v e sources  such  as  improved  intake  more e f f i c i e n t t u r b i n e s and g e n e r a t o r s . costs  more  and  improving  competitive  of energy.  88  with  efficiency, larger  small  projects  and  REFERENCES  " A l b e r t a A g e n c i e s Recommend Small Power be Encouraged." Review, August 1988, p. 78.  Hydro  A l b e r t a M i n i s t r y o f T r a n s p o r t a t i o n and U t i l i t i e s . "Major Program t o Help Small Power Producers i n Alberta." M i n i s t r y News Release, June 14, 1988. Alberta Ministry of Transportation and "Improvements Announced to Small Power M i n i s t r y News Release, November 8, 1989. B.C.  Hydro. 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Streams o f Power: Developing Hydro Systems. Renewable Energy i n Canada  Associates International. Canada. October, 1987.  The P r i v a t e  Power Option  Deborah J . Correspondence from t h e Washington S t a t e Utilities and T r a n s p o r t a t i o n Commission, December 6, 1989. ^  S h a f f e r , Marvin and A s s o c i a t e s L i m i t e d and Sigma E n g i n e e r i n g Limited. E l e c t r i c i t y D e r e g u l a t i o n and Small Hydro Preliminary Assessment. Energy Mines and Resources Canada, December 1987, pp. 40-42. Sigma E n g i n e e r i n g L i m i t e d . Small Hydro Power Resource i n t h e P r o v i n c i a l System - Technology and Resource Assessment. B.C. M i n i s t r y o f Energy, Mines and Petroleum Resources, J u l y 1983. Sigma  E n g i n e e r i n g L i m i t e d and Robinson C o n s u l t i n g Limited. Small Hydro Power Resource i n t h e P r o v i n c i a l System Economic and F i n a n c i a l Assessment. B.C. M i n i s t r y o f Energy, Mines and Petroleum Resources, J u l y 1983.  Stoiaken, Larry. "FERC R e i n t e r p r e t s PURPA." Sources o f Energy, May 1988, pp. 17-19.  Alternative  Swoboda, Don. "IPP S t a t u s Report." Speech g i v e n Workshop, Vancouver, Tuesday, A p r i l 4, 1990.  a t IPP  Synex Energy Resources L i m i t e d . The P o t e n t i a l f o r Development of Independent Power P r o j e c t s U s i n g a C o n t r a c t Modelled A f t e r t h e Rate A p p l i c a t i o n - I n t e r v e n t i o n t o t h e B.C. Hydro and Power A u t h o r i t y Rate A p p l i c a t i o n Dated November 30, 1989. January 1990. Washington S t a t e Energy O f f i c e . Power S a l e s t o E l e c t r i c Utilities - PURPA Q u a l i f y i n g Facility Development i n Washington S t a t e . February 1989.  91  APPENDIX  1  BACKGROUND ON T H E P U B L I C U T I L I T I E S (PURPA)  REGULATORY  POLICIES ACT  PURPA P r i o r t o t h e enactment o f PURPA, an independent power producer s e e k i n g t o s e l l e l e c t r i c i t y t o a u t i l i t y o r d i r e c t l y t o i n d u s t r y faced t h r e e major o b s t a c l e s . First, utilities were not r e q u i r e d t o i n t e r c o n n e c t w i t h t h e producer o r t o purchase t h a t producer's e l e c t r i c a l output. Second, even i f a u t i l i t y was w i l l i n g t o purchase e l e c t r i c i t y , t h e p r i c e o f f e r e d by t h e u t i l i t y might not r e f l e c t f a i r market v a l u e . Finally, a s m a l l power producer was p o t e n t i a l l y s u b j e c t t o e x t e n s i v e u t i l i t y regulation. PURPA amended the Federal Power A c t t o reduce o r e l i m i n a t e t h e s e and o t h e r o b s t a c l e s t o t h e development o f s m a l l power p r o j e c t s . In e f f e c t , PURPA r e q u i r e s u t i l i t i e s t o i n t e r c o n n e c t w i t h q u a l i f y i n g f a c i l i t i e s (QFs) l o c a t e d i n t h e i r s e r v i c e t e r r i t o r i e s and t o purchase power a t a p r i c e based on the u t i l i t y ' s full avoided c o s t f o r energy and c a p a c i t y . PURPA a l s o exempts small power producers (SPPs) from c e r t a i n f e d e r a l and s t a t e u t i l i t y r e g u l a t i o n s . SPPs q u a l i f y under PURPA i f t h e p r o j e c t meets s p e c i f i e d s i z e , f u e l use, and ownership c r i t e r i a . Cogeneration p r o j e c t s must a l s o meet a d d i t i o n a l o p e r a t i n g and e f f i c i e n c y standards. Legal  Challenges  Because of the uncertainties posed t o the u t i l i t y i n d u s t r y by t h e P u b l i c U t i l i t i e s Regulatory A c t (PURPA), t h e mandate t o purchase power from such unproven, u n t r a d i t i o n a l sources o f energy as small power producers became t h e focus o f some e x t e n s i v e l e g a l b a t t l e s i n t h e e a r l y y e a r s o f PURPA implementation. PURPA and FERC's implementation o f PURPA have been l e g a l l y c h a l l e n g e d on such i s s u e s as i n f r i n g e m e n t on s t a t e s r i g h t s , e s t a b l i s h m e n t o f avoided c o s t s , i n t e r c o n n e c t i o n requirements, p r o v i s i o n of back-up power, and t h e d e f i n i t i o n of a Q u a l i f y i n g F a c i l i t y (QF) . These c h a l l e n g e s have produced considerable uncertainty f o r u t i l i t i e s , p r o j e c t developers, and s t a t e u t i l i t y commissions. Two c o u r t cases c h a l l e n g e d the a u t h o r i t y o f PURPA and FERC's i n t e r p r e t a t i o n o f t h e A c t . The f i r s t case, i n M i s s i s s i p p i , r a i s e d the question of the c o n s t i t u t i o n a l i t y of PURPA, a r g u i n g t h a t PURPA i n t e r f e r e d w i t h s t a t e regulatory authority. A f t e r a p p e a l i n g a d e c i s i o n o f a lower c o u r t i n February 1981 that declared the rules under PURPA  92  unconstitutional, FERC was s u c c e s s f u l Supreme Court uphold PURPA i n June 1982.  i n having  t h e U.S.  During this time, another case also threatened the viability o f PURPA. A private utility filed a suit c h a l l e n g i n g FERC's r u l e s on avoided c o s t and i n t e r c o n n e c t i o n requirements, arguing that the f u l l avoided cost rate d i s c r i m i n a t e d a g a i n s t the consumer and was t h e r e f o r e i n d i r e c t c o n f l i c t w i t h t h e i n t e n t o f t h e l e g i s l a t i o n ( f u l l avoided c o s t is the cost the u t i l i t y would incur by p u r c h a s i n g o r d e v e l o p i n g an a d d i t i o n a l u n i t o f energy and c a p a c i t y ) . I f the s u i t was s u c c e s s f u l , avoided c o s t r a t e s would be s u b s t a n t i a l l y reduced and s m a l l power p r o d u c t i o n facilities would be r e q u i r e d t o undergo c o s t l y and lengthy p r o c e e d i n g s t o a c h i e v e interconnection, e f f e c t i v e l y s h u t t i n g down many development proposals. S t a t e implementation o f PURPA slowed c o n s i d e r a b l y d u r i n g t h e two y e a r s t h e case was being fought i n t h e c o u r t s . However, a f t e r o v e r t u r n i n g a lower c o u r t d e c i s i o n , t h e Supreme Court a f f i r m e d FERC's r u l e s i n May 1983, marking t h e end o f the major l e g a l c h a l l e n g e s t o PURPA and a l l o w i n g f i n a l s t a t e implementation o f t h e A c t ' s requirements. While r e c o g n i z i n g t h a t a f u l l avoided c o s t r u l e would not lower r a t e s t o consumers, the c o u r t noted i n t h i s case t h a t ratepayers and t h e n a t i o n would b e n e f i t through decreased r e l i a n c e on s c a r c e f o s s i l f u e l s and more e f f i c i e n t use o f energy. The c o u r t a l s o found t h a t , i n r e g a r d t o FERC's interconnection r u l e s , r e q u i r i n g small power p r o d u c e r s t o undergo t h e same r e g u l a t o r y process as u t i l i t i e s would be time consuming, expensive and non-productive. In May 1983, another c h a l l e n g e came from a c o a l i t i o n o f environmental groups c l a i m i n g t h a t FERC had not c o n s i d e r e d t h e environmental impact o f awarding QF s t a t u s t o hydropower p r o j e c t s r e q u i r i n g new dams. T h i s a c t i o n l e d t o t h e passage of t h e E l e c t r i c Consumers P r o t e c t i o n A c t (EPCA) i n 1986 which put c o n s t r a i n t s on hydro p r o j e c t s by imposing a moratorium on PURPA b e n e f i t s t o f a c i l i t i e s r e q u i r i n g c o n s t r u c t i o n o f a new dam. In 1988, FERC i n v a l i d a t e d New York's 6 cents/kWh avoided cost. FERC found t h a t t h i s minimum p r i c e f o r p u r c h a s i n g power, which had been s e t t o encourage development, was improperly e s t a b l i s h e d a t a l e v e l h i g h e r than t h e p u r c h a s i n g u t i l i t y ' s avoided c o s t . The  F u t u r e o f PURPA  In t h e words o f Martha Hesse, chairman o f FERC, " c l e a r l y , PURPA...is here t o s t a y . PURPA has evolved i n t o something f a r beyond t h e e x p e c t a t i o n s o f i t s c r e a t o r s . . . i t has outgrown t h e r o l e o f a l i m i t e d energy c o n s e r v a t i o n o f program. Now PURPA needs t o be updated t o r e f l e c t what we have l e a r n e d from t h e  93  experience" (Hesse, J u l y 1987, and October, 1988). Thus, PURPA i s i n a s t a t e o f t r a n s i t i o n . Some o f t h e i s s u e s t o be addressed by FERC and t h e U.S. Congress i n c l u d e : - b i d d i n g and c o m p e t i t i v e b i d d i n g procedures and t h e question of r e q u i r i n g u t i l i t i e s to b i d ; - a l l o w i n g u t i l i t i e s t o compete with QFs; - r e l a x i n g t h e r e g u l a t o r y burden o f independent g e n e r a t o r s who do not meet t h e QF c r i t e r i a ; - increased transmission g r i d  access;  - r e g u l a t o r y reform and d e r e g u l a t i o n o f t h e e l e c t r i c a l generation industry. In 1988, i n an e f f o r t t o i n c r e a s e c o m p e t i t i o n i n the e l e c t r i c power g e n e r a t i o n market, FERC i s s u e d N o t i c e s o f Proposed Rulemakings (NOPRs) f o r changes t o PURPA on t h r e e main i s s u e s . These were: g u i d e l i n e s f o r a d m i n i s t r a t i v e l y determining full avoided costs, regulations governing competitive bidding programs, and r u l e s for establishing Independent Power Production f a c i l i t i e s (IPPs) which a r e not s u b j e c t t o PURPA f u e l and e f f i c i e n c y r e s t r i c t i o n s . But, because o f t h e go-slow approach urged by Congress and t h e r e s i g n a t i o n o f Chairman Hesse i n October 1989, FERC s t i l l has not taken t h e long-expected a c t i o n t o make changes t o PURPA rules. FERC i s expected t o continue t o move s l o w l y u n t i l t h e new chairman has time t o develop p r i o r i t i e s f o r t h e agency. Moves t o modify t h e P u b l i c U t i l i t i e s Holding A c t (PUCHA) t o allow the construction of power plants without the r e s t r i c t i o n s o f PURPA a r e p r e s e n t l y stalled i n Congress. Following reports released by t h e O f f i c e o f Technology Assessment ( E l e c t r i c Power Wheeling and Dealing) and FERC (Electricity Transmission: Realities, Theory, and P o l i c y A l t e r n a t i v e s ) i n 1989, i n d u s t r y r e p r e s e n t a t i v e s and r e g u l a t o r s are d e b a t i n g i n c r e a s e d access t o t h e t r a n s m i s s i o n g r i d . Thus, t h e r e w i l l c e r t a i n l y be changes made t o PURPA and o t h e r r e l a t e d r e g u l a t o r y l e g i s l a t i o n , but what these changes w i l l be and what k i n d o f e f f e c t they w i l l have remains t o be seen. However, t h e r e i s s t r o n g support t o make t h e e l e c t r i c a l g e n e r a t i o n i n d u s t r y more c o m p e t i t i v e and l e s s r e g u l a t e d . Sources:  Eden, 1985; Hess, 1987 and 1988; M a r i e r , S t o i a k e n , 1988; WSEO, 1989.  94  Nov. 1989;  APPENDIX 2  ONTARIO HYDRO'S SMALL POWER PURCHASE RATES  5  There a r e f o u r o p t i o n s f o r p r o j e c t s w i t h c a p a c i t i e s up t o MW:  1) Standard Energy Rate (a) C a p a c i t y f a c t o r (CF) o f 65% o r g r e a t e r : 3.97 cents/kWh e s c a l a t e d each year a t the O n t a r i o Consumer P r i c e Index (CPI) f o r up t o 10 years from t h e i n - s e r v i c e date. T h e r e a f t e r , t h e base r a t e i s r e n e g o t i a t e d . This rate i s p r e s e n t l y based on 85% o f Hydro's a c c o u n t i n g c o s t s f o r power, but when avoided c o s t s exceed 8 5% o f t h e a c c o u n t i n g c o s t (1991) , t h i s r a t e w i l l be based on avoided c o s t s . (b) CF o f l e s s than 65%: 2.54 cents/kWh reviewed a n n u a l l y relative t o Hydro's short term i n c r e m e n t a l energy costs. T h i s r a t e r e f l e c t s t h e s h o r t term i n c r e m e n t a l energy c o s t s t o Hydro. (c)  CF o f l e s s than 75% but g r e a t e r than 50% (new hydro p r o j e c t s o n l y ) : 3.97 t o 2.54 cents/kWh based on s l i d i n g scale.  (d)  CF o f l e s s cents/kWh.  than  50%  (new hydro  projects  2) Ten y e a r F i x e d Rate f o r New Renewable Resource (a) CF o f 65% o r g r e a t e r : 4.94 cents/kWh p r o j e c t s coming i n t o s e r v i c e i n 1989.  only):  2.54  Projects  f o r 10 y e a r s f o r  (b) CF o f l e s s than 65%: 2.54 cents/kWh reviewed a n n u a l l y r e l a t i v e t o s h o r t term i n c r e m e n t a l energy c o s t s . (c)  CF o f l e s s than 65% but g r e a t e r than 50% (hydro p r o j e c t s o n l y ) : 3.40 t o 2.54 cents/kWh based on s l i d i n g scale.  (d)  CF o f l e s s cents/kWh.  than  50%  (hydro  95  projects  only):  2.54  3) Time D i f f e r e n t i a t e d (a)  Rates  Peak Hours: 5.87 (Winter) and 5.28 (Summer) e s c a l a t e d a n n u a l l y a t CPI f o r up t o 10 y e a r s .  cents/kWh  (b) Off-Peak Hours: 2.50 (Winter) and 1.72 (Summer) cents/kWh e s c a l a t e d a n n u a l l y a t CPI f o r up t o 10 y e a r s . 4) Ten Year Time D i f f e r e n t i a t e d F i x e d Rate f o r New Renewable Resource P r o j e c t s (a)  Peak Hours: 6.96 f o r 10 y e a r s .  (Winter) and 6.25  (Summer)  cents/kWh  (b) Off-Peak Hours: 2.97 (Winter) and 2.04 (Summer) cents/kWh f o r 10 y e a r s . Definitions: Monthly c a p a c i t y f a c t o r i s determined by d i v i d i n g t o t a l kWh d e l i v e r e d i n a month by t h e product o f t h e maximum monthly kW d e l i v e r e d and t h e number o f hours i n t h e month. Peak Hours a r e 7 a.m. t o 11 p.m. weekdays; Off-Peak Hours are 11 p.m. t o 7 a.m. weekdays, p l u s a l l weekends and public holidays. Winter i s d e f i n e d as October through d e f i n e d as A p r i l through September.  96  March;  Summer i s  APPENDIX 3  ALBERTA SMALL POWER INQUIRY The o b j e c t i v e o f the P u b l i c U t i l i t i e s Board (PUB) and t h e Energy Resources Conservation Board (ERCB) was " t o i n q u i r e i n t o , r e p o r t upon, and make such recommendations as necessary or a d v i s a b l e r e s p e c t i n g e l e c t r i c i t y g e n e r a t i o n by s m a l l power generators i n A l b e r t a " . The Boards were s p e c i f i c a l l y asked t o determine: the s i z e and type o f g e n e r a t o r s t h a t should c l a s s i f i e d as small power g e n e r a t o r s ;  be  the number, types, and c a p a c i t i e s o f s m a l l power g e n e r a t o r s and t h e i r t o t a l c a p a c i t y t h a t c o u l d be i n t e r c o n n e c t e d without n e g a t i v e l y a f f e c t i n g t h e r e l i a b i l i t y of the system o r t h e c o s t of electricity; the p r i n c i p l e s and methods which should apply t o t h e s e t t i n g o f a p r i c e o r p r i c e s p a i d by t h e u t i l i t i e s f o r e l e c t r i c i t y produced by s m a l l power g e n e r a t o r s . Recommendations o f the Boards The  Boards' recommended  that:  1) t h e A l b e r t a Government allow and f a c i l i t a t e t h e p r o d u c t i o n of e l e c t r i c i t y by independent producers i n p a r a l l e l with the A l b e r t a i n t e r c o n n e c t e d system (AIS); 2) a l l power producers w i t h g e n e r a t i n g c a p a c i t i e s o f 2.5 MW o r l e s s a t one s i t e be c l a s s e d as s m a l l power producers (SPPs); 3) i n i t i a l l y , a maximum of 100 MW o f s m a l l power c a p a c i t y be i n t e r c o n n e c t e d , s i n c e t h i s would not n e g a t i v e l y impact t h e reliability of the system nor would i t substantially i n c r e a s e t h e c o s t of e l e c t r i c i t y t o t h e consumer; 4) t h e p r i c e s p a i d t o SPPs by u t i l i t i e s should be based on u t i l i t y long-term avoided c o s t s i n o r d e r t o ensure t h a t p r i c e s t o consumers would not i n c r e a s e . The p r i c e s should vary according t o the r e l i a b i l i t y , a v a i l a b i l i t y , term o f c o n t r a c t , and commencement o f c o n t r a c t ; 5) SPPs should be exempted from t h e p r o v i s i o n s o f t h e P u b l i c U t i l i t i e s Board A c t and t h e E l e c t r i c Energy A c t s u b j e c t t o obtaining, t h e consent of the ERCB p r i o r t o c o n s t r u c t i n g o r o p e r a t i n g a small power f a c i l i t y .  97  Avoided Cost - The only c o s t s which can be avoided from now u n t i l the mid-1990's are v a r i a b l e f u e l , o p e r a t i n g , and maintenance c o s t s . Commencing i n about 1995, i t may be p o s s i b l e t o d e f e r c e r t a i n c a p i t a l a d d i t i o n s and thus a v o i d the a t t e n d a n t c a p i t a l and f i x e d f u e l , o p e r a t i n g , and maintenance costs. Purchase P r i c e - In order t h a t e l e c t r i c i t y p r i c e s t o consumers are not i n c r e a s e d , the p r i c e s p a i d by u t i l i t i e s f o r small power p r o d u c t i o n should r e f l e c t the c o s t s which the u t i l i t i e s would a v o i d over the l i f e of the c o n t r a c t w i t h the s m a l l power producer. T h i s can be achieved by d e t e r m i n i n g p r i c e s based on (a) the year-by-year avoided c o s t s or (b) a l e v e l i z e d p r i c e t h a t has the same NPV as d i s c o u n t i n g the l o n g run avoided c o s t s over the l e n g t h of the c o n t r a c t . C o n t r a c t s - Standard c o n t r a c t s should be developed by the utilities, i n c o n s u l t a t i o n w i t h the Small Power Producers Association, for as-available (secondary) and firm power purchases. The above recommendations should be reviewed i n 1994 or when 100 MW o f small power has been i n t e r c o n n e c t e d , whichever occurs f i r s t . Views of the Boards on Related  Matters:  1)  Small power p r o j e c t s pose l i m i t e d l i a b i l i t y of f i n a n c i a l r i s k t o the p u b l i c and should be s u b j e c t t o a s t r e a m l i n e d r e g u l a t o r y process.  2)  No s u b s i d i e s , by way of i n c e n t i v e p r i c e s and resulting e x t r a c o s t t o consumers, should be g i v e n t o SPPs (but t h i s does not preclude any d i r e c t a s s i s t a n c e t h a t the government might' deem prudent as i n i t i a l encouragement t o a new i n d u s t r y ) .  3)  Socioeconomic benefits associated with small power p r o j e c t s , or a small power i n d u s t r y , should not be a c o n s i d e r a t i o n i n the d e r i v a t i o n o f buyback r a t e s . Any such benefits can be more a p p r o p r i a t e l y recognized through d i r e c t government i n i t i a t i v e s such as taxes or g r a n t s r a t h e r than through i n c r e a s i n g power r a t e s t o the consumer.  4)  E l e c t r i c u t i l i t i e s can make a s i g n i f i c a n t c o n t r i b u t i o n t o the development of a small power i n d u s t r y and should not be denied access t o t h a t i n d u s t r y .  5)  2.5 MW i s a p r a c t i c a l upper l i m i t t o cover the m a j o r i t y of small power projects and small enough to be technically flexible and easily accommodated by the electric distribution systems, with the ability to  98  connect such facilities d i s t r i b u t i o n system. 6)  Avoided  with  little  impact  to i t s  Costs  Avoided c o s t s r a t h e r than h i s t o r i c c o s t s s h o u l d be used as t h e b a s i s f o r determining p r i c e s s i n c e t h i s would b e t t e r r e f l e c t t h e estimated v a l u e o f c a p a c i t y and energy when t h e SPPs would be added t o t h e system. SPPs should r e c e i v e f a i r v a l u e f o r t h e energy and c a p a c i t y they would p r o v i d e t o t h e system as a s u b s t i t u t e f o r what t h e u t i l i t i e s would l i k e l y impose i n t h e i r absence. Long-term avoided c o s t s should be used as t h e s t a r t i n g p o i n t t o determine p r i c e s f o r s m a l l power generation. The Board examined t h r e e methods f o r d e t e r m i n i n g avoided c o s t s : D i f f e r e n t i a l Revenue Requirements (DRR), F u e l O f f s e t , and Proxy P l a n t methods. The f i r s t two a r e d e t a i l e d methods of e s t i m a t i n g long-term avoided c o s t t h a t use complex computer models and educated assumptions. The t h i r d i s a l e s s r i g o r o u s but simplified method t h a t u t i l i z e s information that i s r e a d i l y a v a i l a b l e . The method chosen must be simple enough so t h a t r e s u l t s c o u l d be e a s i l y v e r i f i e d and understood and s t i l l be f a i r t o a l l p a r t i e s ; thus t h e r e w i l l be a t r a d e - o f f between accuracy and s i m p l i c i t y . The Proxy P l a n t Method meets most o f the requirements and was accepted f o r purposes o f d e t e r m i n i n g avoided c o s t s . Some o f t h e assumptions made i n d e t e r m i n i n g  avoided  costs  were: - avoided c o s t s should rebates;  be c a l c u l a t e d n e t o f income  taxes  - as a r e s u l t o f connecting SPPs t o t h e system, l o s s e s on the t r a n s m i s s i o n system would be reduced, and a v o i d a b l e t r a n s m i s s i o n l o s s e s should be i n c l u d e d ; - u t i l i t y p r o p e r t y taxes, insurance, replacements a r e a v o i d a b l e c o s t s ;  and i n t e r i m  - assumed i n f l a t i o n = 4.5%, d i s c o u n t d i s c o u n t r a t e = 6.7%; - annual d e p r e c i a t i o n r a t e = 1 / ( u s e f u l  r a t e = 11.5%,  real  life).  Based on t h e c o s t s o f t h e Proxy P l a n t and t h e above assumptions, annual l e v e l i z e d c o s t s were c a l c u l a t e d f o r t h e avoided p l a n t . These c o s t s r i s e a t t h e r a t e o f i n f l a t i o n over the l i f e o f t h e p l a n t . Avoided c o s t s were then s e t a s :  99  - marginal energy c o s t s ( v a r i a b l e f u e l , o p e r a t i n g , and maintenance c o s t s ) up t o expected i n - s e r v i c e date of proxy p l a n t ( c a p a c i t y a d d i t i o n ) ; - l e v e l i z e d avoided c o s t of the Proxy P l a n t t h e r e a f t e r . 7)  Purchase P r i c e  In o r d e r t o ensure t h a t e l e c t r i c i t y p r i c e s t o consumers do not i n c r e a s e , the p r i c e s t h a t u t i l i t i e s pay f o r small power p r o d u c t i o n should not exceed the c o s t t h a t the u t i l i t y avoids over the l i f e of the c o n t r a c t w i t h an SPP. I f p r i c e s were determined based on the year-by-year avoided c o s t s , most s m a l l power p r o j e c t s would be uneconomic, as f i n a n c i n g of such p r o j e c t s i s c o n t i n g e n t on a f i x e d / l e v e l p r i c e schedule. Instead, the u t i l i t y should p r o v i d e small power c a p a c i t y payments i n advance of when t h a t c a p a c i t y i s a c t u a l l y r e q u i r e d ; t h i s can be achieved by d e t e r m i n i n g a l e v e l i z e d p r i c e ( f i x e d p r i c e ) which, when d i s c o u n t e d , equates t o the l o n g - r u n avoided c o s t s over the term of each c o n t r a c t . Those SPPs which cannot p r o v i d e f i r m power should have t h e i r capacity prorated downward i n accordance w i t h their expected c a p a c i t y f a c t o r r e l a t i v e t o the c a p a c i t y f a c t o r of the proxy u n i t ; however, i n i t i a l l y the same p r i c e w i l l apply t o both f i r m and a s - a v a i l a b l e (secondary) power; i t may be p o s s i b l e t h a t some adjustment and a d i s t i n c t i o n i n p r i c e s between a s - a v a i l a b l e and f i r m power may be necessary when the program i s reviewed. P r i c e s should be developed f o r 10, 15, 2 0-year c o n t r a c t s ; p r i c e s would vary w i t h the term of c o n t r a c t and i t s commencement date (see Table A3-1 which shows recommended l e v e l i z e d p r i c e s ) . These p r i c e s would remain f i x e d f o r the d u r a t i o n o f each c o n t r a c t commenced d u r i n g t h a t p e r i o d . 8)  The regulatory p r o c e s s a p p l i c a b l e t o SPPs should be s i m p l i f i e d , s t r e a m l i n e d and e x p e d i t e d i n order t o reduce the time, e f f o r t , and cost associated with obtaining r e g u l a t o r y approvals, and i n doing so, some degree of c o n t r o l must be maintained r e s p e c t i n g environmental and s a f e t y matters.  100  TABLE A3-1  : Purchase P r i c e s f o r Firm and Secondary Power as Recommended by the A l b e r t a Small Power I n q u i r y  For C o n t r a c t Starting i n Year 1989 1990 1991 1992 1993 1994  10 Years  F i x e d P r i c e i n cents/kWh f o r Contract Duration of 15 Years 20 Years  1, 2. 2, 2. 3. 3.  2, 2, 3, 3, 3. 4,  2 3 3 3 4 4  , , , , . ,  Source: "Small Power I n q u i r y " , ERCB and PUC o f A l b e r t a , Feb. 1988, T a b l e 4-1, p. 15.  Government Implementation of the Boards' Recommendations: In response t o the r e p o r t , the A l b e r t a government announced t h e "Small Power Research and Development Program" i n June 1988 and updated i t i n November 1989. The major differences between the Boards' recommendations and the government program were: - t h e 100 MW  t o t a l c a p a c i t y cap was r a i s e d t o 125  MW;  - t h e program was l i m i t e d t o renewable r e s o u r c e s p r o j e c t s only; - u t i l i t i e s and t h e i r s u b s i d i a r i e s a r e not e l i g i b l e t o p a r t i c i p a t e i n the program; - the purchase p r i c e was i n c r e a s e d (5.2 cents/kWh u n t i l 1995 and 6.0 cents/kWh t h e r e a f t e r ) , e f f e c t i v e l y b r i n g i n g the long term p r i c e forward t o t h e p r e s e n t ; - i n l i m i t i n g the program t o renewable r e s o u r c e s and i n c r e a s i n g the recommended purchase p r i c e , the government c o n s i d e r e d the environmental b e n e f i t s o f renewables. It i s also i n t e r e s t i n g t o note t h a t t h e p r o v i n c i a l government a s s i s t e d the Small Power Producers A s s o c i a t i o n w i t h a g r a n t o f $100,000, matched by the f e d e r a l government, t o a s s i s t them i n making a f u l l r e p r e s e n t a t i o n t o the h e a r i n g .  101  APPENDIX 4  B.C. HYDRO'S IPP ENERGY PURCHASE POLICY There developer:  are four  areas  of i n t e r e s t  t o the p r i v a t e  1)  Domestic Use a) Non-Integrated area; b) I n t e g r a t e d system from p r o j e c t s under 5 MW; c) I n t e g r a t e d system from p r o j e c t s over 5 MW;  2)  Export Market.  This includes e l e c t r i c i t y  r e l e a s e d by l o a d  power  displacement.  B.C. Hydro's IPP P o l i c y Statement: "In i t s e f f o r t t o achieve t h e most economic supply o f e l e c t r i c i t y , B.C. Hydro (BCH) i s t u r n i n g t o IPPs f o r a p o r t i o n of i t s electricity supply requirements. Cost effective independent power p r o d u c t i o n should a l l o w d e f e r r a l o f l a r g e r , p o t e n t i a l l y more expensive p r o j e c t s on t h e i n t e g r a t e d system." "Independent Power P r o d u c t i o n i s d e f i n e d as e l e c t r i c i t y generated by an independent o r p r i v a t e l y - o w n e d f a c i l i t y , which i s connected t o t h e BCH system." will  "To pursue e l e c t r i c i t y (among o t h e r t h i n g s ) :  purchases  and a s s i s t  IPPs,  BCH  - e x p e d i t e t h e process o f r e a c h i n g an agreement f o r t h e purchase o f e l e c t r i c i t y ; - c o n s i d e r s p e c i a l arrangements f o r p r o j e c t s demonstrating new technology o r p r o m i s i n g s i g n i f i c a n t environmental, s o c i a l o r economic b e n e f i t t o t h e Province." "For p r o j e c t s l e s s than 5 MW, BCH w i l l i n v i t e p r o p o s a l s f o r t h e supply o f e l e c t r i c i t y as new g e n e r a t i o n i s r e q u i r e d i n the s p r i n g o f each year f o r a predetermined maximum t o t a l . " Policy -  Highlights:  t o minimize a d m i n i s t r a t i o n and t r a n s a c t i o n c o s t s and t o f a c i l i t a t e t h e development o f independent power p r o j e c t s under 5 MW c a p a c i t y , standard c o n d i t i o n s i n c l u d i n g t h e purchase p r i c e w i l l apply; t h i s r a t e w i l l be announced by BCH a t t h e time o f t h e RFP i s s u e and w i l l be s u b j e c t t o escalation  102  -  the purchase p r i c e w i l l be s e t a n n u a l l y a t a r e f l e c t s BCH's incremental c o s t of e l e c t r i c i t y .  value  that  - a purchase agreement w i l l be e n t e r e d i n t o on a f i r s t come, f i r s t s e r v e b a s i s u n t i l the aggregate of the agreement i s approximately the predetermined maximum t o t a l -  BCH w i l l supply i n f o r m a t i o n on t r a n s m i s s i o n c i r c u i t s i n the p r o x i m i t y of the proposed p r o j e c t and p r e l i m i n a r y estimate of c o n n e c t i o n c o s t s  - BCH would p r e f e r p r o j e c t s capable of s u p p l y i n g more than 50% of t h e i r t o t a l annual energy d e l i v e r y i n the months of November t o A p r i l -  proposed p r o j e c t s are expected t o be i n - s e r v i c e years a f t e r the purchase agreement i s s i g n e d  Application  within  2  Procedure  - p r o p o s a l s are f i r s t checked f o r completeness and f o r f i r s t c o m e / f i r s t served c o n s i d e r a t i o n  registered  - p r o p o s a l s are g i v e n a T e c h n i c a l Review: p r o p o s a l s are reviewed f o r s a f e t y , p r o t e c t i o n , system c o m p a t i b i l i t y , r e l i a b i l i t y , and q u a l i t y of e l e c t r i c i t y s u p p l y - i f accepted, BCH w i l l i s s u e a P r o j e c t Connection Requirements Summary and an E l e c t r i c i t y Purchase Agreement (EPA) - a t t h i s p o i n t , the P r o j e c t Sponsor may i n i t i a t e f u r t h e r d i s c u s s i o n w i t h BCH on e i t h e r the c o n n e c t i o n requirements or the EPA; once the EPA i s s i g n e d and r e t u r n e d t o BCH, the p r o j e c t i s accepted as p a r t of the t o t a l b l o c k requirement Electricity  Purchase  Agreement (EPA)  - highlights  - 20 year term i n i t i a l l y , o p t i o n t o renew each y e a r a f t e r , u n l e s s t e r m i n a t e d upon 6 months n o t i c e by e i t h e r p a r t y - the p r o j e c t i s r e q u i r e d t o p r o v i d e a minimum amount of per year  kWh  - BCH may t e r m i n a t e the agreement without n o t i c e i f proposed i n - s e r v i c e date i s not achieved - the purchase r a t e i s c u r r e n t l y 3 cents/kWh f o r f i r s t year, p l u s adjustments each year = CPI f o r Vancouver, but not exceeding +3%/yr - t o q u a l i f y f o r a EPA with BCH, the IPP must be w i l l i n g and a b l e t o (among o t h e r t h i n g s ) :  103  1) Demonstrate, through p r e v i o u s experience and/or performance guarantees, an a b i l i t y t o design, f i n a n c e , c o n s t r u c t , and operate the proposed p r o j e c t ; BCH w i l l engage independent f i n a n c i a l s e r v i c e s to assess the c r e d i t worthiness and f i n a n c i a l s t a t e of the IPP, and t o analyze the b e n e f i t s t o BCH o f the proposed p r o j e c t 2)  Meet the standards f o r e l e c t r i c i t y q u a l i t y , r e l i a b i l i t y of supply, and s a f e t y , and be compatible w i t h the BCH system  3) Pay f o r i n t e r c o n n e c t i o n c o s t s and e x i s t i n g BCH f a c i l i t i e s assist  required modifications to  4)  Pay f e e ( s ) t o BCH t o e v a l u a t i n g the p r o p o s a l  in  defraying  5)  Obtain a l l necessary approvals, licences, and permits necessary and s u f f i c i e n t f o r the c o n s t r u c t i o n and o p e r a t i o n of h i s p l a n t and to comply with a l l r e g u l a t o r y requirements including a l l exemptions or approvals under the B.C. U t i l i t i e s Commission Act  6) Prove the l a n d i s a v a i l a b l e f o r the proposed P r o j e c t s G r e a t e r than 5 MW  i t s costs  of  use  - Major D i f f e r e n c e s and  Features  -  p r o p o s a l s w i l l be c a l l e d , as r e q u i r e d , f o r purchases of e l e c t r i c i t y f o r the i n t e g r a t e d system from p r o j e c t s g r e a t e r than 5 MW through a p u b l i c RFP p r o c e s s ; BCH w i l l purchase e l e c t r i c i t y from these p r o j e c t s p r o v i d e d t h a t the q u a l i t y i s a c c e p t a b l e and the c o s t t o BCH i s lower than the c o s t of other a l t e r n a t i v e s a v a i l a b l e  -  the e l e c t r i c i t y purchase p r i c e and o t h e r c o n d i t i o n s f o r these projects w i l l be negotiated and BCH will seek f i n a n c i a l arrangements which o p t i m i z e b e n e f i t s t o BCH and i t s ratepayers  - BCH w i l l c o n s i d e r a l t e r n a t i v e p r i c e s t r u c t u r e s and/or f i n a n c i n g arrangements, with a p p r o p r i a t e guarantees, t o a s s i s t developments g r e a t e r than 5 MW s u p p l y i n g the i n t e g r a t e d system -  BCH i n t e n d s t o i s s u e RFPs f o r b l o c k s o f supply and l o a d displacement as r e q u i r e d fall)  - BCH w i l l commence n e g o t i a t i o n s with t h a t submit the best p r o p o s a l s Competitive  Negotiation  - p r i c e i s important, considered  firm e l e c t r i c i t y ( u s u a l l y i n the  the p o t e n t i a l s u p p l i e r s  Process: but  there  104  are  other  key  factors to  be  process i s iterative; initial screening w i l l establish p r e f e r r e d candidates on a s h o r t l i s t , on t h e b a s i s o f financial viability, technical merit, the candidate's qualifications, and the q u a n t i t y of e l e c t r i c i t y being o f f e r e d , as w e l l as p r i c e -  simultaneous n e g o t i a t i o n s w i l l then commence w i t h those on the s h o r t l i s t t o f u r t h e r r e f i n e and a d j u s t t h e p r o p o s a l s , and t o develop a mutually acceptable p r i c e and c o n t r a c t between the IPP and BCH  -  where t h e r e i s no agreement on p r i c e , t h e IPP w i l l be dropped from the s h o r t l i s t , and t h e next most m e r i t o r i o u s IPP, not on the s h o r t l i s t , w i l l be admitted i n t o t h e c o m p e t i t i v e n e g o t i a t i o n process this process will continue until BCH e n t e r s i n t o an agreement t o purchase the r e q u i r e d amount o f e l e c t r i c i t y and/or l o a d displacement a t a c c e p t a b l e p r i c e s and under s a t i s f a c t o r y conditions  Purchase P r i c e and F i n a n c i n g Arrangements - t h e i n t e n t i s t o n e g o t i a t e a p r i c e t h a t p r o v i d e s t h e lowest c o s t t o BCH ratepayers and r e f l e c t s t h e v a l u e s o f f i r m and secondary energy - Factors a f f e c t i n g p r i c e include: - d e p e n d a b i l i t y o f annual energy d e l i v e r i e s - r e l i a b i l i t y o f supply - d u r a t i o n o f supply - dispatchability - impact on the t r a n s m i s s i o n and d i s t r i b u t i o n e.g., p r o x i m i t y t o the Lower Mainland - BCH may t o both project imposing  system,  n e g o t i a t e f i n a n c i n g arrangements t h a t a r e o f b e n e f i t t h e respondent and BCH; t h e purpose i s t o make t h e economic and f i n a n c e a b l e f o r t h e respondent without undue r i s k on BCH  -  f i n a n c i n g arrangements w i l l be e v a l u a t e d on a p r e s e n t worth b a s i s and would be a c c e p t a b l e only i f they cause no r e d u c t i o n i n BCH's net b e n e f i t from t h e p r o j e c t  -  p r e f e r e n c e w i l l be g i v e n t o p r o j e c t s e n t a i l i n g t h e l e a s t amount o f f i n a n c i a l and o p e r a t i o n a l r i s k t o BCH; performance guarantees may be r e q u i r e d t o reduce r i s k t o BCH, both f r o n t - e n d and o p e r a t i o n a l r i s k  Source: A l l i n f o r m a t i o n taken from B.C. Hydro's "Purchase o f E l e c t r i c i t y ( P r o j e c t s Under 5 MW) f o r B.C. Hydro's I n t e g r a t e d System" (May 1989), "Purchase of E l e c t r i c i t y and Load Displacement f o r the I n t e g r a t e d System from P r o j e c t s Greater than 5 MW and P r o j e c t s Under 5 MW" (December 1988).  105  APPENDIX 5  ENERGY COSTS OF SITE C The energy c o s t s o f B.C. Hydro's S i t e C h y d r o e l e c t r i c p r o j e c t used i n Table 3 and F i g u r e s 4 . 2 t o 4 . 5 were c a l c u l a t e d as shown below. A l l data was taken from B.C. Hydro's r e p o r t s e n t i t l e d "1989 20 Year Resource P l a n " ( A p r i l 1989), "Value o f Electricity" (August 1989), and " G u i d e l i n e s f o r P r i c i n g o f Resource Acquisitions" (November 1989). Figures are i n m i l l i o n s o f d o l l a r s u n l e s s noted otherwise. A.  D i s c o u n t and I n f l a t i o n  Rates:  Nominal D i s c o u n t Rate, r Net D i s c o u n t Rate, r * General Annual I n f l a t i o n Rate, i Annual I n f l a t i o n Rate o f E l e c t r i c i t y , I n f l a t i o n Rate, B.  1988 t o 1989  = 12.85% =8.0% =4.5% e = 3.0% (1989-1998) =4.5% (1999 onwards) = 5.0%  Assumptions: - S i t e C comes o n - l i n e i n 1999 a f t e r 7 y e a r c o n s t r u c t i o n p e r i o d beginning i n 1992; P r o j e c t L i f e = 70 y e a r s . - Annual F i x e d Costs e s c a l a t e a t g e n e r a l r a t e o f inflation. - Annual V a r i a b l e Costs (Water R e n t a l Rates) e s c a l a t e a t same r a t e as p r i c e o f e l e c t r i c i t y . - P r o j e c t operates a t f u l l c a p a c i t y f i r s t y e a r o f operation. - C o n s t r u c t i o n Costs are a s e r i e s o f equal annual payments and p r o j e c t i s 100% debt f i n a n c e d . - Annual F i x e d , V a r i a b l e , and C o n s t r u c t i o n C o s t s a r e i n c u r r e d a t year end and do not e s c a l a t e w i t h i n f l a t i o n d u r i n g the year, i . e . , f i x e d annual c o s t s o f $33 M i n 1989 a r e i n c u r r e d a t year end 1989 a t $33 M, not 33 x 1.045 = $34.5 M.  C.  C o s t s i n 1989 D o l l a r s :  1) C a p i t a l Costs = $1,826.0 - i n c l u d e s t r a n s m i s s i o n c o s t but not i n t e r e s t and i n f l a t i o n d u r i n g c o n s t r u c t i o n and c o r p o r a t e overhead. 2) Corporate Overhead  (@ 3% o f C a p i t a l Cost)  3) T o t a l C a p i t a l Cost = 1826.0 + 54.8  106  = $54.8 = $1,880.7  4) Annual F i x e d Cost (@ 1.81% o f C a p i t a l Cost) = $33.0 includes operation and maintenance, administration, g r a n t s and taxes, and i n t e r i m replacement. 5)  D.  Annual V a r i a b l e Costs (@ 0.4 cents/kWh) consists o f energy p o r t i o n o f water average annual energy output = 4710 GWh. C a l c u l a t i o n of Construction  Costs :  6) Present Value o f Annuity, d i s c o u n t e d (P/A, r * , N=7) 7) Annual C o n s t r u c t i o n  = $18.8 rental fees,  a t r * , over 7 y e a r s , = 5.2081  Cost = 1880.7/7  = $268.7  8) T o t a l C a p i t a l Cost i n c l u d i n g i n t e r e s t and i n f l a t i o n a t end o f 7 year c o n s t r u c t i o n p e r i o d = 268.7 x (P/A, r * , N=7)/(l+i) x  (1+i)  = 268.7 X (5.2081/1.045) X (1.1285)  7  = $3,121.0  7  9) T o t a l C a p i t a l Cost i n 1989 d o l l a r s = 3121.0/(l+i)  = 3121.0/(1.045)  7  = $2,293.4  7  10) T o t a l C a p i t a l Cost i n 1999 D o l l a r s = $3,561.6 Note: T h i s f i g u r e compares t o f i g u r e s r e p o r t e d i n v a r i o u s newspaper r e p o r t s of $3.0 t o $3.5 b i l l i o n f o r S i t e C. E.  Adjustment o f Annual V a r i a b l e Costs :  11) Annual V a r i a b l e Costs i n 1999 D o l l a r s = 18.8 x (1+e) x (1+i) = 18.8 X ( 1 . 0 3 ) X (1.045) 9  = $25.7  9  12) A d j u s t e d Annual V a r i a b l e Costs i n 1989 D o l l a r s - t h i s f i g u r e now can be e s c a l a t e d a t j u s t t h e r a t e o f i n f l a t i o n f o r ease o f c a l c u l a t i o n . = 25.7/(l+i) F.  1 0  = 25.7/(1.045)  general  = $16.5  10  C a l c u l a t i o n o f L e v e l i z e d U n i t Energy Cost  13) Present Value o f Annuity, d i s c o u n t e d (P/A,  r * , N=70)  a t r * , over 70 y e a r s , = 12.4574  14) L e v e l i z e d Annual Cost = 33.0+16.5+[2293.4 X ( l + i ) / ( P / A , r * , N=70)] = $241.9  107  15)  Levelized = 241.9  G.  U n i t Energy Cost x 100/4710  =5.14  cents/kWh  Adjustment of C a p i t a l Costs  B.C. Hydro s t a t e s t h e i r l e v e l i z e d u n i t energy c o s t f o r S i t e C as 4.71 cents/kWh i n 1989 d o l l a r s , lower than the f i g u r e of 5.14 t h a t I c a l c u l a t e d above. I have assumed much of the d i f f e r e n c e between the two f i g u r e s can be a t t r i b u t e d t o the c a l c u l a t i o n of i n t e r e s t and i n f l a t i o n d u r i n g construction as t h i s i s where most of the u n c e r t a i n t y i n my calculations lies. I have a d j u s t e d the T o t a l C a p i t a l Costs as f o l l o w s i n o r d e r t h a t the u n i t energy c o s t i s equal t o 4.71 cents/kWh. 16)  Net  P r e s e n t Value of 4.71  = 4.71 = 4.71 17)  cents/kWh  x 4710/100 x (P/A, r * , N=70)/(l+i) X 4710/100 X (12.4574/1.045)  T o t a l C a p i t a l Cost i n 1989 = 2644.5 -  Dollars  (33.0+16.5) X (12.4574/1.045)  Note: T h i s f i g u r e i s e q u i v a l e n t t o d o l l a r s , s t i l l w i t h i n the r e p o r t e d range. H.  Summary of T o t a l Costs i n 1989  Dollars: = $2,053.4  Annual F i x e d  = $33.0  Costs  Levelized  Costs  =  U n i t Energy Cost  $16.5  = 4.71  108  = $2,053.4  $3.2 b i l l i o n $3.0 t o $3.5  T o t a l C a p i t a l Costs  Annual V a r i a b l e  = $2,644.5  cents/kWh  in 1999 billion  APPENDIX  PRICE  ADJUSTMENT  FOR  6  FIRM  ENERGY  An adjustment to the r a t e schedule f o r f i r m n e s s c o u l d done i n one of two ways: 1) u s i n g two power r a t e s : one f o r secondary;  o f power  f o r f i r m energy and  another  2) a d j u s t i n g the r a t e f o r a l l power. T h i s adjustment c o u l d be r e l a t e d to the f i r m n e s s (or c a p a c i t y f a c t o r ) o f the avoided p l a n t . For S i t e C, f i r m annual energy i s about 60% of i t s maximum p o s s i b l e output, and 97% of i t s average annual output. The minimum monthly f i r m n e s s f a c t o r or the minimum annual f a c t o r c o u l d be used. Sigma d e f i n e d a "firmness f a c t o r " as the expected annual energy p r o d u c t i o n of a p l a n t d i v i d e d by the maximum p o s s i b l e production ( i n s t a l l e d c a p a c i t y i n kW x 8760 h o u r s / y e a r ) , and t h i s f a c t o r can be estimated f o r any given s i t e (Sigma's F i g u r e 5.3, reproduced here, shows e s t i m a t e d f i r m n e s s f a c t o r s f o r d i f f e r e n t r e g i o n s i n the p r o v i n c e ) . The f i r m n e s s f a c t o r would be numerically equal t o the load f a c t o r f o r s i t e s s u p p l y i n g power t o an u n l i m i t e d demand such as s u p p l y i n g t o the integrated grid. The system load factor may be s u b s t i t u t e d f o r the firmness f a c t o r f o r o f f - g r i d s i t e s with l i m i t e d l o a d when the p l a n t output i s l i m i t e d by l a c k o f water or l a c k of power demand. In g e n e r a l , the firmness f a c t o r i s h i g h e r f o r c o a s t a l s i t e s (average v a l u e o f 0.6) than f o r the i n t e r i o r s i t e s (average value of 0.5). O n t a r i o Hydro uses a monthly " c a p a c i t y f a c t o r " , which i s determined by d i v i d i n g the t o t a l kWh d e l i v e r e d i n a month by the maximum p o s s i b l e monthly p r o d u c t i o n (maximum monthly kW d e l i v e r e d x the number of hours i n the month). P r o j e c t s with a c a p a c i t y f a c t o r of 65% or more r e c e i v e f u l l avoided c o s t s w h i l e p r o j e c t s with l e s s than 65% r e c e i v e a r a t e based on the s h o r t term incremental energy c o s t s (see Appendix 2 ) . The A l b e r t a Small Power I n q u i r y suggested those p r o j e c t s which cannot p r o v i d e f i r m power should have t h e i r c a p a c i t y p r o r a t e d downward i n accordance with t h e i r expected c a p a c i t y f a c t o r r e l a t i v e to a standard c a p a c i t y f a c t o r ( i n t h e i r case the c a p a c i t y f a c t o r of the avoided proxy u n i t ) . Some f a c t o r s t o c o n s i d e r  include:  the long term l e v e l i z e d v a l u e o f energy i s cents/kWh w h i l e the v a l u e of c a p a c i t y i s o n l y  109  4.5 0.5  cents/kWh. Thus small producers s h o u l d not be e x c e s s i v e l y p e n a l i z e d f o r p r o v i d i n g mostly energy v a l u e , and a t the same time i t s h o u l d be r e c o g n i z e d that some small producers w i l l have some firm capacity. -  the energy production profile (the seasonal variation i n energy production) of small hydro p l a n t s should be c o n s i d e r e d when making adjustments to the base r a t e . For example, i n the south c o a s t r e g i o n , energy p r o d u c t i o n i s g r e a t e s t d u r i n g the winter months when electrical demand is also g e n e r a l l y the h i g h e s t . B.C. Hydro has s t a t e d t h a t they would p r e f e r p r o j e c t s capable of s u p p l y i n g more than 50% of t h e i r t o t a l annual energy d e l i v e r y i n the months of November t o A p r i l . Thus, south c o a s t s i t e s should r e c e i v e a s l i g h t l y h i g h e r r a t e .  As an example of u s i n g two power r a t e s , the minimum monthly energy output from a small hydro p l a n t would r e c e i v e the f u l l unadjusted r a t e based on the v a l u e of f i r m energy. A l l energy produced i n excess of t h i s amount would r e c e i v e an a d j u s t e d r a t e based on secondary energy v a l u e . A l t e r n a t i v e l y , u s i n g an a d j u s t a b l e s t a n d a r d r a t e , a l l power produced from one project would receive the same adjusted rate. The standard r a t e would be a d j u s t e d based on the f i r m energy c a p a b i l i t y of the p l a n t . The f i r m energy c a p a b i l i t y c o u l d be determined f o r the s p e c i f i c p l a n t o r , more simply, the average firmness c a p a c i t y o f the r e g i o n where the p r o j e c t i s l o c a t e d (e.g., south c o a s t , n o r t h c o a s t , i n t e r i o r ) c o u l d be a p p l i e d . If the first method was adopted, the firm energy c a p a b i l i t y o f a s i t e c o u l d i n i t i a l l y be e s t i m a t e d based on the developer's hydrological evaluation. At the end o f each y e a r (or month), t h e r e c o u l d be an adjustment. I f minimum monthly output was g r e a t e r than o r i g i n a l l y e s t i m a t e d , the d e v e l o p e r would r e c e i v e a bonus equal t o the d i f f e r e n c e between f i r m and secondary energy based r a t e s . I f , on the o t h e r hand, the minimum monthly output was less, the d e v e l o p e r would be r e q u i r e d t o pay a p e n a l t y (deducted from the next y e a r ' s payments) . B.C. Hydro could have the o p t i o n t o use the d e v e l o p e r s e s t i m a t e f o r the e n t i r e c o n t r a c t ( i f B.C. Hydro thought the e s t i m a t e was low) or use the bonus/penalty system ( i f they thought the estimate was too high) . I f t h i s option was solely B.C. Hydro's, developers would have a great i n c e n t i v e t o a c c u r a t e l y estimate the f i r m energy c a p a b i l i t i e s of t h e i r p l a n t . The advantage of the second method lies in i t s s i m p l i c i t y , which i s an important c o n s i d e r a t i o n when d e v i s i n g a purchase p o l i c y .  110  FIRMNESS FACTOR = ANNUAL ENERGY (kWh)  FIRMNESS F A C T O R S INSTALLED CAPACITY (kw)K  FIGURE A6-1  8 7 6 0 hrs  : Firmness F a c t o r s  Source: Sigma's "Small Hydro Resource" (1983)  111  >-  t  100-  o < o  NTERIOR  90-  CD 2  <  CC  80-  ui  2 Ul  70-  Q Ul _J  60-  o  £ to  50-  2  U.  o  40-  o cc  30-  Q.  20-  H2 Ul  WEIGHTED AVERAGE OF ALL SITES  Ul  <  SOUTH COAST  CO  < cc  10-  Ul  $  o 0.  —i JAN  1  1  1  1  1  1  1  1  1  1  1  FEB  MAR  APR  MAY  JUN  JUL  AUG  SEP  OCT  NOV  DEC  MONTH  VARIATION O F S M A L L H Y D R O P O W E R CONTRIBUTION Note:  Generator installed to use mean annual flow, run of river.  M E A N MONTHLY P O W E R OUTPUT A S A P E R C E N T O F INSTALLED G E N E R A T I N G C A P A B I L I T Y vs. M O N T H O F Y E A R  FIGURE A6-2  : V a r i a t i o n o f Small Hydro Power Output  Source: Sigma's "Small Hydro Resource" (1983)  112  

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