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Cablegate: As Bc Positions to Become a Clean Energy Leader, Critical


DE RUEHVC #0042/01 0262232
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E.O. 12958: N/A

1. Summary: Stakeholders in British Columbia's electricity sector
are finally beginning to see some clarity in the BC government's
approach to the procurement and possible export of electricity in
the province. The independent regulator, the British Columbia
Utilities Commission (BCUC), sent shock waves through the industry
in July, issuing a controversial ruling rejecting several major
premises of provincial Crown-owned BC Hydro's Long Term Acquisition
Plan, including the mandate for purchasing green renewable power
over traditional natural gas and large hydro projects. In October
and November, the administration of BC Premier Gordon Campbell
responded, issuing a Special Direction effectively sidelining the
aging natural gas generation plant in question and striking four
Green Energy Advisory Task Forces to provide further guidance.
Critical gaps remain in BC's electricity policy, including a clear
export policy and clarification on private power procurement
practices. In the long run, however, Campbell's administration is
pressing forward with a strong mandate for independent renewable
power for both domestic consumption and export to the U.S. End

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2. BC Hydro is the dominant player in the generation, domestic
sales and export of electricity for British Columbia. As directed
by Campbell's administration in 2002 and reaffirmed in its 2007 BC
Energy Plan, BC Hydro must procure all new generation (with the
exception of one possible future source - the Site C dam on the
Peace River) from Independent Power Producers (IPPs) using
renewable sources, such as wind and water. Ninety percent of the
electricity generated in the province emits no greenhouse gases
(GHGs), and the administration has mandated via the Energy Plan
that it remain this way. All new generation must be GHG net
neutral, and coal and nuclear generation are prohibited for the
foreseeable future. The province must be "self-sufficient" in
energy production by 2016, with the ultimate goal of becoming a
consistent power exporter.

BCUC Says "No" to Private Renewable Power

3.(SBU) Against this backdrop, in its July ruling, the BCUC
rejected BC Hydro's heavy reliance (up to 72%) on Demand Side
Management (DSM)(conservation measures by BC Hydro customers via
various incentive and penalty programs) as being unrealistic, and
declining to endorse BC Hydro's estimates for purchasing IPP
renewable power to meet government's self-sufficiency standard.
Because the BCUC was unconvinced by BC Hydro's argument for DSM to
achieve self-sufficiency, it directed the utility to use the aging
and GHG-emitting 900 megawatt (MW) Burrard Thermal natural gas
power plant located in Metro Vancouver (at present only used for
emergency backup, at ten percent or less of its capacity
annually)to meet power consumption marks. The BCUC justified its
ruling on the basis of cost and reliability, arguing that
acquisition of power from Burrard was cheaper and more reliable
than using the IPPs (particularly given the higher price and
attrition rate of previous IPP projects). In doing so, it appeared
to ignore environmental concerns and goals outlined in the BC
Energy Plan. The July ruling was interpreted by most stakeholders
as a challenge to the government's policy on procurement of
additional renewable power from private producers. The ruling also
jeopardized the much-delayed results of BC Hydro's "Clean Power
Call" - its request for proposals (RFP) from the IPPs. The impact
of the ruling on the industry was immediate. Publicly listed IPPs
experienced sharp declines in their stock values. One IPP President
told us his stock has declined 40% since the BCUC decision was
announced in July. Prior to the BCUC decision, the IPPs had become
a favourite of investors looking to enter the clean energy market.
Companies such as U.S.-based General Electric have invested
significant funds in burgeoning IPPs in BC since 2008.

4. Analysts also suggest that the decision points to incomplete
policymaking on the part of the BC government in its directives to
the BCUC. They note that the Campbell administration is struggling
with setting appropriate guidelines for the independent regulator,
which should be considering power procurement decisions on the
basis of broader criteria than the traditional economic efficiency
model of low cost and reliability of sources. In jurisdictions

where renewable power is a policy priority, green attributes are
beginning to matter at least as much as reliability and low cost.
The critics argue that unless regulators have their decision
criteria re-aligned through legislation or special orders,
disconnects will continue to occur between government policy and
regulatory action.

BC Pushing Ahead with Clean Power Call

5. The BC government undertook several actions throughout the fall
of 2009 to mitigate the effects of the BCUC decision and get its
green Energy Plan back on track. In late October the Minister for
Energy, Mines and Petroleum Resources, Blair Lekstrom, issued a
Special Direction to the BCUC, clearly signalling the BC
government's intent to end reliance on the Burrard Thermal plant.
This in turn clears the way for BC Hydro to continue with its Clean
Power Call for up to 6,000 gigawatt hours (GWh) of renewable power
(1,000 GWh of which is expected from bioenergy). The much-delayed
call (results were expected in June 2009), has re-started, with a
more limited pool of proposals. The utility has dropped 21 of the
68 proposals initially submitted, accepted another 13 to move
forward, and invited 34 proponents to sharpen their pencils and
re-submit proposals to make them "more cost-effective". This move
has reassured some ratepayers with an interest in continuing to pay
among the lowest electricity rates in North America, while some IPP
project proponents feel that they are taking a loss by having to
re-quote at lower price levels. One IPP contact told us that the
high rate of project failures seen in earlier calls suggests that
the lowest-cost project is not necessarily a more viable project.

6. In other actions, the BC Premier announced the formation of
four Green Energy Advisory Task Forces, to incorporate expert
opinions on BC energy policy in the following areas:

a. Procurement and Regulatory Reform - will recommend
improvements to BC Hydro's procurement and regulatory regimes,
particularly concerning the promotion of clean and cost-effective
power generation.

b. Carbon Pricing, Trading and Export Market Development -
recommending ways to advance BC's interest in national or
international cap & trade system(s), and to maximise the value of
BC's green-energy attributes in power generation, domestic
distribution and trading.

c. Community Engagement and First Nations Partnerships - will
recommend ways to ensure First Nations and communities benefit from
renewable electricity generation, and have the opportunity for
input into project development in their regions.

d. Resource Development - will identify impediments to and
best practices for planning and permitting renewable generation in
an environmentally sustainable way, and will work with clean energy
sectors (including for forest fibre) to enhance competitiveness.

Most stakeholders view these task forces, which have been given a
very short time frame to deliberate and report (second week of
January 2010), as a tool to help close some of the policy gaps and
give rubber stamps for the Campbell administration's policies.

7. (SBU) Commentary: The BC government has brought the turmoil of
the BCUC decision on itself, providing inadequate guidance to the
regulators on evaluating future power sources in light of GHG and
climate change concerns, and more generally neglecting strategic
policymaking on resource procurement and distribution/export.
There is certainly much more to come with the results of the task
forces' reports, although it is unclear whether these will be made
public. However it likely that an updated Energy Plan is
forthcoming. With such a short time frame, and given the
composition of the task forces, it is safe to guess that their
conclusions and recommendations are pre-ordained. On the input
side, confidential readouts from our contacts suggest that the
relevant task force will recommend feed-in tariffs for IPP
renewable energy, as was recently legislated in Ontario (which
bills itself as the first North American jurisdiction to do so).
Feed-in tariffs set a guaranteed price paid by the utility for

renewable power (set higher than the market rate), typically
combined with ensured access to the electricity grid. On the
output side, there will more than likely be an overt export policy.
IPPs are calling for it, and have calculated that there will be too
much power procured for merely domestic consumption. Further,
their business cases are premised on profits from eventual exports.
It remains to be seen, however, if the domestic constituency will
support the BC government's plan of becoming a major power
exporter, particularly if it means paying higher electrical bills
at home to tap into all that renewable energy from the IPPs. BC
also faces other hurdles in becoming a net power exporter,
including aging transmission infrastructure and U.S. regulations.
We will report in later cables on the outcome of the task forces'
reports and BC's power export challenges. In particular, we will
report on whether BC follows Ontario's domestic input content
requirement for its feed-in tariff. End Comment.

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