Outlook 2018: Calculating the cost of Site C dam

Requiring project labour agreements in future work could add to $10 billion price tag, critics say
Excavation of north slope on Moberly River. | BC Hydro

Business groups and labour organizations representing unionized workers in B.C. breathed a collective sigh of relief last week when Premier John Horgan announced his government would allow completion of the Site C hydroelectric dam.

But independent contractors and one union representing workers fear project labour agreements for future major contracts on the dam may raise labour costs.

There are also concerns about the project’s impact on BC Hydro’s debt, which has grown from $7 billion in 2000 to $20 billion today.

Politically, the decision to complete Site C could result in some defections from the BC NDP, said George Hoberg, a political science professor specializing in environmental and natural resource policy at the University of British Columbia.

“I do think they will lose some die hard environmental supporters to the [BC] Green Party,” he said.

On the other hand, he said, the NDP’s decision is “one big yes” that counters the BC Liberals’ branding of the NDP as the “party of No.” But the decision also means the NDP will have to answer for any additional problems or cost overruns on the project.

A Deloitte report warned that any further delays could push the final cost of the dam as high as $12.5 billion.

“If things go bad there, the NDP will have to own most of it,” Hoberg said. “They will try to continue to blame the Liberals for it, but it becomes their problem.”

Though the dam is now expected to cost $10.7 billion to complete – more than $2 billion higher than earlier projections – Horgan said he could not “punish” ordinary British Columbians by saddling them with a $4 billion debt for nothing.

After the project was referred to the BC Utilities Commission for a review, it was determined that cancelling the project would have meant either a 12% BC Hydro rate hike over 10 years or assuming the debt onto government books.

A 12% BC Hydro hike, starting in 2020, would have added $200 a year to the average residential BC Hydro bill, $192,000 to the average lumber mill’s bill, and $372,000 to a large hospital’s bill, the government calculated.

By contrast, completing Site C at $10.7 billion will require a 1.1% increase to BC Hydro rates in 2025 and 2026. Whereas paying the sunk costs for a cancelled project would be spread over 10 years, paying for a completed dam is to be spread over 70 years.

“Although Site C will cost more than $10 billion to complete, those costs can be recovered over a long period of time by the sale of electricity,” Horgan said. “Cancelling the project would mean an unavoidable $4 billion debt immediately, either on BC Hydro’s books or the books of the minister of finance.

“The consequences of that would be a 12% rate increase almost immediately and forgoing very important capital projects like schools and hospitals, bridges and transit and other initiatives right across British Columbia.”

There are still a couple of major contracts yet to be awarded. The budget for the construction of the spillway, for example, was estimated to be $1.2 billion. In a technical briefing last week, government officials confirmed the actual costs for some of those contracts are expected to be higher than BC Hydro had budgeted.

In an attempt to make the best of a bad situation, Horgan announced a number of measures to try to contain costs and mitigate the dam’s impact on farmland and First Nations.

The government will set up a project assurance board and hire EY to provide oversight over things like contract procurement and management. It will also spend $20 million on an agricultural compensation fund to help offset the loss of farmland that will be lost to flooding.

Horgan said future contract work will be done under project labour agreements that will boost the number of apprentices and local workers employed on the project.

The Independent Contractors and Businesses Association (ICBA) welcomed the news that the dam project will be completed, but is concerned about the use of project labour agreements.

“Our concern would be that, one, it would inflate costs, and it could impact the schedule,” said ICBA president Chris Gardner. “It takes away a lot of the flexibility in how companies can organize the work and execute the work.”

Tom Sigurdson, executive director for the BC Building Trades, an umbrella group representing 14 unions in construction trades, supports the agreements, especially the provision requiring the hiring of more apprentices. Currently, only 2% of the workforce on the project have been apprentices, Sigurdson said.

But the Christian Labour Association of Canada (CLAC) shares the ICBA’s concerns over project labour agreements.

“To reintroduce project labour agreements that limit access to work to members of specific unions would be a huge step backwards for the workers of B.C.,” said Ryan Bruce, government relations representative for CLAC.

The ‘bad energy policies’ that led to Site C

Opponents of Site C dam argue that any new electricity needs in B.C. could have been met with alternatives, particularly wind power, the cost of which have come down dramatically – something underscored last week when Alberta announced the prices for three new wind power projects.

While it’s true wind turbine costs have come down in recent years, that wasn’t the case when BC Hydro was forced to lock itself into long-term power purchase agreements with private power producers.

In a technical briefing last week prior to the announcement on Site C, the BC NDP government detailed what it called the “bad energy policies” of the BC Liberal government over a period of 15 years, during which time BC Hydro’s debt rose from $7 billion in 2000 to $20 billion.

Under the BC Liberal government’s Clean Energy Plan, BC Hydro was forced to acquire new power through long-term purchase agreements with independent power producers. BC Hydro has $50 billion in financial commitments under those agreements, the new provincial government says.

Since 2002, BC Hydro has inked 135 long-term power purchase agreements (averaging 28 years) for things like new wind farms, run-of-river power projects and industrial cogeneration (pulp mills, for example, that built power plants that use wood waste to produce power).

And since BC Hydro was also forced to decommission the gas-fired Burrard Generating Station, the province was compelled to seek new sources of firm power to backstop wind and run-of-river projects, according to the government briefing – hence BC Hydro’s decision to build Site C.

According to the government’s briefing, the cost of power from the private sector averaged out at $100 per megawatt hour (MW-h), compared with $32 per MW-h for “heritage” hydro power.

But it would be unfair to use those costs to assess the cost of wind power today, said Jae Mather, executive director for Clean Energy BC, because the costs of wind turbines have dropped dramatically in just the last few years. It’s particularly unfair to compare those costs with legacy hydro power, he said.

BC Hydro’s most recent estimate for Site C’s costs was double that for heritage power – between $64 and $67 per MW-h.

The bids Alberta announced last week for new wind projects confirm just how competitive wind power has become. On December 13, Alberta announced $1 billion worth of new power projects that will provide 600 megawatts of power.

The weighted average cost of three new wind projects in that province is $37 per MW-h. That’s a far cry from BC Hydro’s estimate for wind power in B.C. – $90 to $309 per MW-h.

The cost of building new wind farms in B.C. would be higher than in Alberta because the best wind assets in B.C. are located in remote areas along mountainous ridge lines, far from main transmission lines, whereas wind projects in Alberta will be built on flat terrain next to transmission lines.

Even so, David Austin, a lawyer specializing in energy policies with Clark Wilson LLP, said the prices announced last week for wind power in Alberta underscore just how outdated BC Hydro’s estimates for wind power were.

“These prices from Alberta demonstrate how quickly the cost of renewables is declining,” he said. 

nbennett@biv.com

@nbennett_biv

Is too much electricity necessarily a bad thing?

One of the arguments against Site C dam is that, when it begins producing power in 2024, much of that output will be surplus to B.C.’s needs, and any electricity it sells will be at a steep discount.

But B.C. has six years to try to develop new markets or domestic uses for its power before the dam starts producing electricity, and some energy experts dispute the low load forecasts that the BC Utilities Commission assumed when it issued its final report on Site C.

“The need for energy in B.C. is only going to skyrocket,” said Jae Mather, executive director of Clean Energy BC.

Should a liquefied natural gas industry ever actually develop in B.C., it could provide additional industrial demand. An aggressive push for greater electric-vehicle adoption and switching from natural gas to electricity for heating could also add additional demand.

But the biggest demand would come from electrifying the natural gas sector and removing regulatory hurdles that make it difficult for companies to build data centres and server farms in B.C., Mather said.

“Electrifying northeast gas is vital,” Mather said. “It sits at the core. Changing our business models and procurement models in B.C. so that we’re compatible with the high-tech industry is the other key one.”

Some electrification of natural gas processing in northeastern B.C. has already occurred, and Mather said it could easily be expanded, creating a significant additional demand for electricity.

While that would add even more costs to BC Hydro for new transmission lines, federal government clean-energy infrastructure funding is available to help pay some of those costs.

The second-biggest demand – one with significant economic benefits – would be positioning B.C. to use its high-tech talent, its abundant clean power and relatively cold climate to become a hub for data centres and server farms, which consume huge amounts of electricity.

“The only reason B.C. is not the server farm capital of the planet Earth is because of our procurement exercises and the way that we manage grid connections,” Mather said.

Any company wanting to connect a new server farm into B.C.’s grid has to go through a two-year study process, Mather said. In Europe, where Mather spent 20 years, the process takes about three months, he said.

He hopes to see the BC NDP government and BC Hydro reconsider their policies to make it easier for data centres and large server farms to be built in B.C.

One other potential new market is sales through emerging energy imbalance market in the U.S., which pools regional power to manage supply and meet demand.

In 2018, BC Hydro’s power-trading arm, Powerex, will become the first Canadian entity to join the western Energy Imbalance Market (EIM), which includes eight western U.S. states and five public utilities, serving a market of 38 million power customers. By 2020, six more utilities are expected to join the EIM.

The market was developed, in part, to help utilities manage the growth of wind and solar power, which is intermittent and unpredictable. It is a real-time trading system in which its members can buy and sell power in five- and 15-minute intervals.

Powerex has been doing this sort of power trading with California for years. By joining the EIM, Powerex will simply be doing what it has been doing for years, but in a bigger market.

“It allows any of these utilities that have excess (power) to offer that into the real-time market, where buyers can then take advantage of what may be a lower cost energy, in order to serve their own needs,” said Steven Greenlee, senior public information officer for the California ISO, which runs the EIM’s control centre.

“It is a big market for power, and the thing that makes it so appealing is that it gets even a little better each time a new entity comes in.”

However, Powerex itself does not expect entering the EIM will significantly increase electricity exports. In an email to Business in Vancouver, Powerex stated the EIM market “won’t be that significant.”

Mather thinks Powerex may be downplaying the EIM’s potential for power exports, partly because of the negative experience it has had with California in the past.

After California deregulated its own power system and began experiencing brownouts, it was forced to buy power from other utilities and jurisdictions, including B.C., between 2000 and 2001, at steep prices.

In 2013, the U.S. Federal Energy Regulatory Commission (FERC) determined that Powerex and 15 other power traders had been engaged in manipulating the market and ordered Powerex to pay back $1 billion to California. Despite that finding, Powerex has continued to sell power to California.

Because of B.C.’s abundant clean disptachable power, Mather thinks the EIM market could, in fact, provide a growing market for B.C. power.

“I think it could be quite a big deal,” he said.

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