Quebec faces new power struggle

Konrad Yakabuski
Globe and Mail
October 31, 2003

On a steamy Thursday evening last August, traffic on the bridges spanning the Ottawa River was molasses-thick. This situation was not the result of one of those occasional political exoduses to which Canadians have become accustomed over the years. Rather, this time, the cars were headed in the other direction.

You see, Quebec had power. Ontario didn’t.

The Aug. 14 blackout that left Canada’s richest province and most of its U.S. neighbours without electricity underscored what has always seemed an incontrovertible truth: Quebec is a power island, isolated not only by the circuit breakers that surround it, but in its cheap, abundant and clean hydroelectric resources.

Electricity has become a scourge for millions of North Americans jostled by their governments’ messy experiments with deregulation. Quebeckers have been spared this upheaval. There never has been much talk of dismantling Hydro-Québec. The state-owned monopoly remains the embodiment of the "maîtres chez nous" (masters in our own house) slogan that Liberal premier Jean Lesage used to nationalize its competitors in 1962.

By all accounts, it’s been a good deal for most Quebeckers. Electricity rates are among the lowest in the world. And apart from interruptions owing to Mother Nature’s wrath – remember the ice storm? – the juice has been steady and cheaper than ever since the former Parti Québécois government froze electricity rates in 1998.

So, Hydro-Québec gave Quebeckers quite a jolt last week when it revealed that it is rapidly running out of power. The province that only last year exported scads of excess megawatts south of the border, accounting for $3.5-billion or 27 per cent of its revenue, will be barely self-sufficient in electricity next year. In 2004, the power imported during consumption peaks will roughly equal that exported in other periods.

Somehow this seems to surprise people. It shouldn’t.

Since the second phase of the vast James Bay hydroelectric development was completed in the late 1980s, Hydro-Québec has added very little new capacity. Its dreams of building huge dams, notably at the proposed Great Whale River in Quebec and on the Lower Churchill in Labrador, were punctured by politics.

Meanwhile, the utility and its owner have done everything to encourage consumption. In real terms, residential consumers in Quebec are paying 13 per cent less for their electricity today than they did in 1997. Since the vast majority of Quebeckers heat their homes with electricity, that is a powerful incentive to crank up the thermostat.

Second, successive governments have offered electricity at ridiculously low rates to lure energy-voracious industries. Take, for instance, the "risk-sharing" contracts in which electricity costs for a number of smelters are pegged to the price of aluminum. With the latter expected to lag at around 68.5 cents (U.S.) a pound until 2008, according to Hydro-Québec’s own projections, there is no doubt which party comes out on the short end of this deal.

And for what? For a few hundred smelter jobs? Even Hydro-Québec, in its 2004-2008 strategic plan tabled last week, recognizes that these kind of projects constitute "a transfer of wealth to industries whose economic impacts are relatively small."

Yet, two-thirds of the additional electricity demand Hydro-Québec projects by 2008 is attributable to big users who pay the utility’s preferential – read lowball – rate. The Alouette aluminum smelter in Sept-Îles, which is undergoing a $1.4-billion (Canadian) expansion, alone accounts for 43 per cent of the additional demand. This is the result of a political decision. The former PQ government not only anteed up cash but agreed to set aside a permanent supply of 500 megawatts of cheap power to butter up members of the Alouette consortium, which is 40 per cent owned by Alcan Inc.

The result is that Hydro-Québec now says it must build. And build. The utility last week proposed capital expenditures of $3.5-billion annually between 2004 and 2020, for a total of $52.5-billion. Some existing hydro stations would be expanded; several new ones would be constructed, including a 3,000-megawatt (MW) project in the Minganie region on the remote North Shore. The $10-billion project would be the biggest hydro development in Quebec in more than two decades.

To keep the lights on until this new hydro capacity comes on stream, which is at least a decade or more away, Hydro-Québec wants to construct its own 800-MW natural gas-fired generating station and buy another 500 MW from a gas-fired plant that Alberta-based TransCanada Energy Ltd. is supposed to erect near Trois-Rivières. Those projects would substantially increase Quebec’s greenhouse gas emissions just as the province is supposed to start reducing them under the Kyoto Protocol.

Is all of this development really necessary?

Premier Jean Charest’s government will have to sort through that question. The new hydroelectric dams will be much more difficult, and hence expensive, to build than existing ones. This only stands to reason, since Hydro-Québec naturally harnessed the best sites first. So, the incremental cost of producing electricity rises with each new kilowatt of capacity added to the system.

Hydro-Québec buys electricity from Churchill Falls (Labrador) Corp. Ltd. at less than 0.3 cents per kilowatt-hour. Hydro-Québec’s own most cost-efficient stations generate power at less than 4 cents per kilowatt-hour. The plants the utility now proposes building would face production costs of up to twice that amount.

Is there a better way to go, one that doesn’t entail flooding vast amounts of untouched animal habitat or spewing additional greenhouse gases into the air?

Tom Adams, executive director of Toronto-based Energy Probe, suggests a system of "tradable electricity permits" (TEP) under which residential and industrial users alike would be allotted a block of power, based on their historic consumption pattern, at a fixed rate. If they use less than their allotment, they could "sell" the surplus back to Hydro-Québec at the market rate, earning a rebate on their next electricity bill. Similarly, if they use more than their allotment, the extra power would be priced at the spot market rate.

The TEP system could spur so much conservation, Mr. Adams contends, that it would not only erase the need for new generating capacity, it would free up loads of power for Hydro-Québec to export at profitable rates.

The problem with Mr. Adams’ idea is that it lacks the sex appeal of a megaproject. Mr. Charest reacted to August’s blackout this way: "Previous Liberal governments showed vision in developing our hydroelectric resources . . . We need to be vigilant and continue to develop [them] because we are running up against the limits of our capacity."

"Masters in our own house" is still a powerful rallying cry.

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