Independent Power Production
Posted March 26, 2009 by Sacha Peter - Link
Category: Environment
Comments (21)
IPPs have been a hot topic amongst the environmental lobby.
The government wrote a press release, titled Facts on Independent Power Production, and it is a fairly accurate release.
I will talk about two parts of this release which I will take issue with, however:
1. In the second claim, the facts mention “between 43,000 and 54,000 gigawatt house of electricity per year” – I’d love to know what a gigawatt house is! They must have a lot of Christmas tree lights there!
These releases are written by people, and occasionally a non-spelling error does spill through. Sometimes they’re funny. The worst type of mistakes are when the word “no” or “not” is omitted accidentally.
Readers of this site will know that I make plenty of errors of this nature – my most frantic editing is within a minute after I hit the “publish” button.
2. About the following:
Claim: B.C. ratepayers are paying the capital costs of new power projects being built by private energy developers through Electricity Purchase Agreement contracts with BC Hydro, and are paying as much as double the current energy market rates
The facts laid out in the press release are correct, but here is some more colour:
BC Hydro takes on price risk by taking fixed prices for power they receive from IPPs. BC Hydro has a standing offer program for potential IPPs (which can be found here, local copy), and looking at section 12 (section 4.1), we have a list of prices:
Across BC the “residential rate” is $59.80 per MWh for the first 1.35MWh you consume (per two month period), and $72.10 for anything after that. This rate will go up about 8% on April 1, 2009. Business rates are much more complicated to explain.
There is also an adjustment for inflation (the CPI rate, which is not necessarily indicative of inflation, so this would favour BC Hydro if “real” inflation is higher than the CPI rate), and an adjustment factor for when the power is delivered, as follows:
So one of the disadvantages of the energy purchase agreements that BC Hydro takes on is that the public is taking on risk that:
1. Prices of electricity remain stable or increase relative to CPI over the typical 35-year contract that BC Hydro would enter;
2. Price differentials between electricity delivered in ‘light load’ times vs. ‘high load’ times remains such that BC Hydro can trade it off profitably via PowerEx, and that this differential between light and heavy times remains the case throughout the 35 year period.
So this would make BC Hydro susceptible to ultra-low cost power generation inventions (e.g. if somebody invented sustainable fusion), etc.
Are these risks reasonable ones to take? In my opinion they are, but I am not enough of an expert in this field to give any confidence level to this opinion.
My understanding for IPP was that roughly 10% of the total costs of producing electricity in BC produced only 1% of the electricity for BC Hydro. The existing dams produced a huge chunk of electricity and cost very very little
There is a good book about this topic: Liquid Gold by Dr. John Calvert
It covers all you need to know
there are also other academic articles
http://www.sfu.ca/~mcohen/publications/Electric/DirtySecrets.pdf
http://www.sfu.ca/~mcohen/publications/Electric/gutting.pdf
http://www.sfu.ca/~mcohen/publications/Electric/deregula.pdf
http://www.sfu.ca/~mcohen/publications/Electric/decline.jpg
If you read the post, IPPs pay the capital costs and take risk there, while BC Hydro takes operational cost risks with respect to how much they think they can sell power for over the next 35 years.
If the IPP spends too much on the capital end it’s their problem and not the province.
Where the province “loses” is if the price of power goes down over the next 35 years and then the IPP will make out like gangbusters, at least until the 35 year agreement ends.
BC Hydro’s redevelopment of the Aberfeldie micro hydro station in the Kootenays provides a good case study of upward capital cost creep that IPP’s also face.
Aberfeldie Capital Costs Estimates:
October, 2004 – $46 million;
February, 2006 – $65 million;
October, 2006 – $83 million;
And that’s for a redevelopment of an existing micro-hydro station with existing transmission lines.
Even then, BC Hydro’s cost of generating electricity is $81/ MWh.
And IPP’s, whether micro Hydro or otherwise, are also susceptible to that same upward capital cost creep risk, which they must eat themselves.
In addition, micro hydro IPP’s are also susceptible to snow-pack/snow-melt risk in terms of electrical generation.
Manitoba Hydro, under the New Democrats, is also engaged in the more expensive wind power IPP purchases. The St. Leon and St. Joseph wind farm IPP’s will produce a combined capacity of 399 MW.
Since BC has over four times the population of Manitoba, that would equate to over 1,600 MW right here in BC, well in excess of BC Hydro’s proposed 900 MW Site C dam.
Completely off topic but, why nothing on Railgate?
Independent Power Producer (IPP) Run-of-the-River Technology FACTs:
Independent Power Producers pay 3 times more social benefits to government than BC Hydro does. BC Hydro pays only $8 per MWh as profit and taxes to the government (2008) while most of that power is produced by dams that have permanently altered the Columbia River and Peace River basins with cumulative environmental impacts. To meet our current energy shortage, BC Hydro wants to build yet another dam (Site C) at 3 times the cost per MW, compared to low-cost low-impact private run-of-the-river technology.
Private power IPPs pay $25 per MWh in taxes, water license rental fees, and community benefits to the government. Half of that is paid to the local government as property tax, while BC Hydro pays no local property taxes for 25 billion dollars of assets that it owns.
A small 10 MW run of river plant pays about $1,400,000 a year to various levels of government, most of it to the local government. BC Hydro pays only $440,000 for the same amount of power to the Province, and none of it to the local government.
No IPP run-of-the-river project is on a salmon bearing reach of a stream, and the environmental impact is minor if any. Run-of-the-river technology can co-exist and share the habitat with fish and other wildlife. IPPs do not build dams – but low weirs or taps on a steep stream that has little or no resident fish. The impact is far less than dams built by BC Hydro, logging, mining, oil and gas, coal, real estate development, transportation, pulp and paper, pipelines, utility telephone and cable poles, etc. And unlike mining, oil and gas, coal, transportation and real estate – run of river technology is sustainable, renewable, clean and significantly reduces greenhouse gas emissions.
http://www.greenenergybc.ca/Assets/PowerPloy_Intro.wmv
http://www.greenenergybc.ca/Assets/PowerPloy_Chapter_01.wmv
http://www.ippbc.com/EN/media_room/frequently_asked_questions/
http://www.ippbc.com/EN/media_room/fact_sheets_and_issue_sheets/
http://www.greenenergybc.ca/
BC Hydro produces power at less than $6 a MWh from our gigantic heritage dams paid by BC citizens (in the 1960s), but sells it at about $80 to BC citizens who own these dams. The average salary at BC Hydro is $100,000 per employee per year. This is 2.5 times the average private salary in the province of $40,000. The average salary at BCTC, a unit of BC Hydro is $130,000 per employee. BC Hydro is a very high cost producer, $110 a MWh, from its own Aberfeldie run-of-the-river project that it has just completed.
On the other hand, IPPs generate power at about $50 to $85 a MWh. Ashlu Creek IPP is selling its power to BC Hydro for $55 for the next 40 years (term of the BC Hydro contract). IPPs pay $25 a MWh in taxes, water license rental fees, and first nation royalty to governments – mostly the local government. BC Hydro pays only $8 a MWh in profit and taxes to the government.
BC Hydro charges the ratepayers and taxpayers $1.4 million per GWh in costs to produce non-green power (Site C). This results in very high electricity prices of about $160 a MWh. BC Hydro is unable to produce power if the project is less than 50 MW.
On the other hand, private power IPPs can produce green and clean power at $0.6 million per GWh, none of that charged to ratepayers – and less than half the cost that BC Hydro charges ratepayers. Private power producers can produce power from projects as small as 5 MW by using local talent and labour.
The cost saving is passed on to the consumer when large number of IPPs compete for the few power purchase contracts offered by BC Hydro. BC Hydro offers on the average only 3 buildable power purchase agreements a year and no more than 2 or 3 IPP projects can be built in a year. Without a power purchase agreement from BC Hydro, no IPP run-of-river project can get built. There are 8,000 major streams and 280,000 minor streams and creeks in BC and only 40 IPP plants in all of BC. The water license held by an IPP terminates in about 25 years.
While a run-of-river plant is producing energy, BC Hydro fills up its gigantic dams, so that the energy production can be shifted to the winter. Run of river complements BC Hydro’s mega-dams very nicely. Energy is stored behind BC Hydro dams for low-water periods, and many IPPs also have lakes for winter storage.
It is not possible to export power to the US without the authorization of BC Hydro. And BC Hydro and BCTC demand a cut of at least 25% of the sales to allow exports. The price of power in Washington State is generally same as in BC, and the transmission lines to California are all congested.
Its Gigawatt Hour. Most likely the essayist spelled it as “hous” and the spellchecker made that to house!
The claim that BC Hydro is buying power at double to market rates is false.
The average rate in the 2006 call was $72. This is actually below the residential rate (after price increase) of $80.
Ashlu Creek project is selling power at $55 a MWh to BCH for 40 years. This is on their website. After 40 years, the Squamish nation gets the 50 MW plant for $1.
The IPP price should be compared to the MARGINAL cost of production by BCH.
BCH new run of river Aberfeldie plant is $110 a MWh (twice Ashlu) in cost!
Site C is $160, and already $400 million has been spent on this $9 billion project that destroys the Peace valley with no results – all paid by the taxpayer.
“Liquid Gold” by John Calvert is a piece of propaganda trash paid by the BC Hydro COPE Union 378 which takes $100,000 a year salaries off the ratepayers. Check their salaries at the BC Hydro website.
This piece of rubbish was thoroughly trashed by Professor Marc Jaccard, one of the Nobel winners with Al Gore.
Its amazing how this liar John Calvert who claims that IPP power is being sold to California and that 600 projects will be built shortly goes on repeating the mythologies of the socialists.
Here is more on this propaganda artist:
http://www.ippbc.com/EN/teasers/jaccard_assesses_bc_electricity_policy_in_peer_review_of_two_controversial_documents_%E2%80%93_october_1,_2008/
http://www.ippbc.com/media/IPPBC%20News%20Release%20M%20%20Jaccard%20Assessing%20BC%20Electricity%20Policy.pdf
“Free the Power” – I think you are completely overstating the case for IPPs – I also think you are massively confusing the difference between operational and capital costs. Since the capital cost base of these projects are so high (especially for large scale hydro), amortization periods play a huge role in determining operating costs. If the ‘legacy dams’ have already had their capital costs amortized, then of course they will have extremely operational costs.
There is no way that Site C would cost $160/MWh unless if you are using an absurdly short term of capital cost amortization. BC Hydro says current estimates would be 5.5-6 billion for Site C, but let’s take your $9B estimate anyway. Site C will produce roughly 4,600 GWh/year, which would be at least $700M when you factor in the export market, and you don’t need to be an accountant to figure out that your ROI is pretty damn good either way (although obviously better for $6B than $9B).
The other factor is that power produced through hydro is a hell of a lot better than power produced through wind or RoR because of variability (less of a factor for RoR).
There are two IPPs that deal strictly with RoR projects in BC, and that is Run of River and Plutonic. Run of River has Brandywine operating, and while this is marginally profitable for them, they are not gushing with cash, but they will eventually pay their bank off. Plutonic doesn’t even have revenues yet. It’s not the province’s responsibility to ensure these companies are profitable (it’s the investors) but from my perspective there’s no money to be made there (at least right now). Note this is not “advice”, just opinion.
One thing I hate about blatant partisanship is that both sides have no idea what they’re arguing about, just quoting material from the relevant lobby groups.
Sacha – thanks for your note -
The figure $50 to $85 a MWh production costs for the IPP includes operational costs, interest, taxes, and a small profit. Ameortization is not included because it is not correct to include that in cost.
I am comparing this cost to MARGINAL BC hydro production costs. You should not compare this to the legacy dam costs (which are $6, as they dont have capital costs).
Again, you should compare apples to apples.
Again, amortization of the debt does NOT come into the cost comparison – it should not. Are you sure you are not referring to depreciation?
Site C capital cost is almost $9 billion – about $10 million a MWh. Compare that to IPP capital cost of $3 million or less.
BC Hydro is lying. You have to add to that cost $2 billion in transmission interconnection cost where they have to pull 500 kV lines for about 120 km plus substations and control/protection infrastructure.
Free the Power – just to clarify, ‘amortization’ in my comments is defined as what you termed as depreciation – the writing off of the capital costs gone into the project.
Ignoring amortization in capital-intensive projects is a huge mistake to make – just because you paid the cash doesn’t mean you can ignore it once it’s been spent, otherwise it would make these projects look ridiculously lucrative. I believe most IPPs amortize their capital costs based on the contract length they have with BC Hydro, which is rational. If they renew then the amortization base is likely to be extended that period of time (e.g. let’s say in year 20, they extend for another 10 years, so instead of amortizing 1/35th they would do 1/25th from that period forward).
The apples to apples comparison is to include amortization of capital costs for both projects, or to exclude them for both. I know what you are trying to imply with marginal costs, but your legacy dam costs are too far too low since the province spent a bazillion dollars on them before I was born. You really need to model cash flows and the number you are looking for is the internal rate of return on investment, not marginal costs.
Probably a better way to think about it is this way – let’s say you blew up one of these ‘legacy’ dams and built it up from scratch again, and compared it to the IPP, who wins?
Site C will have triple the interest cost as an IPP for the same amount of energy. Most of the cost is interest carrying cost, and that will triple. So $160 a MWh is not too far an estimate, when IPPs produce power at about $80.
Yes, the storage capability of Site C does improve its revenue potential when export markets is considered. But again, IPPs can have lake storage to attain the same benefits. So this is not a one-way street.
Again, variability is overrated because BC Hydro already had huge dams (fully paid) that can be used to dampen the hydro/wind variability. And by interconnecting regional transmission lines, variability can smoothen itself out. IPPs also have lakes, such as Lois dam, or can have pumped storage (Brookfield Power). And most IPPs have 48 hours of storage anyways so they can move their power to the evening hours and away from the wee hours.
Sache – I believe you are confusing a number of things. First lets be precise. Amortization means Debt amortization – i.e. repayment of capital. This should not matter, because what you are paying here you are gaining in asset value. So its a wash and does not come into account for cost of production.
Second, you have to include Interest costs. You seem to forget that. That is how capital-intensive projects like IPPs and dams get their unit generation costs computed – by including the interest payments – which is by far the biggest part of the cost.
You seem to confuse interest payment with amortization. Amortization does NOT include interest payments.
Third – depreciation is something you would technically want to include, for this purpose of comparison, is not necessary. This is because both the Hydro dam and IPP RoR under a maintenance regime, cost of which has been included, will last for exactly 100 years and then its a writeoff. Namely, they have identical depreciation regimes.
So lets not get confused.
Cost of production = operational + interest + taxes + nominal profit.
IPP is $50 to $80 a MWh
Aberfeldie (BCH RoR) is $110
Site C is $160
Sacha – please note for the sake of comparison, we need to compare the ECONOMIC cost of production, and not the FINANCIAL cost of production.
The formulas are different. The IPP industry is not interested in how does a Site C finance compare to an IPP finance, or how the banks are dealing with such projects.
The debate is not that. The debate is about social benefits and economic costs. So it does not matter if you amortize over 35 years to be extended over 45 years or such financial considerations. You cannot create wealth by manipulating schedules or playing with numbers.
The economic comparison is the correct method of comparison when you are dealing with this issue as a political issue and wish to figure the social benefits. Otherwise the way banks may evaluate a project, that includes risk of the borrower, equity to debt ratio, DSR, etc. is just their own valuation system, and may have little to do with the proper socioeconomic valuation system that we need to use in a political debate.
The legacy dam cost of $6 is what BCH publishes in their own annual report.
And I agree – we should compare what the replacement cost of the dam is to the IPP.
That is EXACTLY what I have done.
I have compared Site C which is a new dam (i.e. marginal) with an IPP today constructing a RoR – which is again marginal.
So I am not sure what your criticism is.
Run of River Corporation is really a play – see their stock market movements. Brandywine is marginally profitable.
Plutonic is also quite a play, but on more solid footing. They have a plan and a program and have a higher professional level. They will kind of be successful, but not a stellar performer because their costs are high.
The true RoR companies are: Cloudworks, Canadian Hydro, and possibly Innergex, but Innergex has not been tested.
Everybody else so far unnamed are either too small, or just a pretender.
This is a tiny industry – and the way the NDP has blown this issue out of proportion has mainly to do with politiking and also catering to the crown unions. The environmental impact file is very very thin for all renewables.
This will be my last post since I think we have both made our points and we simply disagree with the details of the argument. Plus I have to sleep.
In the accounting world, amortization refers to the process of writing down capital costs to track depreciation. In the mortgage world, yes, amortization refers to debt reduction. I’m not talking about that. Debt reduction is not a cost.
You can capitalize interest costs during construction. Once the capital project is done then you move interest costs at that point into the operational side.
(FYI, accounting/finance is what I do professionally so your reaction is probably “I fear for who you work for”.)
Once you built the thing, you have to amortize the costs you spent to build it (e.g. Brandywine is “20 to 40 years”), which is an operational expense. This isn’t a cash cost though. As a small note, the land cost is not amortized, but this is usually small beans compared to the rest of the project. If it’s leased, operational expense (depends on terms of lease).
If you gave me a choice of an IPP that gave you power at a $65/MWh cost or a huge dam that would cost $160/MWh, this isn’t enough information.
I need to know how much the thing costs to make a proper financial decision.
The reason why I look at RoR (the company) and Plutonic is because they are both BC-based and RoR is the only case that I know of that has public financial statements showing clearly what one of these RoR projects can do in practice. As far as I can tell, RoR (the company) paid about $19M to buy a project that generates about $1.6-1.8M in revenues (give or take) a year. When you back out operational expenses, it’s pretty ugly.
Plutonic is nearly at the point where they’re going to generate revenues, so their statements also have some good figures.
Obviously this is a small sample, and Brandywine is small beans compared to what Plutonic is looking at, but Toba Inlet is supposed to be a 727GWh/year project that will cost $600M ($570M debt/$30M equity) which math-wise is pretty close to Site C’s numbers (if you believe Hydro’s numbers), but given an equal investment, I’d rather take the power from site C for reasons discussed before.
It’s valid to discuss the negative aspect of land flooding, I agree it is a negative of large-scale hydro.
If your debate is with BC Hydro’s cost estimate, I have no argument since I have no idea how much it costs to really build one of those things.
My point here is that you’re taking marginal cost figures and applying them without respect to capital costs. Internal rates of return are much more important than looking at marginal costs (although obviously marginal costs is one factor).
Fine, one last point – you’ve obviously done some homework, feel free to slip me a private email.
Hmmm…
1) The Master Plan is to approximately double electrical supply in BC over the next few decades, based on population growth projections, right? But BC Hydro is now banned from having any part in creating and owning new energy projects, right?
OK, then if my math is correct, new IPP pricing will apply to HALF of our future electricity, right?
2) Of all our energy use in BC, electricity use is only about 25-30% of total, right?
All remaining energy is some direct form of fossil fuels, right?
Since there are NO publicly-owned petroleum businesses in BC or Alberta, then all our fossil fuels are supplied by what are essentially IPP’s, private energy companies that sell us horsepower. Right? ~at whatever price they like, I might add!
OK, then unless we reinstate BCHydro’s capacity and proven ability to produce new power, or we start a provincially-owned fossil fuel company, then at least 80% of all future power will be supplied by IPP’s, whatever type of power source it is.
So, I say lets have a better balance of public and private energy supplies in our future. Let’s go for a 50-50 balance, just to be fair. Lets allow our own successful BC Hydro back in the game of making it’s public shareholders new green energy.
PS: I was not paid by any union to post this message. I just like the track record of public ownership, the world over. The track record of private ownership isn’t so good these days. They call it “Limited Liability”?
Sacha, your point is valid, but we do not disagree – so I am not sure what the debate is on depreciation.
If you re-read my comments, I have addressed this issue. I have said that I have assumed depreciation costs are the same per MWh. Site C and an IPPROR both depreciate over 100 years. So when we are comparing the economics between the two, its a wash and can be factored out.
Your bias is that you are looking at these projects from a “finance” angle. This is wrong. There is no investment, no ROI, no IRR, and no NPV, no DER, no DSR. We are not interested to see which of the 2 projects an investor should advance.
We are looking at this purely in terms of economics (“public wealth generation”). Yes depreciation comes in but:
1- over 100 years, that is only 1% of interest costs. So lets say a cost of $65 Mwh becomes $65.4 MWh, big deal (assuming interest costs are 70% of that).
2- Both (arguably) depreciate over 100 years. So for Economic Comparison, it is moot. In any case 1% of 70% makes no difference in the evaluation, when the costs are 2:1.
The issue you are having is that you think everyone can build the same thing for the same cost. In the business world, this is not the case. That is how companies get formed, grow, beat their competition, survive cycles, productivity increase, etc. That is why if only the government could build homes, the cost of property would be twice as high.
Innergex is also a publicly listed company. So is Altagas, Manulife, Ledcor(?), Brookfield, Hawkeye, Axor. But they are not pure RoRs.
Yes agree that Brandywine is ugly. There is this myth pushed by the NDP and the anti-business lefty classes that because the water comes down the mountain for free (unlike gas or coal), that there are humonguous and obscene profits.
It just shows the contempt that these almost fascist groups have of facts and open debate.
My information is based on some private projects, and are pretty accurate. But this info is very hard to get. Some prospectus can be helpful.
Capital cost per MWh for Toba: 600 / 727 = $0.83M
Site C: 8,200 / 4,600 = $1.78M
Site C is MORE than twice the cost (not to mention that Plutonic is about 30% above the RoR industry). Not sure why you call this “equal investment”.
You mention IRR. Again, as an investor taking a position, its paramount. But as a society that is solely concerned about productivity, IRR is irrelevant. Of course society will look at other “externalities” (environment), but costwise and as “public wealth production or destruction”, you have to look at the economics, and not the finance.
Can you elaborate why you think Site C and Toba have same economics? The numbers prove otherwise.
Dave Gulliver — you make absolutely no sense.
1- BC Hydro is spending billions on Site C, Aberfeldie RoR, Revelstoke/Mica. But since they are such a high cost producer, its best for them not to build some projects, especially the smaller ones below 50 MW.
2- The track record of public ownership is dismal. BC Hydro employees take $100,000 average salaries (even in a recession) and produce power at twice the cost as IPPs. IPPs give 3 times more money to government than BC Hydro does.