Tuesday, January 8, 2013

The "Site C" dam does not make economic sense to me

On many levels building the "Site C" dam on the Peace River is attractive.   The Peace already has two dams on it so much of the damage has already been done and the Site C location would simply capture more power.   It will have some significant impacts on the Peace River valley but I think the bigger impact is the cost of the project.   I think the current estimate of $7,900,000,000 is likely way too low and the final cost will be much higher than that making this very expensive power to bring online, more expensive than buying power from independent power producers.

The Peace River power projects first came about in the 1950s with Axel Wenner-Gren's bold proposals for Northern BC.   From this evolved Premier WAC Bennett's Two Rivers policy for developing hydro power in BC - the Columbia system and the Peace River.   Two dams were completed on the Peace River and serious consideration was to have two more.   What there is left of this project now is the "Site C" location.

Peace Dams - built and proposed
  • The WAC Bennett Dam was finished in 1968 and created the very large Williston Reservoir and produces 13,100 GWh/yr.   It is located 18 kilometers west of Husdon's Hope
  • The Peace Canyon Dam was finished in 1980 and created the small Dinosaur Reservoir and produces 3,500 GWh/yr.  It is located 21 kilometers downstream from the WAC Bennett Dam and 7 kilometers upstream from Hudson's Hope
  • "Site A" dropped in favour of "Site C"
  • "Site B" dropped because of bad geology
  • "Site C" is located 83 kilometers downstream from the Peace Canyon Dam and 7 kilometers west of Fort St John.   It would produce about 5.100 GWh/yr
  • "Site D" dropped because of bad geolocy
  • "Site E" was proposed just to the west of the BC Alberta border on the Peace River.  It was dropped as an option in the 1980s

Locations that have been considered for dams on the Peace
BC Hydro has never let go of the idea of developing "Site C" even though it was dormant enough after 1991 that everyone thought the idea was dead.   It is now very seriously under consideration, in fact BC Hydro is acting as it is a done deal.   The one aspect of the project that concerns me more than any other is the cost to build the dam.

The early stage estimate in 2007 was for it to cost $6,600,000,000 to build the Site C dam on the Peace River.  In May 2011 this had been raised to $7,900,000,000.

Given the stage of the project and the nature of public sector capital project estimates, I see the real construction costs of this project being in the range of $10,000,000,000 to $20,000,000,000.   Amortized over 30 years the construction cost per KWh is $0.0654 to $0.118.   What this means is that the construction costs alone of this power will be likely be higher than what BC Hydro will be able to sell the power for.   To arrive at my numbers I simply took the project costs that I suspect it will be and divided it by 30 years of power production.

In the May 2011 BC Hydro estimated a project cost of $7,900,000,000.  BC Hydro estimates the cost of the power to be $0.087 to $0.095 per MWh.  Most of this cost is from the costs to build the project

Based on the likely costs of the "Site C" project and what it costs BC Hydro to produce power, it would seem that BC Hydro would have to sell the power for about $0.09 to $0.14 per KWh to break even in 2020 with this rising to $0.12 to $0.17 per KWh in 2040.   BC Hydro currently buys power from IPPs at an average of $0.068 per KWh and most of their purchase agreements are set up in such a way that this price is highly unlikely to reach $0.10 per KWh anytime soon.   Building "Site C" will cost BC Hydro more than relying on the private sector.

"Site C" only makes sense if the cost of power is affordable and if it is the best option for more power in this province.   What I have not seen is a good business case for why "Site C" is economically the best option for BC.  The 2007 feasibility study certainly does not make a strong case because it does not look at what the other options are out there.

At the moment BC Hydro's latest call for power is at roughly $0.10 per KWh which then rises at half the rate of inflation for the term of the contract which is anywhere from 20 to 40 years.   The latest call for power is only available for very small projects, the upper limit is a capacity of 15 MW which is why the rates  are higher than for previous IPPs.   Because BC Hydro will only cover half the rate of inflation, it means that over time the cost of the IPP electricity will fall in adjusted terms.  A purchase agreement now for $0.10 per KWh would be $0.135 in 20 years with 3% inflation.  If the full rate of inflation were applied it would be $0.181.  

With the latest call for very small scale power projects that is on offer BC Hydro, the company can be reasonably certain of new IPP power built now being available in 2040 for about $0.135 per KWh.   The cost of getting that power from "Site C" will be roughly the same cost but with BC Hydro taking all the risk.  A new larger scale call for green power in BC will very likely make power available to BC Hydro in the short term - less than five years - for significantly less than the cost of "Site C" power.

BC Hydro will add about 8,500 GWh/yr of power from new IPPs coming online over the next few years.   The cost of all of this power will be cheaper than constructing "Site C".  BC Hydro is already getting over 1,000 GWh/yr from projects that were part of the 2010 integrated power call.

The economics of "Site C" simply make it a bad risk for BC Hydro and the province.   For that reason alone I do not think we should go ahead with the project.
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