B.C. Economic Snapshot Nov. 30, 2013

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The era of low cost hydro is over
the poor will pay the price

VANCOUVER, BC, Nov 30, 2013/ Troy Media/ – Powering B.C.’s future is set to become more expensive for households and businesses in coming years as they are pinched by significantly higher electricity costs.

The B.C. government’s 10-year plan for hydro rates, announced last Tuesday, will result in a series of hikes over the next decade. Rates will increase nine per cent in 2014 and six per cent in 2015. From 2016 to 2018, increases will be at the discretion of the BC Utilities Commission, but limited to an upper bound of 4.5, 3.5, and three per cent over the period. Further increases are expected for the second five-year period from 2019 onwards.

These hikes, along with operating cost reductions at B.C. Hydro and reduced dividend payments from the utility to the government, will fund needed refurbishment and expansion of the provincial hydro infrastructure.

B.C. Hydro forecasts average annual capital expenditures of about $1.7 billion over the next decade, which includes major investments such as the Northwest Transmission Line ($725 million), refurbishment of the Gordon M. Shrum generating station ($272 million), and John Hart generating station replacement project ($1,149 million).


The need for significant investment is not in question. According to latest B.C. Stats projections, the provincial population is expected to rise to more than 25 per cent over the next two decades to near 5.9 million persons which, alongside associated growth in non-residential activity, will drive higher electricity demand.

In addition, the province will also need to meet energy demand from major resource-oriented projects that will drive economic growth going forward, including numerous proposed mines and liquefied natural gas projects. According to B.C. Hydro, the province could face a 40 per cent increase in energy demand over the period.

B.C. residents and businesses have long enjoyed ultra-low and stable electricity rates. In fact, real inflation-adjusted prices generally trended lower from the mid-1990s through most of the last decade.

That era is now over. From 2009 to 2012, approved cumulative rate hikes pushed prices up 30 per cent over the period. Following a 1.4 per cent hike this year, the 10-year plan suggests electricity rates could be 25 to 30 per cent higher by 2018 if increases are near the upper threshold by 2018.

Costs in B.C. will remain comparable to many other North American jurisdictions, but there is little doubt that the combination of recent and proposed future hikes will be an increased burden on for both households and business.

While the cost of electricity will undoubtedly be higher going forward, the impact on household budgets should be kept in perspective. According to the 2010 Survey of Household Spending, direct shelter-related electricity expenditures were about $850 which made up about 1.2 per cent of total annual expenditure and about 1.5 per cent of current consumption (net of income taxes, gifts, alimony etc.). This proportion has likely increased with rate hikes, but it remains a small part of overall expenditure.

By the end of the next five-year period, the average household will see its hydro bill rise by about $300 a year. Part of this increase will be offset by income gains, but most will necessitate a modest reallocation of the household budget – which could mean fewer meals out, or cuts in general spending or saving.

There will also be a distributional impact on households. Although electricity usage and dollar expenditure typically grow with income levels, as higher income households are more likely to own homes and have more discretionary gadgets, the share of expenditure allocated to electricity is actually higher for lower quintile income-earners. This reflects a basic amount of electricity usage needed for households. Lower income households will likely be more strained by the rate hikes, given their greater difficulty in reallocating spending compared to higher income groups which have more discretionary spending.

In addition, businesses will also experience higher operating costs as a result, which will likely lead to some cost-push inflation when the general economy improves, as businesses attempt to pass on costs to end consumers.

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