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Hydro needs a new vision

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Manitoba Hydro currently plans to embark on a $16-billion expansion following its traditional strategy of building big dams in the north and shipping the power south.

It all began with studies in the 1950s, to determine whether or not it was feasible to build dams a long way from where the power was needed and to get the power there cheaply enough to keep Hydro rates affordable. Rural electrification in the late 1940s and through the 1950s meant big increases in demand. So did industrial developments in both the north and south, as well as the return of the peacetime economy and the baby boom of the early 1960s.

The key to making it all work was to massively change how water flowed in the northern rivers, first by damming the Saskatchewan at Grand Rapids. Then flows from the mighty Churchill were diverted to the Nelson, a river much easier to access, being farther south and close to the Hudson Bay Railroad, as well as to Thompson, where Inco was developing a huge nickel mine and a refinery that needed a lot of power.

In 1961, the Kelsey station near Thompson made the development of the City of Thompson and Inco possible. In 1968, the Grand Rapids dam created storage for water in Cedar Lake at the end of the Saskatchewan River, providing alternating current power (AC) to the south.

By the 1977, the Churchill and Nelson flows had been changed, South Indian Lake became a huge storage lake and the way was clear to build a series of dams farther north.

In 1979, the Jenpeg dam provided regulation for Lake Winnipeg, allowing for greater water storage and enhancing the flow of the Nelson. Research with Atomic Energy Canada had solved the problem of long-distance transmission of direct current (DC) power, a uniquely Canadian solution to sending power over long distances without losing too much energy in the process.

Exports to the United States and to Ontario began to absorb a greater proportion of Manitoba's excess capacity, and the first firm power sales to the U.S. began in the 1970s.

Through these complex and imaginative measures, Manitoba Hydro set in place its model for development for the next 40 years, providing Manitobans with stable, very low-cost power, in a highly reliable system.

This is the model still followed today... but... times have changed.

As is often the case with large successful organizations, Hydro became increasingly stuck in a comfortable and frequently lucrative model of operation. In common with many other large electricity-generators, Hydro was not much interested in newer technologies and failed to notice what was really happening with electrical demand in all of its markets, including Manitoba itself.

Even today, Hydro's development plans still focus on building more dams, selling more power to the U.S., while meeting growing domestic demand.

Increasingly, Hydro fought with its regulator, the Public Utility Board, largely ignored the PUB's and other groups' calls for better energy efficiency and refused to seriously examine use of other modes of power generation.

The result has been increasing confrontation with those who do not see more big dams with big debt as the only way forward. More troubling for consumers, Hydro forecasts rate increases of more than 3.5 per cent per year into the indefinite future, saying that these increases are needed to pay for dams, the majority of whose power will be exported to the United States.

In the plainest terms, Manitoba Hydro has failed to make a transition to what Manitoba really needs -- a Manitoba Energy Corporation.

If we had an Energy Corporation, it would have divisions, each one a profit centre. There would be Manitoba Hydro, Manitoba Energy Transmission, Manitoba Wind, Manitoba Geo-Thermal, Manitoba Biomass and, hopefully, Manitoba Energy Research. We would understand that we are no longer in the hydroelectricity business, but in the energy business.

Demand and supply rule power planning, but neither are simple. Demand changes over each 24-hour period, peaking in daytime working hours, and declining at night. It is less on weekends than during the week. It is higher in winter than summer. And each winter is different, needing greater or lesser amounts of power as changing temperatures demand.

Planning a secure supply of power means taking into account all these variables, assessing the risks of power outages of many kinds, calculating what power may be available from other regions or states, allowing for maintenance and accurately forecasting changes in demand.

Because of Manitoba Hydro's commitment to megaprojects such as dams, these big projects can take a decade or more to complete, making forecasting even more difficult.

Underlying all these already complex factors is the fundamental need to keep the lights on, no matter what; in other words to reduce risk as much as possible. Our modern society simply grinds to a halt when the power goes off. The recent pictures of New York make that all too clear. What would happen to Manitoba in winter without power for even two days, let alone 10 or more?

These issues of supply, demand and risk dominate power planning and mean that power generators like Manitoba Hydro become intensely conservative organizations. They hate what they perceive as risk. This means that they tend to look with anxiety and scepticism on new technologies or anything else that complicates their lives. This is generally true across all big power utilities and Hydro is no exception.

Hydro has forgotten it was innovation that brought it to its current place, and instead are fearful of change. But massive change is upon us.

Change comes in many forms. Sometimes it is a huge economic shock, such as the 2008 credit crisis and ensuing recession. Sometimes it is political, in the sense that populations may come to conclusions that challenge our current way of doing things. Malcolm Gladwell has made this point powerfully in Tipping Point, showing where a slowly building change suddenly reaches a tipping point and becomes the dominant paradigm. Climate change is very likely one of those tipping points. Deniers are now few, business is demanding clear public policy, carbon taxes are beginning to appear and the public is largely convinced climate change is mainly caused by human settlement and increased carbon emissions.

But the most pervasive pressures in the 20th and 21st centuries come from new technology. Whether it is the microchip, now found in virtually any powered device, or the solar array seen in large numbers of Ontario communities and throughout the U.S., or the wind turbine, the bio-digester or the coming "smart grid," it is technology that has overtaken power planning.

Jeremy Rifkin speaks powerfully about the new paradigm for energy development. Using the analogy of the Internet, he reminds us that we all are able to be "online" and, with the coming of plug-in Hybrids, fuel cells, community wind power, solar energy, community biomass, geothermal and small-scale bio-diesel, power can come from many more sources, can be generated closer to where it is needed and, hence, provide more reliability and less demand on central, high-cost infrastructure.

Another disruptive technology can be seen in the boom in shale gas and shale oil extraction. While it is too early to be confident that these fields will have sustainable flows after the initial well development, many experts believe shale gas will change the power development world for decades to come.

Already, the low price of natural gas has meant power generation default costs are gas generation, not coal. There is no doubt that horizontal drilling combined with fracturing ("fracking") shale formations which have trapped oil and gas has changed the North American energy picture.

Another powerful change in energy reality is the driving force of traditional economics pushing industry and consumers into seeing energy efficiency as the cheapest form of power generation. Simply put, every kilowatt of energy that is saved through energy efficiency is a kilowatt that does not need to be generated. Studies clearly show energy-efficiency measures cost less than 20 per cent of new generation.

The net result of these changes is risk for Manitoba Hydro has risen sharply. Unless Hydro reshapes its strategy, the scale of that risk could overwhelm Manitoba's greatest asset for the 21st century and beyond.

Hydro has long told Manitobans the greatest risk it faces is the loss of transmission from northern Manitoba because of ice or wind storms. That's not the full story, however. The greatest system risk Hydro faces is actually a fire or explosion in a converter station, especially in the Dorsey station. That's because the huge transformers are not "off-the-shelf" and cannot be easily replaced in a short time. Dorsey, just northwest of Winnipeg, is where the Bipoles I and II terminate, and where the direct current from the north is converted back to alternating current. It is also the critical hub of the entire AC grid that serves all of southern Manitoba. Anything that seriously harmed the AC side of that huge assembly would put our entire power system in the south out of commission for a long time, not just a few days, which would be the case with the loss of a Bipole due to wind or ice.

If a Bipole is disrupted, we can import power from other jurisdictions very quickly to keep the lights on in the south as long as the AC grid at Dorsey is not harmed. That's what we did when the tornado struck in the mid-1990s and knocked out both Bipoles. But if Dorsey is seriously harmed, we would not be able to do so.

Fortunately, after more than two decades, Hydro is acting on this greatest risk by building a second AC grid node at their new station called Riel, located just east of Winnipeg. When this station is connected to American AC lines from Minnesota, we will have much greater reliability in the southern grid.

The greatest economic risk Hydro faces is drought, which occurs roughly once in 10 to 12 years. The last drought in 2002-03 resulted in a loss of more than $400 million and required a great deal of imported power. No one knows what climate change will bring, but there is agreement future weather events will be more extreme than in the past. A long drought would be catastrophic for Hydro's financial situation.

The second-greatest economic risk is rising interest rates during the process of building a new dam. For example, if Keeyask were committed to today, the major expenditures would not occur for at least four years, but the firm sales contracts will have been all concluded. What will interest rates be by then?

Finally, there are risks to power prices. We sell less than 15 per cent of our power in firm export contracts at present. The remaining exports are sold on the spot market, fetching widely varying prices. The PUB estimates that in 2011-12, Hydro sold its export power, at an average of about three cents per kilowatt hour. Residential customers in Manitoba pay about 6.5 cents. So, in reality, it would be better right now to sell all that power to us.

The strategic challenge facing Hydro today is how to manage all these cascading risks while meeting Manitobans' needs for clean energy today and tomorrow. This challenge is embedded in a larger matrix of economic challenges and opportunities. What will climate change demand? What economic-development opportunities await us as a province? What are the new technologies that will drive new jobs, new productivity for Manitobans?

In an uncertain macroeconomy, one of the best strategies is to meet needs with investments that can be incremental, rather than "betting the farm" all at once. A major benefit of that approach is we would not get caught in bruising competition for labour and materials, as happened to Canada's oilsands industry, causing huge cost overruns on already costly projects.

Another strategy should be to seek ways to strengthen our power generation in the south, where most of the demand is. That way, long transmission lines are less needed, and the risks associated with them are reduced. A third strategy is to make much greater efforts at using energy more efficiently. Every kilowatt saved by energy efficiency is worth the cost of a new kilowatt, or more than 10 cents, but will cost, on average, only two cents.

It is also better to use a variety of ways of generating power. That way, when drought strikes, we are not so dependent on that one mode of generation. And it would be best if we could reduce the dollars we send out of Manitoba to buy energy. That way, Manitoba dollars make our economy stronger. If we can do these things and reduce our carbon footprint, that would be even better.

Fortunately, Manitoba already has experience in generating wind power. Communities love it, and Hydro knows it can integrate much more into its grid, at far less cost than building new dams. Manitoba already is Canada's leader in geothermal installations, with more than 11,000 to date. But we have 127,000 electrically heated homes. Converting even half of them would save 400 megawatts of energy and cost Hydro nothing, with the energy savings paying for the costs of the geothermal conversions. Bill 24, which makes on-bill financing possible for energy and water saving retrofits, gives Manitoba a national lead in making our older homes energy-efficient, savings hundreds of megawatts in the bargain. In other words, we have what we need to free up lots of new power for Manitobans and for export. And we will always have the ability to build those two great northern dams, when demand is more certain, and costs are clearer.

There are two big questions that need answers. The first is the easiest: What business is Manitoba Hydro in? The answer surely must be the energy business. Once that is clear and clearly understood, the second question becomes a lot easier to deal with.

It is: Why are you putting all your energy risks in one basket, while raising rates dramatically in order to build new dams when there are clear, affordable and sound alternatives?

Hydro wants the PUB to approve rate increases while building dams to serve export markets. No one seems to have realized this is an abrupt shift from the older strategy -- build new dams in order to keep rates stable and low.

It simply makes no sense to raise rates to build dams for U.S. consumers. If we could build dams with small increases, that might make some sense. The present proposals simply do not.

This is especially the case when it is clear the use of geothermal energy, wind energy and much more aggressive energy efficiency, (demand-side management) would more than meet Manitobans' needs for power, and allow for increases in firm export power sales, at almost no cost to Hydro.

It is time for an independent assessment of Hydro's current strategy by a competent third party. All energy modes should be examined, risks of rate shock and interest-rate shock carefully assessed and a public report made available to Manitobans before any further capital is allocated by Hydro to northern development.

Tim Sale is a former NDP cabinet minister responsible for Manitoba Hydro.

tsale@mts.net

Republished from the Winnipeg Free Press print edition January 19, 2013 J1

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