A bid by the Selinger government and Manitoba Hydro to build two new dams and associated transmission lines faces an uphill battle when a special Public Utilities Board hearing on the plan starts March 3.
Two independent reports prepared for the PUB's Needs For and Alternatives To (NFAT) hearing paint a dim picture of the government's expectations of northern hydro development and Hydro's own research. The two studies, requested by the PUB in advance of the NFAT hearing, were done by La Capra Associates Inc. of Boston and Potomac Economics of Fairfax, Va. Both reports, with confidential information on Hydro's pricing for export power sales redacted, are posted on the PUB website.
Collectively, the reports call into question the wisdom of spending billions in upfront capital costs on the Keeyask and Conawapa generating stations and accompanying transmission lines when one or both could be put on hold indefinitely in favour of building less costly combustion turbine plants that burn natural gas to produce electricity.
'The economics used by Manitoba Hydro to arrive at their preference for the preferred development plan is not robust and, depending upon the perspective of the decision-maker, could actually conclude that other development plans are preferred'
-- La Capra Associates in its report filed to the PUB Jan. 24
Hydro's export customers
Minnesota Power: Hydro has a deal to sell 250 megawatts (MW) of firm power for 15 years, starting on June 1, 2020. This contract is contingent on Keeyask construction starting by 2016 and building a 500-kilovolt transmission line to deliver the power to Minnesota. Hydro has the option to exit the agreement if Keeyask is not built.
Wisconsin Public Service: Hydro has a deal to sell 100 MW of firm power for eight years, starting on June 1, 2021. This agreement is an extension of an existing agreement for 108 MW. It's also contingent on Keeyask being built.
Wisconsin Public Service: Hydro is in negotiations for up to 300 MW of system participation and surplus energy sales. It's also contingent on Keeyask.
Hydro has two additional agreements contingent on new hydroelectric development:
A 15-year deal to exchange energy with Minnesota Power, up to 250 MW in any hour, starting on June 1, 2020. The idea is one would store power for the other, such as wind energy, for use at peak times. This depends on Keeyask being built.
A deal to sell 125 MW of firm system power to Northern States Power for four years, starting May 1, 2021. This agreement is contingent on the start of construction in Manitoba of at least 1,000 MW of new hydroelectric facilities by May 1, 2018.
"The economics used by Manitoba Hydro to arrive at their preference for the preferred development plan is not robust and, depending upon the perspective of the decision-maker, could actually conclude that other development plans are preferred," La Capra Associates (LCA) said in its report filed to the PUB Jan. 24.
The Selinger government and Hydro argue two dams are needed in the next decade not only to meet the province's energy needs -- forecast to rise 80 megawatts a year -- but to meet contractual demand to the west and in the U.S.
LCA said much of Hydro's plans, and modelling to back them up, were done two years ago and are now out of date.
"We should also note that these probabilities are the opinions of those experts at that time," LCA said in its report. "Decision-makers or other experts may have a different perspective on those probability assignments."
Potomac Economics said what's changed is the advent of cheap natural gas through fracking (horizontal drilling) in the United States and Canada, which has tapped into a vast supply of natural gas.
"In particular, our models generally rely on lower natural gas price forecasts, lower growth rates of demand and lower quantities of coal-plant retirements," Potomac said in its Jan. 15 filing with the PUB.
Both reports said Hydro's expectations of selling more surplus power on the grid because of the two dams may be overly optimistic.
The government has said revenue from increased electricity sales to the northern U.S. and Saskatchewan will help pay for the two dams and keep domestic prices low for Manitobans, although built into Hydro's plans are annual rate increases of about 3.5 per cent for the next decade.
LCA's analysis found the rates could vary over time, with significant increases forecast in later years.
"While we recognize some value in viewing the potential impact of these development plans over a long time horizon, given the long life of hydro assets, we believe that viewing the results through other, shorter time periods can provide additional and perhaps even more valuable information to decision-makers," LCA said.
What's also working against Hydro is its outlook covers 78 years, which makes it susceptible to market uncertainty and technological advances.
"Given the relatively long time frame of these forecasts, it is plausible that technological advances could reduce the cost or increase the efficiency of the marginal combustion turbine, or cause alternative technology to displace the combustion turbine," Potomac said. "In both cases, the long-run capacity price could fall and reduce the forecast capacity revenues."
Hydro and the NDP government argue hydro sales will rebound when natural gas prices rise and more coal-fired power plants in the U.S. either close or switch to natural gas.
The NFAT hearing is scheduled to run until May 2. The PUB is to issue its report to the Manitoba government by June 20.