In May, Barclays Bank fired a warning shot across the bow of American electrical utilities. Given Manitoba Hydro's reliance on U.S. export sales, it is a warning we ignore at our peril.
Citing the fast-falling costs of distributed solar and storage technologies, Barclays downgraded its corporate bond rating for the entire U.S. electricity sector. It highlighted the risk of a "defection spiral" in which cheaper and locally available solar drained demand from the traditional grid:
"In the 100-plus year history of the electric utility industry, there has never been a truly cost-competitive substitute available for grid power. We believe that solar storage could reconfigure the organization of the electric power business over the coming decade."
The spectre of consumers defecting from the U.S. grid must be a chilling one both for investors and for Manitoba Hydro, which has premised much of its future prospects on American export sales. And the timing, for the Crown utility, could not have been worse. It came as Manitoba Hydro was facing a review by the Public Utilities Board of its plans to invest $17 billion in developing new hydro dams in the north, and an expensive new transmission line to bring the power south to the U.S.
Barclays Bank is only the latest voice to warn of unprecedented risk in the U.S. market. Hydro's own consultant Dr. Dean Murphy states, "Recently, the future seems even more uncertain than usual."
The American marketplace has already been rocked by sharp price declines driven by vast new supplies of shale gas. Demand for electricity appears relatively stagnant -- a product both of post-recession economic change and unprecedented efforts to help U.S. consumers save energy. Political gridlock in Washington has cast a pall of uncertainty over hopes that carbon pricing would expand opportunities for renewables such as hydroelectricity.
Rapid price declines for solar power and storage may well be the next game-changer.
In June, legendary investor Warren Buffet confirmed Berkshire Hathaway intends to double its $15-billion commitment to wind and solar.
For Manitoba ratepayers, fundamental uncertainty in the U.S. market is not a mere academic concern. Over the next 10 to 15 years, Hydro plans to spend over $17 billion, or roughly $17,000 per Manitoban, on two generating stations on the Nelson River. These projects are being built in advance of Manitobans' own need. Hydro hopes to offset much of its costs through high-value sales to the American Midwest. If these hopes do not fully materialize, Manitoba consumers will pay a steep price in their electric bills.
Until recently, building in advance of Manitoba's need was a tried-and-true investment strategy for Hydro. The building of the Limestone Generating Station in the 1990s and the associated sales of surplus power to the U.S. played an important role in keeping Manitoba electricity prices relatively affordable.
Sadly, the same has not held true for the just-completed Wuskwatim project. Manitoba Hydro is facing a triple whammy of low-cost shale gas, increased U.S. wind production and relatively stagnant U.S. demand. Export prices are far lower than forecast at the time construction was approved. Wounded by the sharp decline in export prices and burdened by capital costs that were far higher than expected, Wuskwatim is a classic underachiever.
Spending $17 billion on two new generating stations only makes economic sense for ratepayers if export prices are much higher than they are now, and if we can be confident Hydro can obtain these prices for decades to come.
Hydro boosters may seek solace from recent initiatives by U.S. President Barack Obama requiring the U.S. electrical industry to achieve aggressive greenhouse gas emission reductions over the next 15 years. These reductions can be expected to hasten the demise of a number of aging coal plants and create opportunities for competing sources of supply including wind, solar, natural gas and hydroelectricity.
But the Obama plan is predicated on states employing energy-efficiency initiatives to deliver what amounts to zero growth in electricity demand. Increased energy efficiency is good news both for consumers and the environment. However, it can be bad news for Manitoba Hydro if it leads to neighbouring states experiencing lower-than-expected demand.
So does this era of unprecedented uncertainty mean all Hydro-related development activities should come to a screeching halt? At this point in time, we are not holding up a stop sign. However, we are waving a bright yellow caution flag.
A sober rethinking of Hydro's ambitions is in order.
The U.S. market can no longer be regarded as a sure-fire road to riches. Nor have we yet calculated the profound cumulative cost of Hydro activities on the people as well as the water, land and species of the Nelson River.
Across North America, electric utilities are being forced to realize their traditional ways of doing things cannot endure. They are taking a fresh look at energy efficiency and at the potential of new cost-competitive renewables such as wind and solar.
Hydro's dreams of economic opportunity must be carefully weighed against very real economic, social and environmental risks. Times of unprecedented uncertainty call for a rethinking of the single-minded pursuit of northern hydroelectrical development as the primary tool to meet the needs of Manitoba ratepayers.
Byron Williams represented the Consumers Association of Canada-Manitoba before the recently concluded "needs for and alternatives to" review of Hydro's development plans at the Public Utilities Board. Gloria Desorcy is the executive director of CAC-Manitoba.