On November 4, 2014, the BC Government enacted the Domestic Long-Term Sales Contracts Regulation, which requires BC Hydro to establish a program for long-term sales contracts for electricity to LNG facilities within six months, and sets the minimum prices to be paid by LNG facilities for electricity under such agreements. On the same day, LNG Canada also became the first of BC's proposed LNG facilities to enter into a long-term power agreement with BC Hydro for the provision of electricity for its auxiliary power needs. It is expected approximately 20% of the site load (about 200 MW) will be served by BC Hydro power, with the remainder via "direct drive" processes.
The Regulation provides potential investors with an additional measure of cost certainty and should assist them in pricing out projects as they move towards final investment decisions. Under the Regulation, the combined energy and demand charge for LNG facilities will be $83.02 per megawatt hour (MWh) for 2014, significantly in excess of the $54.34/MWh average industrial rate quoted in government news releases.
The choice between self-generation/direct drive and purchasing BC Hydro power has become more clear as a result of the Regulation and the recent Greenhouse Gas Industrial Reporting and Control Act. The latter requires LNG facilities to maintain a carbon dioxide equivalent intensity of less than 0.16 or offset or purchase credits for emissions above that level. It appears, however, that provincial climate change carbon reduction targets will be put under severe pressure as a result.
The Regulation sets out the framework for BC Hydro's program to offer long-term sales contracts to LNG facilities. To a large extent, it reflects marginal cost pricing. Offers must include:
- firm service at 60kV or higher for the purpose of operating the customer's facility, including the operation of the liquefaction, storage and loading components, but not for the purpose of constructing the facility;
- a rate that is the sum of a demand charge and the greater of (i) the industrial rate set by BC Hydro, or (ii) the amounts set out in the schedule to the Regulation; and
- a requirement for the customer to pay the full cost of interconnecting with the system and any system upgrades needed to serve the customer.
The annual "floor" amount set out in the schedule to the Regulation is given as an energy charge, which for 2015 is set at $73.87/MWh.
For comparison, non-LNG industrial customers would pay the industrial stepped rate, comprising a demand charge, a "Tier 1" price for 90% of typical annual consumption, and a significantly more expensive "Tier 2" price for the last 10% of the annual load. The purpose of the Tier 2 rate is to send a conservation price signal.
While the terms of LNG Canada's agreement with BC Hydro were not released, based on public government disclosure, the agreement appears to comply with the requirements of the Regulation.
Another consideration affecting LNG electrification choices is the Kitimat airshed, which is currently under scrutiny following the Kitimat Airshed Emissions Effects Assessment study conducted earlier this year. It is expected that BC will release new air quality objectives in the near future, having repealed their former objectives in 2006. The cost of complying with these objectives may influence LNG proponents' choice between the proportion of site load powered by BC Hydro and direct drive options.
Overall, the Regulation is a positive step forward for LNG proponents in BC because it reduces cost uncertainty. While the BC Government has shifted the cost of developing any new electricity infrastructure required by LNG facilities onto the facilities themselves, there is continued tacit recognition that the effects of direct drive liquefaction on climate change targets (recognizing the new climate fund) are an acceptable trade-off for LNG development.
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