FRE 521C: Wicked Case

Is the South West Coast of BC Geographically Well Positioned as an Energy Export Market?

The South West Coast of BC (SWCBC) hosts a multitude of transport channels for the delivery of goods and people in the United States, Asia, and the rest of Canada. The convenient avenues that this area encapsulates provides a ripe opportunity to trade from and allows one to wonder how well positioned it to export a greater number of commodities, especially those in the energy sector. In this blog article I will explore this question to help determine the viability to the geographical region to explore energy commodities by using a variety of tools and techniques including a Rural-Urban Market Integration model, a business and financial analysis, and an investigation of a some of the environmental effects.

Geography and Infrastructure

To start out with I will define what the South West Coast of BC encapsulates and what services it already has that would make it well positioned to export energy commodities. I define the SWCBC to include the Lower Mainland (Metro Vancouver, Fraser Valley, and the Sea-to-Sky Corridor), the Sunshine Coast, and Southern Vancouver Island (South of the Alberni and Pacific Rim Highway, BC-4). This area includes eight regional districts (Alberni-Clayoquot, Capital, Cowichan Valley, Fraser Valley, Metro Vancouver, Nanaimo, Squamish-Lillooet, and Sunshine Coast) and has an estimated population of 3.48 million inhabitants[1].

The area hosts a large portion of the provinces largest infrastructure that have historically made it an excellent geographical region for export. This includes: the Vancouver International Airport (YVR) (Canada’s second largest airport, by passenger volume[2]); three shipping ports[3], including the Port of Vancouver (the largest port in Canada[4]), the Port of Alberni, and the Port of Nanaimo; access to the trans-Canada highway, the Canadian National Railway, the Canadian Pacific Railway, and Amtrack; aas well as access to the North American Transmission Grid through the Western Interconnection[5].

As a result of these large infrastructure connections, the SWCBC is an attractive geographical region with which to export energy commodities.

What to Export and Why?

The Port of Vancouver currently estimates a large variety of energy products including a large amount of fossil fuels, such as Petroleum Products, Liquid Natural Gas, and other fuels. In 2018 total Canadian exports of these products were valued at $21.6 billion with approximately $15.9 billion being exported to the United States[6]. This indicates that the market for non-renewable energy products is already well capitalized through the Port of Vancouver. As a result, there is little room for exports of fossil fuel based energy commodities to grow until the Trans Mountain Pipeline has completed construction. However, this does not mean that other energy products cannot be exported from the SWCBC.

Since 2015 the government of BC has been building the Site C Dam along the Peace River, about 7 km from Fort St. John, BC. The project is projected to produce 5,100 gigawatt hours (GWh) of electricity each year and have a capacity of 1,100 megawatts (MW). It expected to be completed in 2025 [7]. While the Site C project has come under significant scrutiny[8] during its planning and construction it represents an opportunity for the province to set up an electricity exporting program. A 2014 report established by the Federal Minister of the Environment and the British Columbia Minister of Environment concluded “that the [project] has not fully demonstrated the need for the project on the timetable set forth”[9] meaning that the Site C will generate excess electricity at the time of completion. This excess electricity is what I propose should be considered for export to the United States through North American Transmission Grid through the Western Interconnection.

The Economics of Exporting and Storage

Using a Rural-Urban Market Integration model (figure 1.) we can see the time at which export would be most and least profitable given the rain season of the geographical area. The graph shows a simplified method to understand when electricity would be exported throughout the year. It considers the fact that electricity would be generated in Northern BC, need to be transported to the SWCBC for price = T, and that prices may fluctuate during the year given water flow on the river.

We can see that electricity would not be exported year-round as there would be a brief period where the export price of electricity would be less than the SWCBC price and would thus not make sense to export.

Figure 1. Rural Urban Market Integration Model for Electricity Export.

Consumer Preferences, Economic Externalities, and Environmental Consequences

One of the larger issues with this proposed scheme is the environmental externalities it may cause due to the price and prevalence of ‘dirty’ electricity in the United States. Assuming that all electricity is perfectly substitutable (clean and dirty electricity), that clean electricity from Site C is exported into Washington State, and that increased supply of clean electricity is preferred by consumers, then there will be excess ‘dirty’ electricity in the electrical grid. This excess ‘dirty’ electricity will mean that other localities, let’s say Idaho, that do not have a preference towards cleanly produced electricity will face a market with cheaper ‘dirty’ electricity, making it more attractive to consumers and thus not mitigating any climate effects.

As a result, Washington consumes less dirty electricity while Idaho consumes more, assuming that their markets are similar in size, then the amount of ‘dirty’ electricity consumed will remain the same. As a result, the export policy would not cause extra CO2 consumption or production but could not be marketed as being environmentally friendly.

The Business Case

By analyzed the gross margin of Ørsted, a Danish wind and solar energy firm, we can see what the proposed profitability of the proposed scheme may entail. In 2019 Ørsted’s the gross margin was 32.65%. In the same year the company accomplished a profit margin equal to 12.17%[10]. Using the lowest priced electricity in BC (large general service) we see that the per day cost of being served by BC Hydro is $0.2502 with the cost per kWh being $0.0567[11]. Assuming that electricity is supplied by BC for 75% of the year (273.75 days) and that 25% of the output from Site C is sold to the US, we can see how much approximate revenue would be generated.

273.75 days x $0.2502 = $68.49225.

25% of 5,100 GWh = 1275 GWh

1275 GWh = 1,275,000,000 kWh

1,275,000,000 kWh x $0.0567 = $72,292,500

Revenue = $72,292,500 + $68.49225 = $72,292,568.5

Gross Profit = $23,603,523.61

Profit = $8,798,995.59

From this we can see that BC Hydro would increase its yearly revenue by $72.3 million and would make a profit of approximately $8.8 million per year. Given that the crown corporation lost approximately $441 million in 2019[12] this project would make a small dent in improving the company’s finances.

Conclusion

From this brief analysis we can see that the South West Coast of BC is geographically well positioned to export hydroelectricity given the substantial infrastructure and excess electricity that it can transport. The area is already a large exporter of non-renewable energy products to Asia and the United States, and it can profitably export a wider variety of energy commodities. The Rural-Urban Market Integration model shows that this could be done for the majority of the year given BC’s climate and low cost to transport electricity, and the consumer preferences model shows that on an extremely conservative basis the scheme would cause no increased environmental damage (assuming that the Dam would get built either way). Finally, we can see that given an extrapolated gross and profit margin from another electricity producer, that BC Hydro could make a profit of around $8.8 million if it conducted the scheme. All in all, this analysis shows that the South West Coast of BC is well positioned as an energy export market.

[1] https://www2.gov.bc.ca/gov/content/data/statistics/people-population-community/population/population-estimates

[2] https://www.yvr.ca/-/media/yvr/documents/facts-sheets/2019/12-december/update/traffic-update.pdf

[3] https://tc.canada.ca/en/marine-transportation/ports-harbours-anchorages/list-canada-port-authorities

[4] https://www.csatransportation.com/blog/largest-ports-in-the-us-canada

[5] https://electricity.ca/wp-content/uploads/2017/05/CEA_16-086_The_North_American_E_WEB.pdf

[6] https://www.canadianenergycentre.ca/canadas-ports-and-energy-imports-and-exports-international-comparisons/

[7] https://www.sitecproject.com/about-site-c/project-overview

[8] https://www.ctvnews.ca/business/royal-society-of-canada-academics-call-site-c-dam-a-test-for-trudeau-liberals-1.2914588

[9] https://www.ceaa-acee.gc.ca/050/documents/p63919/99173E.pdf

[10] https://orsted.com/en/investors/ir-material/financial-reports-and-presentations#financial-reports-presentations-and-fact-sheets-2019

[11] https://energyrates.ca/british-columbia/explaining-your-british-columbia-electricity-natural-gas-rates/

[12] https://www.bchydro.com/content/dam/BCHydro/customer-portal/documents/corporate/accountability-reports/financial-reports/annual-reports/BCHydro-Annual-Service-Plan-Report-2018-2019.pdf