An Electrification Plan Part 2: Countering Common Electrification Assumptions
Preliminary modelling indicates that BC can impose an electrification mandate that is cost-competitive for industry, for government, and for BC Hydro ratepayers. This may not be true for all volumes of potential development as the supply curve for new renewable supply is upward-sloping, and there is a finite limit on transmission upgrades and the capabilities of the Heritage Assets. But at low to moderate volumes- perhaps up to 800 or 1000 MW- there is reason to believe that the policy menu suggested by the Plan is technically and financially robust.
Nevertheless, this proposition needs to be carefully evaluated and refined. In particular, further research and evaluation is needed to address several assumptions that have tended to contradict the viability or attractiveness of the policy actions suggested by the Plan. Strong evidence would suggest that the following assumptions would benefit from careful consideration:
Assumption: Electricity is not competitive with natural gas, because natural gas prices are very low.
Considerations: While natural gas prices are very low, and fracking techniques tend to reinforce downward pressure on prices, three factors argue that the gas price appropriate for evaluating electricity-for-gas substitution is materially higher than the current price, in real terms:
Under conditions of scarce pipeline capacity, the profit margin on processing into LNG or methanol, for example, is the appropriate gas price to consider. This margin represents the opportunity cost to the producer in consuming a finite supply of gas for manufacturing power.
Limited market access is a primary reason that gas from the Western Canadian Sedimentary Basin is currently so inexpensive. Plans that improve that access, and by extension open up opportunities for gas liquids, will tend to drive up prices.
It should be assumed the current trend of rising carbon prices will continue globally. This puts upward pressure on the cost of natural gas, as gas is one of the few viable options for GHG reductions in many parts of the world.
Assumption: Using the Heritage Assets for purposes other than trade represents a subsidy from BC Hydro to industry.
Considerations: This assumption relies on two premises, both of which warrant further consideration.
First, this assumption implies that the value of capacity that Powerex receives from trade (dollars earned divided by the capacity required to earn that revenue) is higher than BC Industry would be willing to pay. As Powerex’s trade revenues have decreased over time, from $1 billion/year at the peak of the market to approximately $125 million today, this premise should be re-examined.
Second, the assumption implies that the value of re-orienting the Heritage Assets as contemplated by the Plan accrues to industry. An alternative perspective is that the winners in re-orienting the Heritage Assets are all British Columbians, who benefit from economic development, environmental improvement, and improved outcomes for First Nations. In all likelihood, pricing to industry would be designed to, at most, hold industry indifferent financially between using gas and electricity. There would be no reason to offer industry more than that.
Assumption: Renewables and the associated capacity are too expensive.
Considerations: This assumption is simply out-dated. Prices for renewable generation and distributed capacity options are falling quickly. For example, the capital cost of offshore wind has fallen by half since 2010. For high-capacity factor plants like those likely to develop in BC, this means prices that are likely to be competitive with natural-gas fired generation (on an energy basis) over a plant’s 40-year life.
Moreover, these energy prices are predictable moving forward, where gas prices are subject to future uncertainty. Capacity prices are following a similar trajectory. For example, the US Department of Energy has predicted that Vanadium Redux-Flow Batteries (“VRFBs”) will be able to provide energy from grid-scale capacity projects at roughly 10 cents per KWh, compared to roughly 40 cents per KWh a decade ago. These pricing trends should be carefully factored into today’s policy choices.
Assumption: Coastal gas processing facilities will be supplied from interior generation.
Considerations: Current reviews of electricity alternatives for the Northwest have tended to build on the traditional service model. That is, generation from the Peace and Columbia Rivers, moved on the bulk transmission system from Prince George to Terrace, and beyond. This model is being reinforced in current thinking by the predicted system surpluses following the completion of Site C. But two important considerations may justify modifying this perspective.
First, there is ample local, clean generation potential on the coast, and developing it can be a useful engine of regional economic development and First Nations reconciliation.
Second, Site C is likely the last major dam development in the Province, and its surplus will clearly not sustain the full life of a new industrial load. In fact, electrification of industry will almost certainly eliminate surplus from Site C, creating the requirement for new generation resources in BC sooner rather than later. This creates an opportunity for the aforementioned clean generation projects on the Northwest coast to play a key role in an electrified industrial Northwest BC.
The considerations highlighted above work to counter the assumptions that have historically hindered electrification progress. And further, to suggest that the policies set forward in the Plan are viable. Discussion of the appropriate price at which to view natural gas draws the conclusion that electricity is competitive on a cost basis. Analysis of the implications of re-orienting the Heritage Assets inspires the position that rather than a subsidy to industry the move would represent the re-directing of created value to all British Columbians. Evaluation of the true cost of capacity development from renewables reveals that the assumption that it is cost-prohibitive is outdated. And finally, a review of potential generation resources concludes that generation will not solely come from the interior but also from the coast, where electrification has the potential to be a major driver of regional economic development. With electrification established as both desirable and viable in principle, the following post will work to identify the necessary specifics of a successful electrification policy framework for BC.