Winnipeg Free Press - PRINT EDITION

Wuskwatim dam to set scene for future Hydro development

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This is the first of a continuing series of stories that looks at development of the Wuskwatim hydro dam, the first mega project launched by Manitoba Hydro in nearly two decades. The first installment looks at the economic arguments for building Wuskwatim.

By Dan Lett

IF it's so small and low-risk, then why is everyone making such a big fuss about Wuskwatim?

According to Manitoba Hydro, the proposed $1-billion hydroelectric dam on the Burntwood River is a modest, environmentally friendly project with a big economic payoff.

When finished in 2009, it will flood only 0.5 square kilometres of wilderness (a tract of land equal to Polo Park Shopping Centre and the Winnipeg Stadium combined) and generate a modest 200 megawatts of electricity (about four per cent of the utility's total generation output, or enough power to light up Brandon).

And because Manitoba Hydro generates more electricity than Manitobans currently need, the utility will argue that all of the power from Wuskwatim will be exported to neighbouring provinces and states at enormous profit.

You would think that nearly everyone -- environmentalists, consumer watchdogs and political critics -- would willingly stand aside to allow Wuskwatim to go ahead.

But the reality is that Wuskwatim is hardly a slam dunk. As the first dam built by Manitoba Hydro in nearly 20 years, this modest, low-risk project will be subjected to the most rigorous and expensive regulatory review in Manitoba history, beginning in September.

The scrutiny is the result of many factors, including Manitoba Hydro's long-term expansion plans. Wuskwatim is the proverbial tip of the iceberg, the first of four new generation stations now on the Crown utility's drawing board. If Wuskwatim is approved by the Clean environment Commission, it will set the standard for environmental and economic impacts and trigger a quarter-century of dam construction that will double Manitoba Hydro's current generating capacity.

"We have a wonderful renewable resource here that is cheap and reliable and in demand," said Bob Brennan, Manitoba Hydro's president and chief executive officer. "It's only a matter of time until we get to those other projects."

The future of those projects, however, depends on Manitoba Hydro's ability to convince the Clean Environment Commission, and a legion of skeptical intervenors, that the future is not only bright, but that it will be powered by Manitoba electricity.

Wuskwatim's principal function, according to Ed Wojczinsky, Hydro's head of power planning and development, is to bolster the utility's lucrative export energy sales to Saskatchewan, Ontario and the United States. Hydro earns nearly $600 million in export revenues each year -- 42 per cent of the

Crown corporation's total revenue -- which allows the utility to offer Manitobans arguably the lowest energy rates in North America, Wojczinsky said.

However, while Manitoba Hydro currently has an abundance of electricity for export, increasing domestic demand is slowly eating away at that excess capacity, Wojczinsky said.

In its submissions to the CEC, Manitoba Hydro has forecast an annual increase in domestic use of about 1.3 per cent. Even at that modest rate, Wojczinsky noted, in less than 20 years domestic load growth, coupled with the decommissioning of several natural gas-powered generating stations in southern Manitoba, will exhaust Hydro's supply of surplus electricity, and bring to an end the era of export profits.

Key element

The "export doomsday" scenario will form a key element of Hydro's submission to the CEC, and is already a core element in the NDP government's advocacy of Hydro expansion. Energy Minister Tim Sale said in an interview that he has grown impatient with critics who suggest that building Wuskwatim will have a negative impact on domestic rates.

"If we don't build Wuskwatim, even if we pursue wind power and do better on demand-side management (conservation), our rates will go up because we will not be able to maintain our exports," said Sale. "It's very simple. If we don't build Wuskwatim, our rates will definitely rise."

Based on its nearly 100 per cent focus on export sales, Hydro will also attempt to portray Wuskwatim as a nearly risk-free investment. Wojczinsky said Hydro has forecast that the dam will produce an annual return equal to 10 per cent of the project's capital costs, including all borrowing. Thus, even from the first year, the utility will argue at the CEC that Wuskwatim could produce $100 million in revenue.

"If you build a hydro project, it lasts virtually forever," said Brennan. "If you can make money in the first year of operation, you make money forever. I can't imagine ever taking a dam out of service."

However, Hydro's entire economic argument is based upon selling power on North America's energy markets, and the utility's best guesses of how much its best customers will pay. On both of these points, critics are already raising concerns.

Byron Williams, a Winnipeg lawyer who represents the Consumers Association of Canada and Manitoba Society of Seniors coalition at Public Utilities Board hearings, said little information is available right now about the export rates Manitoba Hydro charges for firm and opportunity sales. Hydro argues such information is essentially confidential and would jeopardize its ability to find export customers.

Energy 'products'

Williams said that Manitoba Hydro offers literally dozens of different types of energy "products." Firm contracts with U.S. customers will provide a quantity of electricity on a peak demand "5-16" basis (five days a week and 16 hours a day). These firm export sales offer customers reliable supply, at a fixed cost, over a period of years.

Other "less-firm products" are sold on a myriad of energy trading desks and exchanges throughout North America, where utility buyers seek electricity for peak demand, and utility sellers look to maximize profit from excess capacity, Williams said. These opportunity sales may involve a smaller quantity of electricity sold on an hourly basis to meet a peak demand, and at a huge price.

The exact price is difficult to determine in advance because of a wide array of market conditions that can fluctuate export rates. For example, recent volatility in natural gas prices has been a boon for Manitoba Hydro because it has driven up the costs of natural gas-fired generation.

There is no firm contract in place for Wuskwatim's 200 megawatts but Brennan said he would like to find a firm customer once the dam comes on line in 2009. Until that contract becomes a reality, Wuskwatim's output will be devoted almost entirely to opportunity sales, he confirmed.

Williams said it will be necessary for Hydro to share some information on what it charges for different kinds of products, and explain its revenue forecasts. Without that data, it will be impossible to judge the accuracy of Hydro's forecasts, he said. The utility will also have to be explicit about its market forecasts and how currency, interest rates and other fiscal issues could affect the affordability of Manitoba energy.

"We can't get a sniff of the reasonableness of their assumptions right now," said Williams. "We want to look at the numbers, what kinds of risk they're assuming and their modelling for growth in demand in export markets. Without some disclosure on that stuff, you might as well not have the hearings. This is the single biggest part of their economic argument and we have no way to test it right now."

Brennan acknowledged that forecasting energy prices and other market factors is a difficult process and one that can threaten the long-term financial health of a utility. One need only look at Ontario Hydro, which has been thrown into an energy crisis in large part because of poor economic forecasts in the 1980s and 1990s.

Backed out

Ontario was poised to purchase 1,000 megawatts of electricity from Manitoba's Conawapa dam in 1992 when Ontario Hydro abruptly backed out of the deal. The decision was based, in part, on revised forecasts that showed Ontario's generating system was expected to produce a net surplus well beyond Conawapa's completion date.

That decision turned out to be foolish, especially after Ontario's economy grew much faster than the utility had anticipated, and the province's nuclear generating stations suffered catastrophic mechanical problems. Now, Canada's richest province cannot find enough electricity.

Brennan said the utility will be able to share some information about its export sales but will be prevented from going into great detail. However, he expects the utility will be able to convince the CEC that there are powerful and obvious forces at work in the North American energy markets that cannot help but make Wuskwatim a success.

dan.lett@freepress.mb.ca

Republished from the Winnipeg Free Press print edition July 28, 2003 $sourceSection$sourcePage

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