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The RFQ Process

Who was eligible?

Eligible customers were industrial or large commercial customers who have on-site generation potential and have been served by BC Hydro for at least the last 12 months.

The new generation must be:

  • located in British Columbia on a customer's site served by BC Hydro, and
  • using proven technology, and
  • available to BC Hydro by November 1, 2005, and
  • from a new generator added for this purpose, or from upgrading an existing generator.

RFQ documents

RFQ Questions and Answers

Pricing Q&As

Q: What is the methodology for determining ceiling price?

A: The following supplements the information found in Question & Answers Part II.

During the question and answer section of the 21 June CBG workshop there was a question about the methodology for determining the CBG ceiling price. The following provides this information:

The CBG ceiling price shown on page 8 of the "CBG 2002 Request for Qualifications" (RFQ) package is set equal to a levelized value of the forecast of future electricity prices. This price forecast is comprised of three components:

  1. Short Term (Up to 3 years): Electricity prices are obtained from published forward market information available through brokers and online systems (Dow Jones Telerate Index, Wall St. Journal). Market prices are adjusted with wheeling charges and line losses to estimate the price at the BC - US border.
  2. Medium Term (Years 3 - 8): Electricity prices at the BC - US border are based on a forecast of supply and demand for electricity and cost drivers expected to prevail modeled under a computer simulation of the hourly supply-demand balance for the Western Electricity Coordinating Council which includes the Western US states, BC and Alberta. BC Hydro uses the Henwood Energy Services simulation software, which among other modeling details outlined below, accounts for transmission costs and limitations. The price of the marginal resource at the point where supply and demand are in equilibrium determines the price for that hour. Monthly and yearly average prices are obtained by aggregating the computed hourly prices. Additional modeling details include:
  • Hourly simulation of 20+ WECC areas.
  • Expected WECC load growth (2%)
  • Expected hourly load shape (estimated from hourly 1993 - 2000 loads)
  • Expected BCH load forecast
  • Expected natural gas prices (market forwards)
  • Average water throughout WECC
  • Existing WECC resource base; less expected retirements; plus expected additions
  • Generic resources added to maintain reserve margin targets for WECC sub-regions
  • Expected inflation
  • Expected long term transmission limits, losses and costs

Long Term (Years 9+): Prices are set equal to the estimated unit cost of the most economical resource addition, currently a natural gas fired Combined Cycle Gas Turbine (CCGT), based on the information from a number of market and third party forecasts. Key costing details include:

  • Greenfield project (a new project, not a re-powering of an existing site), located in the Lower Mainland
  • 500 MW F-series Combined Cycle Gas Turbine (CCGT)
  • 2 x 2 x 1 configuration (2 gas turbines; 2 heat recovery steam generators; 1 condensing steam turbine)
  • Capital Cost = 901 C$/kW x 500MW = C$450.5 million
  • Variable O & M cost = 4.54 C$/MWh
  • Sumas gas price = Expected price based on a range of third party forecasts between $3.61 and $5.87 expressed in Real year 2000 Cdn$/GJ
  • Escalation rate = 1.5% per year in Real terms (i.e. 1.5% above inflation rate)
  • Fuel tax = 8%
  • Heat Rate = 7,252 GJ/GWh
  • Unit availability = 92.5%
  • Project life = 25 years

As stated on page 8 of the 2002 RFQ package, BC Hydro will update the CBG ceiling price in September 2002 with the condition that the updated ceiling price for this CBG call will not be less than $49/MWh. Please note this methodology applies to this program and may require changes to properly reflect circumstances.

Q: Is this methodology used to decide on when and whether BC Hydro (BCH) builds their own facilities? Considering current market prices and the methodology suggested the levelized value of future electricity prices will probably calculate to be in the range of $49 per MWh. However, the cost of BCH building a combined cycle gas turbine (CCGT) will probably calculate to be in the order of $75 per MWh. Is it correct to assume that BCH will accordingly decide not to build a CCGT themselves because it is so far above the $49 per MWh figure?

A: Yes. BC Hydro makes decisions to acquire incremental resources (contractual and/or physical) based on the same methodology as is being used in the CBG program. These resources can be developed independently or, more likely, with private sector participation. In doing so, BC Hydro must also comply with any direction from Government. Absent any direction from government, any facilities built by BC Hydro in the future will have to compete with private sector alternatives.

We have no information to comment on the $75/MWh, other than to re-state that (i) the levelized value has to be adjusted for location, and (ii) that any future decisions by BC Hydro would have to be competitive with all the alternatives. With respect to current committed resources on Vancouver Island, we refer you to the 1996 IPP Review Panel Report.

Q: It would be helpful to add to the methodology a discussion on price risk? Consider that the pricing is going to be used to establish 10 to 20 year firm price contracts, what is the impact of price risk by using the short term and medium term market price of power? For example, using the methodology suggested the lowest cost alternative might be to purchase power from the market and not build any facility, IPP, CBG or BC Hydro (BCH). This decision however, would expose the people of B.C. to major future price risk? How does BCH and the government assess this risk?

A: The price offered for CBG is the 20 year levelized (i.e. time weighted average) value of the forecast of future electricity prices. Therefore, this levelized price appropriately corresponds to the period of the purchase contract. By offering a fixed long term contract price for CBG, BC Hydro is assuming the risk that future gas/electricity prices might be lower than currently forecast. BC Hydro is able to justify initiatives such as CBG on the basis that these fix price contracts provide a hedge for our customers against future upside risk on the price of gas/electricity. It is up to the project proponents to assess whether accepting an assured revenue stream but forgoing future upside potential is acceptable.

BC Hydro intends to base future CBG price offerings on the then-current 20-year levelized value of the forecast of future electricity prices. It is acknowledged that this could be higher or lower than the current price offering and that variability is expected to be mainly due to to the influence of short/medium term prices on the levelized price.

Also relevant to this question is BC Hydro's energy planning criteria. In scheduling new resources to meet probable demand growth, BC Hydro limits its reliance on spot market resources to 2500 GWh per year. This limits BC Hydro's exposure to having to purchase high-priced spot market energy.

Q: How is the use of short-term spot market prices reconciled with the time it takes for BC Hydro to purchase and sign contracts and for customers to build projects?

Answer: BC Hydro's intent is to base the ceiling price for the CBG program on the 20 year levelized value of the forecast of future electricity prices over the years corresponding to the contract period. This will be further clarified on the Website in the near future.

Q: The long-term price portion is based on a 500 combined cycle gas turbine (CCGT) facility, how is the operating load factor risk taken into consideration?

A: The forecast of future electricity market prices is developed in the context of the integrated western North America competitive electricity market. These prices reflect a transition from the dispatch cost of the existing mix of resources in the market to the incremental cost of economic new resources.

Participants in a competitive market add new resources based on market price signals. Therefore, as market prices based on the dispatch cost of existing resources meets the full incremental cost of new resources, market participants are incented to bring on these new resources. Of course this needs to take into consideration project lead times.

The detailed market-wide production-costing model used by BC Hydro to determine medium term market prices captures the transition described above. CCGTs are added in the model to simulate the addition of new resources in the integrated market and dispatched along with existing resources to derive a detailed marginal price based on this mix of existing and new resources. The incremental cost of CCGT is assumed to reflect the long term cost of electricity. The "operating load factor risk" is considered in the context of the load growth of the integrated market, which is an order of magnitude larger than the increment of new generation associated with a CCGT.

Greenhouse Gas

Question: Terms relating to GHGs appear in a few places in the RFQ document. Can you please clarify what is meant by these terms, and how they are going to be applied in the CBG process?

Answer: BC Hydro recognizes that there can be two basic types of greenhouse gas (GHG) benefits arising from a customer-based generation project. The first type consists of onsite GHG emission reductions that arise from the displacement of high GHG intensity activities directly at the customer site. The second type consists of offsite GHG emission reductions that arise from the displacement of higher GHG intensity electricity generation at existing BC Hydro thermal facilities.

The first type of GHG benefit remains with the customer, although the customer may decide to try to sell these benefits to BC Hydro or some other third party. The purpose of Question 5.7 of the 2002 Qualification Statement is to assess the likelihood of these particular type of GHG benefits being offered to BC Hydro.

The second type of GHG benefit remains with BC Hydro, although BC Hydro will recognize a value of up to $3/MWh based on the relative difference in GHG intensity between electricity generated from the customer based generation project and electricity generation from BC Hydro's major thermal plant (ie. Burrard Generating Station). This value is used as a credit for ranking purposes during the selection process, and will be used in the EPA as a potential price reduction if the actual GHG intensity of the plant is less than what was expected during the selection phase of the program.

Note that "GHG intensity" refers to the amount of GHG emitted per unit of electricity generated.

Last Modified: May 21, 2003

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