Benefits and Costs of Energy Project Investment in the Columbia Basin

Electricity in the 1990's and Beyond: Changing Technologies, Changing Markets

The investment of public money in electricity generation was once a widely-accepted source of economic development in B.C., but factors supporting it have changed. Until the 1980's, the financial cost of government-funded hydroelectric projects in B.C. was unarguably low, compared to the cost of other power development options of the day. But, within the last decade, power generation technology has shifted. The costs of new generation have fallen and non-utility producers are more interested in investing. The market has become more competitive.

The recent shift is towards thermal, not hydroelectric generation technology, which generally uses natural gas in a modern turbine plant. These turbine plants can now be run almost continuously at high efficiency, compared to traditional steam boiler plants. In addition, deregulation of natural gas prices has led to a large reduction in fuel prices, thus reducing plant costs. Advantages of thermal plants include: they can be built to a variety of scales, they are largely manufactured (rather than engineered on a plant-by-plant basis), they have relatively low capital costs and shorter construction periods. They can be sited anywhere there is gas supply. The principal disadvantage, relative to hydroelectric projects, is that they need a fuel throughout their operating life - and the price of this fuel may be variable.

The cost of hydroelectric projects is generally all incurred during construction. Thus, the financial risk centres on the high fixed (capital cost).

Recovering Columbia Basin Project Costs

In general, there are two ways to recover electricity project costs and generate an equity return. Costs and return can be recovered from B.C. ratepayers (utility customers who pay regulated rates), or from sales in a competitive market.

Competitive marketing may be done either through dedicated contracts or speculatively, or through a blend of the two. A dedicated contract is a long term contract for plant production that is in place prior to investment. In the speculative case, equity participants would normally require a higher rate of return, to reflect higher risk. For economic efficiency, the total rates of return from electricity generation options should be compared to province-wide averages for investments of similar risks.

Market Potential

Electricity is not a single commodity. Different electricity "products" are traded, including, but not limited to firm (guaranteed) energy, non-firm energy and capacity. Prices that buyers will pay are generally based on their next lowest cost alternative for equivalent products. Other factors that enter into a contract include location and time of delivery, reliability of the generation supply and transmission system, the duration of the contract, price re-negotiation and indexing conditions and environmental impacts. Buyers and sellers generally make "apples versus oranges" trade-offs to some extent and electricity contracts are likely to be quite complicated.

Investment Risks

Different financial risks are associated with thermal and hydroelectric generation projects, and these differ from risks in other sectors of the economy. Compared to service or manufacturing sectors, electricity supply uses a relatively large amount of capital, in relation to labour and other on-going costs. As a result of competitive pricing (versus regulation and nearly-assured returns to capital), the capital risk tends to be transferred from customers to suppliers, and finally to creditors and equity-holders.

Under competitive pricing, hydroelectric project financial risks are borne by the providers of capital. If a satisfactory, long-term, assured-price contract can be arranged, the risk is small. In thermal projects, the risk mostly comes from uncertainty in the fuel price, which is an on-going operating cost.

Employment Impacts

The employment potential for any electricity supply option is substantially smaller than for almost any sector of the economy. As stated in the B.C. Energy Council's Energy Strategy for British Columbia (November 1994): "Energy projects have long been looked to as a means of triggering economic development. But a careful analysis shows that the number of jobs created in energy projects is low compared to other uses of equal amounts of money."