BC Hydro

Sunk costs sinking

Opinion: The sunk costs fallacy is killing us in the struggle to contain  COVID-19 - The Globe and Mail

BC government is reluctant to reveal information about BC Hydro’s Site C project but emerging news is useful to knowledgeable analysts.

One of those is Richard McCandless. At BC Policy Perspectives, the retired senior pubic servant wrote that initial operating losses at Site C will add billions to the project’s cost:

The Site C dam is likely to result in accumulated operating losses of $5.5 billion for the first 15 years of operation. The losses result from the cost of production (primarily debt service) exceeding the additional sales revenue. For a number of years, the new power supplied by the dam will add to BC Hydro’s surplus power and will be exported at a much lower price than the cost of production…

Power exported (Trade) generated an average of only $42.52 per MWh last year.

…BC Hydro has not indicated how it will pay for the losses; it has yet to acknowledge that major losses are pending.

Using BC Hydro’s 84-year1 cost amortization, McCandless estimates Site C power will cost $127 per MWh. Given instability of lands beneath the dam and the risks of damage from nearby fracking, I believe it is imprudent for the utility to use such a lengthy write off period. Additionally, Rick’s estimate seems not to account fully for maintenance, transmission, distribution, sales, and administrative costs.

Using a 50 year amortization and increased allowances for operating and overhead costs, my calculation of annual Site C power cost is $162 per MWh and that might be low if interest rates jump, as they are certain to do over the coming decades. I believe Rick McCandless’ loss estimate of $5.5 billion in the first 15 years is conservative. It could easily exceed $7 billion.

Since the costs of wind and solar power has been trending steadily downward, growth is unlikely in prices BC Hydro gains from exports or heavy industrial sales. Site C losses will continue to mount after 15 years.

German researchers have developed an arrangement of ferroelectric crystals that induced a powerful effect in solar cells. This is only one of many exciting initiatives in renewable power generation. Dramatically increased efficiency in wind turbines and solar panels, along with improving energy storage systems, will result in large industrial consumers committing to self-generation if utilities raise prices. Elasticity of demand for power from the grid is higher than ever before.

Retired economist Erik Andersen examined Site in a different way. I paraphrase his words:

The burning issue at start-up will not be what it cost but what it is worth. An asset should be valued by its ability to earn income over time. Low degrees of confidence in estimates of revenue and lifespan lower asset value.

If the demand for electricity in BC remains flat or diminishes, then revenue will be stagnant or even reduce. The case for this outlook is strong because citizens are already showing their unwillingness to pay more. This condition is referred to as the elasticity of demand.

There will likely be no rescue by heavy industrial customers as they have demonstrated success in getting royalty and rights payments for natural gas production reduced (see Norm’s charts). They will pay the utility no more than the cost of self-generation.

At the end of the last century, coal buyers encouraged global over-production as a way of creating a buyers market from a sellers market. Large electricity buyers want to achieve the same today. Over-supply means lower prices, which mean devalued generating assets. When excess investments are made, the usual response is to write down asset values until matched with revenues. That encourages vulture capitalists who aim to buy cheap, cut services and reliability, strip valuable assets, then exit.

Of course, the BC government may continue to dictate the use of accounting trickery to distort the utility’s financial condition. Unrealistic asset amortization is just one example; improper manipulation of regulatory accounts is another.

Before 2017, BC NDP promised to bring order to BC Hydro’s business affairs. Instead they’ve made the company’s financial condition and outlook worse. Far worse.


The decreasing cost of renewables unlikely to plateau any time soon, ARS TECHNICA, October 2021:

Early price forecasts underestimated how good we’d get at making green energy.

Past projections of energy costs have consistently underestimated just how cheap renewable energy would be in the future, as well as the benefits of rolling them out quickly, according to a new report out of the Institute of New Economic Thinking at the University of Oxford.

The report makes predictions about more than 50 technologies such as solar power, offshore wind, and more, and it compares them to a future that still runs on carbon. “It’s not just good news for renewables. It’s good news for the planet,” Matthew Ives, one of the report’s authors and a senior researcher at the Oxford Martin Post-Carbon Transition Programme, told Ars…

Image of a wind turbine.

1 Initially written as 70 years. Corrected to 84 years. Thanks to Richard McCandless for noting my error.

Categories: BC Hydro, Site C

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11 replies »

  1. Hello Norm and thanks for the contributions by yourself and Richard. As you will remember Prem. Gord tried to privatise BC Hydro (like BC Rail) early in this century but the political push-back was enough to stop the game.

    It is possible that Site C is the next try at the same game. By loading a seriously wounded bird (Site C) on to the BC taxpayers, citizens might get so fed-up that privatisation has a good chance this time around.

    It is impossible for me to accept the current financial optics of Site C as logical, so I start looking elsewhere for reasons and the only one I can buy into is the sale of a publicly owned monopoly to private interests who want the incomes that can be had from monopolies.

    Keep up the good work.

    Liked by 1 person

  2. We were told at the Joint Review Panel Hearings by BC Hydro, that they were aiming then for a 70 year amortization. There could have been an extension on that when the price of construction got bumped again. If the price goes to $20 billion, the cost of interest, not counting the losses on production, which would have to have interest paid as well, at 6% over the 70 years would amount to $84 billion, making the total cost of power from Site C more than a $100 Billion. At one point I told Chairman Harry Swain that the only thing that could justify building it was the bailout of the banks, again.

    I think that we as owners of BC Hydro need to tell the banks that backing really stupid projects is a poor financial decision and if Site C gets built that they are going to have to come up with their own interest because we don’t think that they had enough interest in the decision making process to enter better input to that process.

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  3. That is a of money. I expect B.C. Hydro thinks the consumer is going to pay for all of it. The tab runs into the billions and there are only 5 million and change of us, the consumers. We’re going to pay for this forever, especially if interest rates go up. Yikes. If we the consumer are expected to pay for this by our electrical bills, I think its time I started looking at a little wind turbine for my roof along with some solar panels.

    of course the real question which keeps going through my mind is, after its built, how long will it stand there, what if it slides down hill? I guess we still have to pay for the thing even if it collapses.

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    • It may help a little if you were to know a little BC history regarding accounting for public money.

      Over a decade ago the provincial Auditor General was from Australia. He repeatedly reported that our government accounts left something to be desired. This is the equivalence of getting a failing grade in full disclosure. He opted to leave the job.

      Following that there were more examples of the same.

      Early in the last decade I tried asking the travelling pre-budget consultations by a committee of the of the legislature, to discuss “contractual obligations” that in 2017 totalled more than CDN $100 billion but on at least 2 occasions they refused to talk about these obligations because accountants did not consider them debts, but they were secret.

      About 2016 the BC Government and BC Hydro decided that they would discontinue publishing an Annual Report and instead used a “service plan” as substitute. Not producing an annual report is against provincial legislation so they get exemption from the Lt. Governor General. In the world of private corporations not publishing an annual report disqualifies a company from raising capital and the trading of shares. If you read the description of what is a “service plan” you will quickly realise that there is no legal accountability carried by the Minister on down.

      When folks want to confuse the public they change accounting terminology and become even more secretive. We might be about to have such an experience in BC. Last March the current and new Auditor General posted that on March 1, 2022 he/they would be transitioning to some new accounting method. No description or reasoning has been offered since and amazingly I have not read any public comments from MSM.

      I hope this helps folks understand the kind of challenges Norm has in producing this blog.

      Cheers

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    • The debt of BC Hydro will eclipse provincial debt with the rise of interest rates.Taxpayers are on the hook for Site C for next 50 years. Little chance of selling Site C as there would be few buyers unless the buyers could sell the power for more than cost of production. The biggest potential for Hydro assets is the value of fresh water. There would be a big customer to the south.

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    • Not “if it slides down hill”, but “when”!
      How much consideration has been given to loading up the reservoir with millions of tons of water?
      True, they have Engineers involved in these concerns, but they had them at Mount Polley too.

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      • It is a matter of what accountants describe as “debt”. In 2017 the then BC AG described $100 billion as “Contractual obligations”.

        In the case of BCH their portion of that total was about $60 billion. If you wanted to read these contracts like I did, the BCUC will send you a letter saying you can’t because they contain commercial secrets.

        If the contract for the Duke Point generation plant was an accurate sample of what later contracts were constructed like, then all “contractual obligations” guaranteed the the private party certainty of income sufficient to retire debt and cover interest on borrowed financing.

        These contracts are usually transferable and dividable which facilities “off-shoring”.

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  4. Meanwhile at outfits like CKNW, commercials extolling clean, green, and abundant BC Hydro power are narrated by in-house personalities cajoling the general public to go electric.

    How likely is it that a CKNW talk show host narrating one of these commercials will then come back live on air and do a segment properly examining the BC Hydro issues as raised here by Norm, Erik Andersen, Richard McCandless, or Randal Hadland?

    Global and the hosts holding themselves out as journalists should know better. The intent of the commercials is not at issue. Surrender of journalistic integrity is.

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