Independent Power Producers

This case study covers the Independent Power Producers scheme in the British Columbia province under the centre-right British Columbia Liberal Party from 2002.

Introduction

In July 2014, British Columbia’s then Minister of Energy visited Kwoiek Creek to meet representatives of the Kanaka Bar Indian Band for a tour of their newly opened 49 MW hydroelectric power station.

This was a project that Kanaka Chief James Frank had worked on for decades. When private companies had started selling electricity to British Columbia’s grid in 1988, he had asked: “If they can do it, why can’t we?” Twenty-six years later, the Kanaka had a 50% stake in a hydroelectric power plant and a 40 year electricity purchase agreement with the province’s electricity board.

The 2002 British Columbia Energy Plan increased the province’s energy capacity in a way that empowered the private sector and communities, and which moved risk away from the state. The years 2002-2017 saw a “rapid growth of new clean energy projects” in the province. The Energy Plan was implemented by the centre-right British Columbia Liberal Party, and demonstrated clear conservative and market-driven leadership on energy. The reforms of the Energy Plan let the market into British Columbia’s nationalised electricity grid.

Today, 25% of British Columbia’s electricity comes from privately owned clean energy generators like Kwoiek Creek. IPPs have proven to be a successful conservative alternative to state investment for building green electricity capacity.

Dam Big Hydro

Until 2002, virtually all electricity in British Columbia was produced, distributed, and sold by BC Hydro – a provincial Crown corporation. Eighty nine percent of electricity used in British Columbia is hydroelectric, with BC Hydro operating 31 hydroelectric dams. The balance of generation sources has not changed significantly for decades: most of the large hydroelectric facilities date from the “big dam era” (1950s-1970s).

Hydroelectric power is among the best forms of electricity generation. A large hydroelectric dam can provide firm power at a very high capacity without burning fossil fuels, creating waste, or releasing greenhouse gases. Dams also last a long time: the Silversmith Power & Light Generating Station in Sandon, BC has been generating power since 1897. Hydroelectric dams are electrical generation at its finest: long-lived, firm, and clean.

While they last a long time, building a new hydroelectric dam is a lengthy and costly process. BC Hydro’s newest dam, the “Site C” dam on the Peace River, was planned in the 1950s. It should be fully operational by the end of 2025 at a cost of approximately $16bn to the provincial ratepayer since 2010 alone. It was estimated in 2004 that Site C would cost between $2.3-$3.2bn.

There is an alternative. Since the 1980s,  centre-right governments in British Columbia have encouraged private sector development to make up shortfalls in capacity. 

The need for IPPs

There are no rich countries with low energy use. Energy is required to grow an economy, and its use is a hallmark of development: in the 1980s and 1990s ordinary British Columbians began buying luxury electric goods. BC Hydro predicted that if electricity use continued to grow, the province would be importing electricity by 2007. Barry Penner, a BC Liberal MLA, was early in making a conservative case for expanding supply rather than just improving efficiency: “You just have to think of all the new electronic gadgets [...] to realize that no matter how much people talk about conservation [...] the bottom line is that we've all gotten used to using electricity.” 

British Columbia had enjoyed low electricity prices, but a largely stagnant capacity. BC Hydro had begun to subsidise industrial energy conservation in order to reduce demand and avoid the capital cost of building new power stations. Keeping prices artificially low by using only BC Hydro’s existing dams – known as heritage assets or heritage hydro – meant an effective degrowth policy. In the short term this would harm the economy, and in the long run make it impossible to meaningfully lower emissions, as there would not be sufficient electrical capacity for fossil fuel heavy parts of the economy such as transport, industry, or heating to go green. 

The BC Liberals realised that this was unworkable. People wanted their “computers, cell phones, larger TVs, DVDs, [and] microwaves”, and if generation capacity didn’t grow then British Columbians would be faced either with blackouts or expensive electricity imports.

Under the Liberals’ energy reforms, BC Hydro’s purpose was made clear: produce as much clean energy as possible, and let“conservation simply [take] a back seat”. British Columbia’s economy saw significant growth in the years after the financial crash, and was the fastest growing Canadian provincial economy in 2015. Energy intensive construction was a key sector leading that growth. More power stations need to be built to keep up with lifestyle changes, grow as an economy, and move away from fossil fuel use.

The Liberal Party government took a free-market approach to this problem and “embarked on a comprehensive restructuring of British Columbia’s electricity system in order to eliminate the role of the public sector” in new electricity production, in order to increase capacity.  A strong economy needs energy, and protecting the environment needs that energy to be green. British Columbia has proved that you can have both. 

Run-of-river hydro

Another interest of Barry Penner’s was small-scale run-of-river (ROR) hydro power stations. He promoted the idea of ROR in the Legislative Assembly in 2001, and it soon became a cornerstone of provincial electricity policy. 

ROR utilises height differences found naturally in the landscape rather than flooding valleys to make reservoirs, and does not completely impede the flow of a river. As this avoids the large displacement of land animals, the impeding of fish migration, and the overall dramatic ecosystem change of flooding a valley, ROR hydro is better for nature than big dams are. Site C exhibits the most significant adverse effects ever reported in a federal environmental assessment, according to a University of British Columbia study, and it has taken so long to build that there have been books written about its environmental costs. ROR is better. Penner claimed that: “There is virtually no environmental impact.”

Differences between large scale hydroelectric dams and small run-of-river hydro

There are some environmental concerns with ROR, raised in particular by the Western Canada Wilderness Committee. The majority of research on ROR environmental damage suggests that while there could be wider impacts to river ecosystems, these are very difficult to judge, however the immediate impact to fish seems negligible. A 2016 UK Environment Agency study concluded that there were “no statistically significant impacts… on 5 out of 6 widely used fish metrics.” Other studies have been inconclusive in proving any connection between ROR and a decline in salmon population.  British Columbia’s landscape lends itself to conservation in this case, because of the need for steep drops ROR hydro is generally located upstream of natural fish barriers like waterfalls.  

A downside of ROR is that you need a larger number of power stations to create the same amount of electricity, and so economies of scale may be less effective and deliver higher energy costs. There is a trade-off to be made here against the environmental damage caused by larger-scale power stations.

WWF considers that the “best option” for nature when building hydroelectrics is “to avoid negative impacts from the outset.” One method of this is ROR. The starting point is that British Columbia needs more green electricity, and that whilst ROR studies may show a minimal amount of environmental degradation, the assessments on big dams are very conclusive in saying that they are bad for the environment. ROR is preferable. Weirs do not fully impede river flows as dams do, and ROR does not require a valley to be flooded to create a storage reservoir.

Implementation

The 2002 British Columbia Energy Plan prohibited BC Hydro from building new power plants and instead ordered it to purchase more electricity under Electricity Purchase Agreements from IPPs.

Electricity Purchase Agreements (EPAs) are contracts between BC Hydro and an IPP for the supply of a certain amount of electricity per year over a long term (usually 20-40 years), which BC Hydro will purchase at an agreed price per MWh. Purchase of electricity would begin at the Commercial Operation Date (COD) of a facility. The $/MWh was set to rise at 3% a year, which is just below average inflation. When EPAs expire, there is usually an opportunity for a contract renewal. Under an IPP’s second contract, the $/MWh price is lower than the end of its first contract, as developers ought to have “recovered most of their capital costs over their original contract terms.” Alternatively IPPs can sell their electricity elsewhere.

The IPPs before 2002 were small businesses “funded through their own resources, venture capital and limited public offerings.” The smallest of these have been known as “Mom and Pop” hydro: projects of just a few megawatts. Ron Williams owned a disused mining dam; Jeff Ankenman and Sue McMurtrie saw potential in a stretch of river disturbed by a former highway bridge. EPAs gave entrepreneurs like Williams, Ankenman, and McMurtrie the security to invest significant capital in development that might otherwise have been financially unviable. Williams spent $320,000 in the late 1980s converting his dam to hydroelectric power; in 2019 it powered between 40 and 50 homes. Ankenman and McMurtrie borrowed $250,000 in 1997 on the back of securing an EPA, and in 2018 the 200 KW it generated that year was sold to BC Hydro for $84.86/MWh. 

This was a model that conservatives saw as worth harnessing on a larger scale: it promoted private investment at a very localised level by individuals with a personal stake in the environment, rather than a state-driven production drive. The Energy Plan aimed at the creation of a “financial and ownership framework designed to promote investment in BC’s electricity system” through long-term EPAs issued in regular “Calls for Power.” 

The first Call for Power awarded EPAs to 16 IPPs. Most of these were prospective sites. Critics complained that BC Hydro could have developed the sites itself – it had identified many of them – however identifying a possible site for ROR did not necessarily mean that it would be financially viable. Fifty-six percent of IPPs issued EPAs in 2006 never reached operation. Decades-long EPAs were a means to encourage investment by providing “an attractive, and certain, investment climate for private sector developers who were able to accurately predict profitability for their owners and shareholders.” The 2002 EPAs required stations to be commercially operable by 2006 at the latest.

Here the conservative case for IPPs is evident. The risk of exploratory work was undertaken by the private sector. IPPs were guaranteed an income, however they weren’t guaranteed passing an environmental assessment or finding funding. They could easily fail either hurdle, at no financial loss to the provincial taxpayer. 

IPPs “began to grow in earnest.” In 2009 there were 46 projects in operation and an additional 38 proposed or under construction. By 2014 IPPs represented 20% of domestic supply, which rose to 25% by 2023. Eighty per cent of independent electricity came from either ROR or storage hydro, and a further 12% from wind. 

Not all IPPs are “Mom and Pop” ventures. Innergex is among the largest private renewable energy producers in Canada. It owns, or has a stake in, 11 IPPs across British Columbia, with a combined capacity of 297.5 MW. For context, the average Canadian home uses about 1 MWh a month. 

The 2002 Energy Plan marked a shift in British Columbia’s electricity landscape, redefining the role of the public and private sectors in energy production. Through long-term EPAs and clear pathways like the Calls for Power, the BC Government fostered a surge in IPP activity at all scales, from small, “Mom and Pop”, First Nation, or community-driven projects, to large ventures from multinational corporations. All of these were built at no immediate cost to the provincial taxpayer. 

Use of deregulation to incentivise nature-friendly construction

One of the more controversial aspects of the way IPPs are approved is the environmental assessment (EA). Anti-IPP organisations such as the Western Canada Wilderness Committee are keen to point out that ROR IPPs under 50 MW do not need a full EA. This sounds like a failure of environmental protection, however it can also be viewed as a use of specific deregulation in order to encourage private investors to take more environmentally friendly decisions.

A full EA is a lengthy and costly process, requiring extensive assessment before construction can begin. Removing the need for an EA for smaller scale development has meant that many companies, as rational actors, will save money and time in preparing an EA by simply building less than a 50 MW capacity. Developers have been “quite frank in admitting that the Ministry [of Environment] requirements have ‘a direct bearing on project finances’ and thus” building >50 MW becomes an easier choice. The best option is to “avoid negative impacts from the outset.” The effect of removing a regulatory burden for small-scale development was to incentivise IPPs which were less environmentally damaging in the first place. The 50 MW threshold is an effective device for empowering individuals and small-scale IPPs as well as encouraging large developers to work in ways that are better for the environment.

Calvert predicted that generation stations with capacities of 50 MW or less would be built en masse without EAs and then upgraded to larger scales. However this has not been the case over the last 18 years: there are fewer than 20 hydro IPPs larger than 50 MW, and a number of those were preexisting storage dams rather than newly built ROR. In comparison, there are 39 hydro IPPs which are >10 MW, all of which are ROR.

Similarly the Standing Offer Program (SOP) was “designed to allow small projects a streamlined, ad-hoc EPA process with BC Hydro, rather than having to bid through a power call.” SOPs were initially for projects with a capacity of under 10 MW, which was later raised to under 15 MW. Again, small-scale development was incentivised through streamlined, less bureaucratic, regulatory programs.

The presence of regulation in itself does not mean that environmental standards are upheld. Site C has gone through decades of environmental assessment and is still being built at a significant environmental cost. A simple piece of regulation like the EA framework, where IPPs over a certain size have a more complex process, has proven an effective method of keeping development within nature-friendly scales.

IPP criticism: the imaginary perfect is the enemy of the real good

Some criticisms of IPPs, often coming from established environmental organisations such as the Wilderness Committee, are prone to letting the perfect become the enemy of the good. The anti-growth arguments of the early 2000s have been mapped onto environmental grounds, however they remain politically charged. If British Columbia is to avoid importing electricity, it needs to either (a) build coal or gas power plants; (b) build big dams; or (c) continue with IPPs.

Many of the environmentalist critiques of IPPs are anti-development rather than seeking the best practical environmental solution. This is particularly evident when the Wilderness Committee criticises both Site C and IPPs with equal venom. There is no perfect solution to energy generation. The Wilderness Committee advocates for nationalisation of all energy generation, but yet rallies against the environmental degradation of Site C, which is entirely built by the state. This is putting politics above the environment. 

The state can (and does) make poor environmental choices like Site C. When an IPP is built the developer at least has to prove itself to external environmental regulators rather than signing off on its own homework. In the same vein, environmental regulation is not inherently beneficial if it is not enforced.

IPP criticism: Zapped and nationalised degrowth

In 2007, John Calvert claimed that an increase in the cost of electricity generated through IPPs would be clear within a decade. In 2019 he seemed vindicated: Zapped, a report for the Ministry of Energy, was interpreted as the writing on the wall. According to the left-wing NDP/Green coalition in government at the time, Zapped “details how the [BC Liberal] government manufactured an urgent need for power… requiring the public utility to buy power from private producers at inflated prices.” Zapped was a political piece expressly written to find private sector failure. The realities of the electricity market are more complex than Zapped makes out.

According to Calvert, in 2003 electricity from BC Hydro’s heritage assets was $5.43/MWh, but BC Hydro was buying power from IPPs for an average of $58.59/MWh. This seemed damning, but it had been over 20 years since BC Hydro had significantly expanded its capacity despite increasing demand. This is not a useful comparison as IPPs were a growing part of the energy landscape. 

The price artificially separated from the market was the cost of heritage hydro, not the IPPs.

When electricity prices in British Columbia and the Canadian national average are adjusted for inflation, the disconnect between BC Hydro heritage prices and the market cost of electricity becomes clear. When capacity had recently been enlarged in the 1980s, prices in British Columbia were higher than the market rate; when capacity remained stagnant prices dipped below the market; when capacity was enlarged again after 2002 the price rose back up to the market rate. The highlighted section shows 2002-2017, when IPPs were used the most under the centre-right Liberal government.

Furthermore, the chart shows that once IPPs began to come online in large numbers – around 2006-2010 – the price of electricity in British Columbia did not see major anomalies compared to the Canadian average. Zapped’s claim that IPPs are being paid significantly over their market rate for electricity is inaccurate. This inaccuracy comes from a comparison of firm prices to the more volatile spot market. The surge in price after IPPs began to enter the market was a market correction.

British Columbia had been shielded from changes in the electricity market for a decade, however its stagnant capacity meant it would have been impossible for this to continue without blackouts or degrowth.

There is no way that in today’s world of environmental protection and planning permission BC Hydro could have built up around 25% extra clean capacity within 15 years at a lower cost than the IPPs did collectively. Site C is the first big dam built since the 1970s, and it spent most of that time in stages of environmental assessment. Even when operational it will only add 8% more capacity. Since 2010 Site C has cost $16bn for a future additional 1,100 MW capacity. The criticism laid at IPPs is that they have cost $17-25bn for an active additional 5,298 MW capacity. At the top of that price scale, IPPs have cost BC Hydro $4.7 million/MW capacity, compared to $14.5 million/MW capacity for Site C. 

This comparison is imperfect. Site C will pay itself off over time, and the cost of its electricity will come down in a way that IPPs won’t. However to meet a continuously rising demand, BC Hydro would have to be continuously building new dams, so the artificially low price of the 2000s would never be reached.

Instead, IPPs have allowed the capital investment and risk of building hydroelectric power stations to be taken on by the private sector. This has also encouraged means of electricity generation that are better for the environment and communities than big dams. IPPs are spread across 119 different sites, most of which cause less environmental damage in both installation and operation. While Site C has caused significant friction with local people, including First Nations, many IPPs have been community or First Nation owned.

The future of IPPs

Despite mounting opposition against the centre-right BC Liberals for implementing IPPs, the centre-left New Democratic Party (NDP) have issued several Calls for Power since forming a government in 2017. Proving the concept of IPPs, the NDP has recently used them to encourage wind development. British Columbia now has 702 MW of installed wind capacity, representing 4% of its total. Much of this development has been through IPPs. The principle of BC Hydro purchasing clean energy from the private sector through EPAs remains a strong one. 

A disappointing development is that since the BC Liberals left power in 2017 many small hydro IPPs have not seen EPA renewals, and EPAs have not aimed at hydro. However these are policy changes which could easily swing in the other direction in future. IPPs will remain a part of British Columbia’s energy landscape in the years to come.

Lessons to be learned from IPPs

• System operators can make long-term offers without taking on risk. Issuing EPAs which do not pay out until power is generated shields the government or national grid operator from the risk of investment and development (exemplified by the billions spent on Site C), instead encouraging the private sector to bank on a future power payment and innovate.

• Make smaller nature-friendly development easier. Apparent loopholes in environmental regulation for types of development which have little-to-no impact on nature have demonstrably worked in encouraging small-scale and nature-friendly development as investors look for loopholes.

• Give communities a buy-in. The list of people who act as IPPs demonstrates that this policy has engaged with a variety of community stakeholders. This is not just big business profiting from renewable subsidies (as UK models have been criticised for in the past) but allows for small individual plants; First Nation groups, and local government alike to get involved in power generation. Community involvement and clear benefits can help to overcome local objections. 

• Make development easier and the private sector will invest. Transmission and security of investment return are the main barriers to private investment in clean energy. Ease of connection to the national grid, and assurances that the national grid will purchase generated electricity for a period of time, are necessary to encourage investment at all scales, from micro ROR hydro to large-scale wind farms.