Why Site C is a Loser!

Cost of Site C

The December 16, 2014  press release from the Provincial Government identified the cost to customers of Site C as $500 million per year, nominal dollars, continuing at that level for the indefinite future.  If you divide that cost by the 5200 gigawatt hours Site C will produce in a year, the average cost is $96/megawatt hour.  That assumes the project comes in at its projected cost of $8.9 billion and starts up on schedule in 2026.  It would not be at all unlikely that project costs over-run by 20 percent, with an extended schedule adding further to the cost.

So the cost of Site C power is publicly known.  The question of importance is how to best measure the value of the electric power that Site C will begin producing in 2026 if construction proceeds on schedule.

BC Hydro’s Marginal Cost of Electric Pow

If BC Hydro is short of electric power they will buy additional supplies on the market.  If they have a surplus, the only option is to sell in the market.  Just as market price is BC Hydro’s marginal cost of electric power today, the same situation will prevail in 2026.

Market Structure

The market for electric power in North America is well established.   To quote from the website of the United States Energy Information Agency (EIA):

“Currently, electricity products can be traded at more than two dozen hubs or delivery points in North America, and natural gas products can be traded at over 120 hubs. The data posted under EIA’s agreement with ICE represent eight major electricity and corresponding natural gas trading hubs. Included are daily volumes, high and low prices, and weighted average prices.”

The nearest trading hub to BC is what is known as Mid-C, nominally a location on the Columbia River accessing the power produced by the several dams on that river.

The current pricing regime, and probable future pricing regime for electric power has been greatly affected by development of these electric power trading hubs at many locations in North America.  In the late 1980’s.  BC Hydro created a subsidiary in 1988, Powerex, to participate in, and profit from, these new markets.

Combustion Turbine Generators

Following the development of active markets was the development of combustion turbine technology to generate electric power from natural gas.  Essentially stationery jet engines powering generators, this new technology reduced the amount of natural gas required to product a megawatt of electricity by approximately 50 percent.  The average combustion turbine generator has a heat rate (the quantity of natural gas required for a megawatt of electricity) of 7.0.

California Power Supply Crisis

About the same time the combustion turbine generator technology became available, around 2001, the California electric supply crisis occurred with brown outs, the failure of Enron, etc.  In response to those events utilities in the western United States added substantial combustion turbine generating capacity in order to upgrade their ability to handle peak demands. With ample capacity, the facilities already built and paid for, the incremental cost of producing another megawatt of electric power is the incremental cost of fuel.  Since, as we have discussed this cost is the heat rate (7.0 average) times the natural gas price.

Shale Deposits of Natural Gas

The final change was the development of technology to exploit large, low cost supplies of shale gas.  The market expectation today is that there will be a plentiful supply of relatively low cost natural gas for the indefinite future.  As a result the expectation today is that natural gas will be in ample supply at relatively low cost.  Recent prices are under $3.00 per gj, much reduced from the $6-10 range that prevailed from 2002-2010.

Economic Result

Given the relationship between natural gas prices and electric power prices the market price of electric power can easily be derived from a forecast of natural gas prices.  With natural gas prices now under $3.00 per gigajoule and apparently stable at that level, it would seem unlikely that natural gas prices would exceed $5.00 in 2026.  At that natural gas price electric power market prices would be in the mid 30’s per megawatt hour and Site C would have a negative return of over $300 million per year {($100/mWh – $35/mWh) x 5,200,000 mWh}.

Conclusion – It is highly probable that the financial return on Site C will be negative.  This project should be delayed until there is a reasonable probability that the cost of power from Site C will be less than the likely market price.

 

 

About Daniel Potts

Dan Potts is a retired 75 year old grandfather and former forest industry executive. He earned a BS degree in Chemical Engineering at the U of Washington, 1962; MBA, Stanford University 1964. Major part of career was location manager of five different pulp and paper mill locations. These highly energy intensive facilities led to the development of an interest in energy issues. Upon leaving the forest industry in 1999, Potts became the Executive Director of the trade association representing BC Hydro's largest customers. This association sponsored intervention before the BC Utilities Commission on various proceedings affecting industrial customers. It also represented its members to government and BC Hydro when appropriate. Potts retired in 2010. He lives with his wife in West Vancouver and frequently travels south to visit his four children and eight grand-children.
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