The renewable hydro electricity market in British Columbia

by Yingheng Chen and Roger Hardman

This is an abridged and edited version of a sector report on the Run-of-River Energy Sector in British Columbia which was published by Hardman & Co in September 2008. For more information visit www.hardmanandco.com

BC Hydro, one of the largest electricity utilities in Canada, serving more than 1.7 million customers in an area containing over 95% of the population of British Columbia (BC), forecasts energy demand in BC to grow by 23 – 37% over the next 20 years, while the projection of current supply capacity falls short significantly. BC Hydro estimates that the current contracted clean electricity sources can meet just 41% of BC’s incremental energy demand over the next ten years. To match this increase in demand, BC Hydro intends to acquire electricity from independent power producers (IPPs) to help mitigate the projected supply deficit.
 

BC’s Government published a new Energy Plan in February 2007. The Energy Plan sets out several ambitious targets that affect the renewable energy industry, including:

•    BC is set to achieve electricity self-sufficiency by 2016;
•    All new electricity generation projects in the province will have zero net greenhouse gas emissions.

Ultimately, the BC Government intends to become a net exporter of clean energy by 2020.
 
To facilitate the Government’s ambition, BC Hydro has issued a ‘call for power’. In the upcoming Clean Power Call – Request for Proposals issued by BC Hydro, contracts with a total of 5,000GWh firm energy supply will be awarded to IPPs with the most attractive projects. Run-of-river projects are expected to provide the majority of this energy.
 
BC’s run-of-river renewable energy sector is still in its early development stage with time consuming permitting procedures (a project typically needs to obtain more than 50 permits, licences and approvals from approximately 14 regulatory bodies). With successful examples in the province already in evidence, we are confident that this sector will keep on growing.

What is Run-of-river?

In a run-of-river project, the mechanism of power generation is simple physics. The power comes from the potential energy of water driving a water turbine and generator. The energy extracted from the water depends on the volume and on the difference in height between the source and the water’s outflow.

The difference between run-of-river and traditional hydro power generation is that a run-of-river project does not require a large reservoir and projects tend to be on a smaller scale. Run-of-river projects also need to be built on a river with a consistent and steady flow (mostly natural). By definition, a run-of-river plant can only have storage for no more than 48 hours of water supply. The main structure of a run-of-river plant is simply to redirect water flow from a weir (a small headpond) towards the penstock (delivery pipe), which feeds the water downhill to the power station. The natural force of gravity generates the energy used to spin the turbines located in the power station which converts the energy from the water to generate electricity. After this process, the water is redirected back to the natural flow of the river.

The following are the main requirements and contribute to a significant part of the project’s construction costs:

•    Intake weir – constructed to draw water from the river creating a small ‘headpond’ of water.

•    Penstocks – these pipes deliver water from the headpond to the turbines in the power station downstream. They are normally placed at the bottom of the headpond, in order to maximise the intake of the water flow, and are typically 3-8km long. Penstocks are made of different materials (from plastic to high quality steel) on different sections of the pipe, depending on the pressure and the economic viability. For example, in the final part of the penstocks, where the steepest drop occurs, high quality steel is required because of the high pressure inside the pipe. Penstocks can take around 50% of a project’s cost.

•    Powerhouse containing turbines and generators – these turbines and generators are the core of a project. Each turbine and generator is uniquely designed for the site, which is determined by the head (head is defined as the difference in the elevation of water at the penstock and the elevation of the turbine inlet located in the powerhouse), flow and volume of water of each site. They also need to be compatible. As technology improves, the turbines associated with run-of-river hydroelectricity generation are getting better in design and efficiency, leading to a reduction of overall maintenance costs. Turbines and generators will normally take up to around 15% of a project’s cost.

•    Tailrace – a channel through which the diverted water is returned to its natural flow.

•    Access roads – construction may be required depending on the existing infrastructure and remoteness of the project site. This sometimes can have a significant impact on the cost of developing a site.

•    Transmission lines – transmission lines from the powerhouse to the local transmission grid can have a significant impact on project costs. A remote site may require significant investment in transmission infrastructure to connect the project to the local grid. However, with strategic planning, this cost can be shared over several projects if several run-of-river projects are developed in close proximity.

<subhead>Key Drivers of the Run-of-River Industry

With ambitious targets set by the Government, renewable energy IPPs with economically viable projects will benefit simply by being ‘green’.

Advantages of the run-of-river industry are:

•    Low environmental impacts – run-of-river projects are considered to be ‘green energy’ with little environmental impact, because they do not require damming like large hydro projects. There are no greenhouse gas emissions and run-of-river projects run from a renewable, non-depleting resource.

•    Sustainable and reliable supply – because of the water abundant geographic advantage of BC, water supply from rivers is reliable, although it varies from season to season and with the weather pattern. Also, these projects take only a small percentage of the total flow to generate electricity.

•    Reliable demand – most of these projects will not be developed unless the company has an Electricity Purchase Agreement (EPA) with BC Hydro. The contract life is normally between 20 to 40 years, which reduces the risk of exposure to energy price volatility.

•    Low transportation cost – unlike other forms of fuels, electricity can be transmitted simply by connecting to the local grid with a small percentage of transmission loss. (It is dependent on the voltage of the transmission lines and the distance of the transmission lines between the power station and the local grid.)

•    High operating efficiency – the operating life of a run-of-river project is typically longer than 50 years, with low operating costs, normally around 10-15% of revenue.

•    Government incentives – There are Government incentives in place to drive infrastructure investment, e.g. the Renewable Power Production Incentive (RPPI). The RPPI scheme is set to provide an incentive of $10/MWh for up to ten years to eligible low-impact, renewable electricity projects constructed before 31 March 2011.

<subhead>Disadvantages:

•    Environmental impacts – the effects on the natural habitat are the biggest concern with run-of-river projects. Reduction of natural water flow can change the quality of the habitat (eg, water temperature, depth and vegetation) for fish and other organisms. These factors can change the economic feasibility of the project. Also, if such a problem does exist, it can cause the rejection of a permit application by some agencies, for example, the Fisheries and Oceans Canada (DFO), and could result in the project not being developed at all.

•    Infrastructure and social impacts – the infrastructure required by the project – including access road, transmission lines, construction of the headpond and the powerhouse – can cause damage to the surrounding areas and interference with wildlife and plant populations. They can also impact on human activities, such as fishing, hiking or other recreational activities. Run-of-river projects may also face opposition from local communities, such as First Nations, who might have claims to the land or other aspects of the projects.

•    Limitations of size and site expansion – run-of-river projects normally run at a smaller scale than other forms of energy generation. The average capacity of run-of-river projects that are currently in operation is approximately 12MW vs. an average capacity of 100MW for wind power projects that are currently under construction. It is often not possible to expand a site, because it is subject to the size of the river.

•    Geographic constraint – because run-of-river projects are heavily dependent on the natural flow of the river, there is a constraint to the size of a project. It also depends on the selection of site: run-of-river projects in BC are relatively scattered. With the growth in appetite for renewable energy, it is expected see a boom in these run-of-river projects in BC. It is yet to see the combined impact of projects located in the same region, because there is currently no regulation regarding this aspect.

•    Complicated approval process – the project permitting process can often be one of the biggest hurdles in a run-of-river project. In general, a project is required to obtain permits from more than ten review agencies at both provincial and federal levels, plus First Nations. From the submission of application forms to receiving the approval (depending on the applicant’s preparation), the time line for complete approval of each project is likely to be at least two years.

Canada and British Columbia - The Geography

The Pacific coastal strip of Canada is part of the 5% of the earth’s surface that has rainfall in excess of 2,000mm a year. In this it is rivalled only by Indonesia, the Himalayas, parts of the Central West African coast, Central America and the upper Amazon catchment area. The immediate interior of the coast is mountainous (The Cascades, the Rockies), some of it snow-capped throughout the year and with numerous glaciers. Within sight of the Canadian border is Mount Baker in Washington State in the US, which holds the world record for the heaviest recorded snowfall in a year, 28,956mm between June 1998 and June 1999.

The population of BC is 4.1 million, approximately half of whom live in the south-west corner, in or near Vancouver or on Vancouver Island, the provincial capital and administrative centre. The province is extraordinarily underpopulated both for its size and for its hydro-electric generating potential. BC is four times the size of the UK, with considerably less than a tenth of the number of people.

To the south is the US where, three states down from Canada, California is hugely wealthy. It has a massive future power requirement that it cannot meet from its own resources. State Governor Arnold Schwarzenegger has recently visited Canada to, among other things, negotiate for future power supplies. The routing of new high voltage transmission lines between BC and California has been openly discussed. One of the options is a sub-sea transmission cable off the coast of BC.

Power Generation in British Columbia

Through a combination of geography and the foresight of Provincial Government ministers between 50 and 70 years ago, BC has some of the cheapest and most abundant electricity supplies on the planet. Two major dams built generations ago in the north-east of BC, Peace River, between them generate 3,424MW of electricity, and hydro-electric generation accounts for 66% of the region’s total power output. Because hydro-electric projects have very high upfront costs but very low running costs, the electricity from these two giant projects costs c2–3c/kWh. This means that the average cost of power production for the BC consumer is very low. Residential electricity prices in Vancouver are 6.4c/kWh. This compares to 21.1c/kWh in San Francisco. Industrial users in BC obviously obtain even cheaper rates than this.

BC does not produce enough power to meet its own needs, however. It imports electricity from Washington State in the USA, as well as Alberta and other Canadian provinces. In 2007, BC imported 7,201GWh of electricity, accounting for approximately 12% of the province’s power consumption. Up to June 2008, BC had already imported a net amount of 3,108GWh. Electricity is also generated from sources other than the two major dams, not just run–of-river but biomass. Nuclear facilities are banned in BC, and the only gas powered plant is used solely for peak demand surges. The marginal cost of this is highly influenced by the price of natural gas, especially when electricity generation is heavily dependent on gas power facilities in a dry year.

Another source of energy is through Powerex Corp., BC Hydro’s subsidiary and one of the biggest energy traders in Western Canada and the Western United States. Powerex’s energy trading activities help BC Hydro to optimise its electricity system resources, improve the security and reliability of electricity supply for the province and provide significant economic benefits via its daily trade arbitrage, i.e. Powerex buys power from must-run thermal plants in Washington and Oregon at a cheap rate and exports power during the day when prices are high. In June 2008, Powerex bought power at an average price of $25/MWh while selling at an average price of $68/MWh. This high margin can help BC Hydro to justify spending higher prices on acquiring power from IPPs.


In terms of hydro-electric power, no new dams have been built for many decades. There is a site for a third dam, known as ‘Site C’, but current environmental thinking in BC is against large dam projects due to flooding concerns and the disruptive construction process. Site C will undoubtedly be built out at some time, but cost of generation will be many times higher than that of Peace River because the main cost, construction, will be current rather than 50 year historic.
Source: Statistics Canada, Survey 2151

Players in the Market

There are many small hydro and run-of-river developers and operators in BC and the majority of them are private companies. With BC’s potentially huge hydro energy resource, thanks to its geography, the number of run-of-river projects is expected to continue to rise in suitable geographical regions in the province. While the cost of energy continues to climb and with the BC Government’s ambitious target of being self-sufficient by 2016, it is expected that more developers will want to join and have a share of this cake.

In the 2008 Clean Power Call – Request for Proposal, BC Hydro will only accept projects that are ‘green’: hence, run-of-river projects will be competing directly against wind, solar and wave. Biomass projects, which were in the 2006 Call for Power, will no longer be direct competitors this time. They will enter into the Bioenergy Call for Power instead, which will assist BC in becoming electricity self-sufficient and also help to get rid of the 80% of timber stand that has been or is expected to be affected by mountain pine beetles.

The key competitors in this upcoming RFP include a few pure-play run-of-river hydro power project developers, such as Plutonic Power Corp., Cloudworks Energy Inc. and Syntaris Power Corporation. There are a number of companies developing/operating both run-of-river and wind farm projects, some with biomass as well, such as Brookfield Renewable Power Inc., Enmax Power Inc., Innergex Renewable Power Inc., Run of River Power Inc. and Sea Breeze Power Corp. (CVE: SBX), etc. The Canadian alternative energy market is still in its development phase, and most project developers are privately held or early-stage companies.

Plutonic Power Corp.

Plutonic Power Corporation (PCC) is an independent power producer and developer of environmentally friendly and clean power in the province of British Columbia. The company has identified 40 run-of-river projects with approximately 2,000MW in capacity or about 6,200GWh per year. PCC was granted its first two contracts from BC Hydro’s 2006 Call for Power, the East Toba River/Montrose Creek and Rainy River projects. The East Toba River/Montrose Creek projects have a capacity of 196MW and were awarded a 35 year EPA. Both projects have been under construction since July 2007 and are expected to be operational by 2010 with direct construction costs of about $500 million and total costs of $660 million. PCC entered into a joint venture with GE Energy Financial Services (GE) to finance and develop the East Toba/Montrose projects in May 2007, in which GE agreed to invest up to $112 million to acquire a 49% equity stake in both projects and a 60% economic interest in the projects for the 35 years of the EPA and to be granted the right to debt finance the project.

However, in August 2007, PCC decided to terminate the EPA contract with BC Hydro for the 15MW Rainy River Project, after having come up against some unexpected environmental difficulties in the permitting process. The Rainy River project and projects in the Hope area were then subsequently sold to Calgary-based AltaGas Income Trust in February 2008. These projects are expected to be submitted into the 2008 Clean Power Call by AltaGas.

PCC’s portfolio of development projects, the ‘Green Power Corridor’, is located close to areas of high demand and has the ability to share infrastructure and some of the project costs with East Toba River/Montrose. This will give PCC an advantage in the upcoming Clean Power Call. On 14 August 2008, GE signed a Memorandum of Understanding to partner with PCC on a bid to develop approximately 1,000MW of projects in the Toba and Bute Inlets along the southwest coast of BC. These projects are expected to be submitted into the 2008 Call. With approximately $4 billion of capital costs, the joint investment would be the largest single private sector investment in hydro power generation in Canada.

Syntaris Power Corporation

Syntaris Power Corporation (Syntaris) is an unquoted, independent power producer concentrating on developing hydro electricity projects in BC. The company was incorporated in December 2006 and is in a development stage, primarily focused on the development and acquisition of small hydro-electricity projects.

Syntaris has a portfolio of projects consisting of six development projects with capacity of approximately 150MW (or with over 520GWh of electricity supply per year) for near term growth, and 30 prospective projects with capacity of about 550MW for long term growth.

These six development projects include Jake Lake (23MW), Kinskuch (72MW), Culliton (24MW), Maselpanik (18MW) Chipmunk (10MW) and Airplane (5MW). They are in various stages of the permitting process.

Run of River Power Inc.

Run of River Power Inc. (ROR) is an independent power producer and developer of run-of-river hydro projects and biomass power projects. ROR’s first operating project – Brandywine Creek Project – with capacity of 7.6MW, completed construction in May 2005 with a 20 year term contract with BC Hydro. The revenue stream started occurring in August 2005 of about $2.1 million per year and $1.7 million in EBITDA. Currently the project is running ahead of its projected capacity. However, there had been some issues during the project’s early operating stage. Corrosive, iron reducing bacteria was found inside the steel portion of the penstock during the first year of operation, which caused a reduction of water volume flowing through the penstock and in turn a reduction in power output.

ROR has a portfolio of projects consisting of 13 projects under development, totalling 229MW of capacity, and most of them will be submitted into the upcoming Clean Power Call in November 2008. ROR also has a prospective portfolio of 478MW in capacity.

In February 2008, ROR completed the acquisition of Western Biomass Power Corp. (Western Biomass), a private company originally formed to provide clean electricity in BC and to utilise the inventory of timber that was destroyed by mountain pine beetles. Two biomass power projects are under development: one has a capacity of 30MW and the other has capacity of 60MW. Both of these projects have been submitted into BC Hydro’s Bioenergy Call Phase I in June 2008.

Cloudworks Energy Inc.

Cloudworks Energy Inc. (Cloudworks) is a private, Vancouver based producer of green, renewable electricity. Cloudworks, which focuses primarily on BC’s hydro power market, has a portfolio of projects consisting of two operating projects (Miller Creek – 35MW in capacity and Rutherford Creek – 50MW in capacity), eight development projects (six of these were awarded EPAs in the 2006 Call for Power and three have obtained all the required permits and approvals from various Government bodie: the two projects without EPAs are expected to be submitted into the 2008 Call), and 18 prospective projects (12 of which are expected to enter into the 2008 Call).

Innergex Renewable Energy Inc.

Innergex Renewable Energy Inc., (INE) formerly known as Innergex Management Inc., is an independent manager, developer and operator of renewable power generating facilities with a focus on hydro-electricity and wind power. INE completed its Initial Public Offering on 6 December 2007.

Innergex, which focuses on opportunities in Quebec and BC, has a portfolio of projects consisting of one 8MW operating hydro facility (Glen Miller), nine development projects (five hydro and four wind) with EPAs under construction or to be constructed between 2008 and 2012 with a gross expected capacity of 565MW, and 21 prospective projects (3 hydro and 18 wind) with long term growth capacity of 1,638MW.

Enmax Corporation

Enmax Corporation (Enmax) is an energy distribution, supply and services company. Enmax participates in the energy generation market through its wind power projects and run-of-river power projects. Enmax has one wind project operating in Alberta and one run-of-river project operating in BC. Furry Creek, the hydro project in BC, has a capacity of 11MW and has been in commission since 10 June 2004.

Hydromax Energy Ltd, Enmax’s Vancouver based business development company, has two developing run-of-river projects with 10MW capacity each (the Upper and Lower Clowhom projects). These two projects were awarded EPAs from BC Hydro in August 2006, with an expected commercial operation date in late 2009. Caribou Creek, another Hydromax developing project, has capacity of 17MW. This project is expected to be submitted into the upcoming Clean Power Call.