On the heels of winning an epic two-year battle for Canadian environmental approval this summer, the international Georgia Strait Crossing (GSX) sea-floor pipeline project offshore of Washington State and British Columbia appears to have foundered on the rocks of higher natural gas prices.

The British Columbia Utilities Commission rejected a gas-fired, 265 MW power project on Vancouver Island at Duke Point that was intended to be an anchor customer for deliveries via GSX. The agency directed the C$370 million (US$285 million) generating station’s sponsor, provincially-owned BC Hydro, to look for a lower-cost plan.

The BC utilities commission said “concerns that supplies of natural gas in North America are being depleted — and will need to be supplemented by supplies from remote areas, offshore and non-conventional resources – support the view that gas prices are likely to continue at recent broadly higher price levels.”

Seasonal patterns of energy consumption make the need to search for the lowest-cost energy heighten the need for building cost-conscious conservation into expansions of the grid, the commission said: “The periods when BC Hydro will need to run the Vancouver Island Generation Project to meet capacity requirements are likely to be times when gas prices are relatively high.”

The ruling said the provincial agency “recognizes the difficulty in forecasting gas prices over the long term” and that unruly conditions on spot markets should not be projected into the future. “Nevertheless, it is widely observed and broadly accepted that natural gas prices have moved to higher levels since the mid-1990s. In part the increase can be attributed to the increased in gas-fired electrical generation.”

The order, requiring the Crown corporation to shop around and call for bids from private-sector sponsors of power generation projects, followed a hearing where five alternative prospects stepped forward. None would rely on the new GSX pipeline, which is a partnership between BC Hydro and Williams Gas Pipelines Ltd.

A leading rival, titled NorskeCanada, intended to draw its gas from the original Vancouver Island gas pipeline, built in the late 1980s from the BC mainland across the Canadian waters of the strait. The system’s proprietor, investor-owned Terasen Inc., is proposing a capacity expansion including compressor additions to the pipeline and a liquefied natural gas terminal on Vancouver Island.

Terasen has told the B.C. commission that its plan would save ratepayers C$179 million (US$138 million) or about 35% over 20 years compared to the GSX-BC Hydro strategy.

In directing BC Hydro to reconsider the gas-and-electricity supply strategy for Vancouver, the commission pointed to an energy policy handed down last November by the provincial government. The program calls for acquisition of power supplies on a least-cost basis, with the private sector taking over responsibility for developing new generation. The commission rated NorskeCanada, a package of modest-sized additions to the power grid to be developed as needed in phases, as a “promising” proposal that “has the potential to produce a lower-cost alternative.”

But, tight supplies, high prices and consensus forecasts calling for more of the same across the North American natural gas market struck a chord in B.C., both among critics of the GSX and BC Hydro cogeneration package and at the utilities commission.

The order for BC Hydro to shop around echoed demands made by Canadian conservation and consumer groups at both a federal regulatory panel’s hearings on environmental aspects of GSX and the provincial review of the Vancouver Island power project. The BC Commission confirmed that there will be a future power capacity shortfall on the Island and they need to move expeditiously to reinforce electricity supply before the 2007-08 winter. But it also said it has found that the need for new supply resources is around 100 MW less than BC Hydro’s forecast for 2007-08.

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