Analysis

Winnipeg Free Press - PRINT EDITION

Wuskwatim under water -- and sinking

By: Tom Adams

Posted: 07/27/2012 1:00 AM | Comments: 0

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The Wuskwatim Generating Station is shown on July 5. (MIKE DEAL / WINNIPEG FREE PRESS ARCHIVES) Photo Store

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Premier Selinger smiles after touring Wuskwatim Generating Station on July 5. (MIKE DEAL / WINNIPEG FREE PRESS ARCHIVES) Photo Store

Premier Greg Selinger triumphantly opened the Wuskwatim hydroelectric project on the Burntwood River near Thompson on July 5. Responsible for Manitoba Hydro since his first term as finance minister in 1999, Selinger is still adamant the project will provide good value. Selinger's analysis is rooted in the past. With today's realities, he is all wet.

In 2002, the provincial government was convinced Wuskwatim was a winner. Selinger promised a Public Utilities Board review of the justification for the project. In 2003, the government changed course, deciding instead the Clean Environment Commission, an agency with less business experience, would review it.

The gaps in the CEC's final 2004 report are revealing.

Then forecast at $900 million, the CEC claimed "with a 90 per cent confidence level, costs will be within minus eight per cent to plus nine per cent of the estimated cost." Whoops.

The final cost of the project -- still months from completion -- is now estimated by Manitoba Hydro at $1.67 billion.

Using the rosy forecast of $900 million, the CEC accepted Manitoba Hydro's assumption the cost of Wuskwatim power on a levelized basis over the long term would be 6.6 cents per kilowatt hour in 2002 currency. The levelization methodology estimates a constant cost of power over the economic life of the project. Updating, including with the current construction-cost estimate, approximately doubles the previously estimated levelized cost.

The project's completion is now at least 26 months behind the CEC's assumption.

Built to supply out-of-province consumers for at least a decade, the lowest export revenue that the CEC foresaw was a price approximately equal to the 2003 export price. Whoops again -- 2003 was exactly at the recent peak of the export market.

Manitoba electricity ratepayers are now subsidizing the export sales from the province's new generators, including Wuskwatim and new wind farms. Subsidies to exports will grow in the near term and persist for the foreseeable future.

Once lucrative for exports, the U.S. electricity market is suffering the combined effects of a slower Midwestern economy, the rising Canadian currency and the new shale gas bounty now transforming our energy future. On top of this, Manitoba's official assumption the U.S. would implement carbon pricing has fizzled.

Where a kilowatt-hour of electricity earned Manitoba Hydro 6.422 cents in 2003, last year it was worth only 3.09 cents.

Until 2008, export profits held down domestic rates. In 2003, most large industrial customers taking power at voltage levels similar to export customers paid far less than export customers -- 3.23 cents per kilowatt-hour. But now that relationship has reversed. Those same industrial consumers last year paid 4.2 cents per kilowatt-hour -- 36 per cent more than export customers.

Exacerbating this reversal, Manitoba's new wind power generates far less export revenue than Manitoba consumers are committed to pay for it.

What is worse, both new wind and Wuskwatim's output are further glutting the export market.

Domestic demand won't mitigate the glut. Manitoba's consumption of electricity this year is at about the 2008 level.

Now, with Wuskwatim's costs transferring from construction accounts to operating accounts, Manitoba Hydro's equity is tanking and electricity operations profits next year are officially forecast at just $20 million -- just a hair away from zero given the forecast uncertainties. Dwindling equity and miserable profits indicate a cash-hungry utility.

In April, rates increased two per cent. In mid-June, Manitoba Hydro announced it was asking the PUB for another 2.5 per cent hike starting Sept. 1, followed by 3.5 per cent seven months later. Without those increases, the utility credibly claims it faces the specter of red ink.

The utility now assumes rate increases of 3.5 per cent per year for more than 10 years, almost double the utility's forecast of inflation over the period.

Premier Selinger has tried to dodge criticism of Wuskwatim and his long role in the project by arguing the current negative market factors won't last indefinitely and historically, hydro-electric investments have served the province's citizens well.

Based on this airy analysis, Selinger has committed that the current electricity downturn won't delay the construction of Keeyask, Manitoba Hydro's next northern megaproject. Manitoba Hydro's current estimate pegs the cost at $5.6 billion, a cost per unit of installed capacity about equal to Wuskwatim. Site preparation for Keeyask has already begun.

Selinger is just as adamant about pushing the proposed Conawapa generating station -- the warm-up estimate is $7.8-billion -- and the new Bipole III transmission line for $3.28 billion and counting.

Every uneconomic project Manitoba Hydro takes on inflates power rates and squanders Manitoba's one historic undisputed advantage -- rock-bottom electricity prices.

Wuskwatim shows how politically successful power projects can be a path to ruin.

Tom Adams is an energy consultant (www.tomadamsenergy.com), and is a research fellow at the Frontier Centre (www.fcpp.org).

Republished from the Winnipeg Free Press print edition July 27, 2012 A10

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