Clean Power Call Review

On March 31, 2010, BC Hydro removed NaiKun Wind's project from consideration for a contract award in the Clean Power Call. The following is a report of our conclusions regarding the decision based on information collected to date.

In addition, the Government of British Columbia passed the Clean Energy Act on June 3, 2010, and we take this opportunity to offer comment.

Clean Power Call and NaiKun Wind's 396 MW Project

NaiKun Wind's 396 MW project was removed from consideration in the Clean Power Call on March 31, 2010. NaiKun Wind felt that it had met the requirements of the BC Hydro Request for Proposals, which included comprehensive project de-risking (e.g. environmental certification, reliable resource measurement, First Nation agreements). We also believed that our proposal was made stronger still by other features that might reasonably be expected to be taken into consideration in a clean energy call, such as eliminating the annual use of 9 million litres of diesel fuel on Haida Gwaii, providing a production profile consistent with load and countercyclical to the Province's abundant hydro-based assets, and bringing the opportunity for north coast communities to benefit from over $250 million in direct spending during construction, many of those benefits to First Nations communities. Although it brought with it no guarantee of success, our project reflected BC Hydro's stated parameters and their environmental, social and economic policies.

For the project to ultimately succeed, it is important for NaiKun Wind to understand why we were not awarded a contract in the current Clean Power Call. In light of recent decisions by BC Hydro and the BC Government, NaiKun Wind is able to offer the following information to help explain the decision.

Clean Power Call Contracts for Less Power than Stated at Initiation of Process

When BC Hydro invited companies to participate in the Clean Power Call, its stated intention was to enter into contracts with larger projects that carried lower development risk, and NaiKun met both of these parameters. BC Hydro also announced a target to purchase 5,000 GWh of electricity, and in its 2006 power call had awarded contracts beyond its target.

As of mid-June 2010, contracts totaling 3,125 GWh had been awarded through the Clean Power Call and projects still under consideration would add 75 GWh to this, if awarded. Contract awards will thus total approximately 60% of the utility's target as stated at the time the Clean Power Call was initiated.

Six large-scale projects, totaling just under 10,000 GWh, were bid into the Clean Power Call, including NaiKun's 396 MW (1,400 GWh) project. It is important to note that none of the six large-scale projects received a contract in the Clean Power Call. It is reasonable to conclude that the smaller size of the Call is one factor behind the decision to exclude larger utility-scale projects.

Power Price

BC Hydro indicated that power price was the reason NaiKun Wind was not awarded a contract. NaiKun Wind was aware that price would be an important consideration in the Call decision and had provided over a dozen possible prices based on a series of "Value Variations", as allowed under the Call's Request for Proposals framework.

The electricity generated by offshore wind comes at a price premium to that generated by some, but not all, other forms of power. All new sources of electricity that BC Hydro contracts with, or builds itself, will increase the utility's base cost, as its embedded historical cost largely reflects legacy assets built decades ago. We estimate that the per-customer impact of initiating the establishment of an offshore wind industry in British Columbia and reigniting economic development activity on BC's north coast would be about $2.00 per month. An unwillingness to pay a premium despite the project's unique benefits and minimal impact on ratepayers seems to have been a key factor in the BC Hydro decision.

Numerous other jurisdictions around the world acknowledge and accept that different forms of power come at different prices, those prices being determined not only by the power that is delivered but the benefits (and, of course, challenges) unique to each source. These benefits make the inclusion of offshore wind an appealing and responsible choice for electrical utilities seeking diversity of supply, and this is particularly relevant in British Columbia, which relies on hydro-based assets and imports for almost all of its power.

Capacity Additions by BC Hydro

Subsequent to the Clean Power Call's initiation, BC Hydro announced plans to purchase rights to one-third of the power produced by Teck Resource's Waneta Dam (June 17, 2009), received Environmental Assessment Certificates from the Province to upgrade its Mica Dam (April 8, 2010), and was given government approval to advance the Site C Dam project to the environmental assessment stage (April 19, 2010), this last decision revitalizing a project that has been in development for decades. Waneta will be a source of 1,000 GWhs of supply annually, the Mica dam capacity increase will add power-shaping ability but only modest incremental output, and, if approved, the 900 MW Site C dam could come on-stream as early as 2020, adding 4,600 GWh.

Needless to say, these additions likely influenced the ultimate size of the Call, as BC Hydro will incorporate them into the resource supply stack it uses to determine future sources of firm electricity.

Need for Power Remains; NaiKun Wind Project Can Play a Role

An assessment based on BC Hydro data and assuming a 100% probability of success for the Site C project indicates that there is still a significant need for the Province to contract for additional electricity in the intermediate term. The insurance provision (discussed in Clean Energy Act section below) accounts for 3,000 GWh of additional procurement, before taking into account any higher-than-assumed attrition from completed power calls or additional power needed to meet economic growth.

We also expect BC Hydro to coordinate a power call of undetermined size to meet the need for export power that will be assessed over the next year or so.

As stated in our Quarterly Update of April 19, 2010, our strategy for the 396 MW project is to engage the Provincial Government and BC Hydro in discussions regarding the role that NaiKun Wind can play in helping the Province deal with the realities of its electricity supply/demand situation. We intend to move as quickly as practical to determine the government's stance toward electricity procurement going forward and its interest in the benefits that NaiKun Wind's project can bring BC Hydro and the Province.

We continue to believe that the NaiKun Wind project offers distinct advantages. The project is a utility-scale clean energy source that can be built in the near term to deliver power to over 130,000 homes in British Columbia or the western United States. Given its advanced stage of development and having secured environmental certification from the Provincial Government, construction can begin within two to three years of the award of an electricity purchase agreement, enabling completion prior to the 2016 provincial deadline for electricity self-sufficiency.

Clean Energy Act Overview

On June 3, the Government of British Columbia passed the Clean Energy Act. We would like to offer some comments.

The list of provincial electricity objectives that opens the Act is excellent, and British Columbians should be pleased with this well-thought-out list of goals. The Act also reinforces the mandate for electricity self-sufficiency for the Province by 2016, while clarifying the "insurance provision" by stating that the Province must have 3,000 GWh of energy over and above the self-sufficiency target no later than 2020. In these regards, the Act remains consistent with government objectives stated in the past.

Absent, however, is any explanation of how and when the Province intends to introduce "fair, predictable power calls," "simplified procurement protocols," and "new measures to encourage investment," as promised by the government in its February 2010 Throne Speech, news releases and other forms of communication over the past few months. We would be encouraged to see the government communicate that it has a comprehensive plan to meet its commitments in this regard. We also believe that waiting for the conclusion to the Integrated Resource Plan, which will be released about 17 months from now, would be too much to ask of renewable energy companies and their investors.

Another key part of the Act calls for BC Hydro to absorb BC Transmission Corporation, thus putting the two entities responsible for the Province's electricity system back under one roof. This decision should result in improved planning and other efficiencies.