How to Keep Hydro’s Power Affordable and Convenient

Commentary, Energy, Graham Lane, Manitoba, Uncategorized

Is it still possible to hold future electricity rate increases to the rate of inflation?

Following nine years of rate increases well above the rate of inflation, Manitoba Hydro’s $30-billion plus plan includes increasing electricity rates by four per cent every year for another twenty years. If Hydro is right, the average monthly bill for the average electrically heated house will go from this year’s $160 to $352, if I am right, think $480.

Whether the average monthly bill ends up being $352 or $480 twenty years out, either outcome would be disastrous, particularly for the 30% of households that are lower-income. Annual rate increases should be held to no more than the general rate of inflation. Assuming annual inflation of 2%, the monthly bill for the average electrically-heated house in twenty years shouldn’t exceed $250, far lower than the $480 bill I fear.

Could annual rate increases be kept to 2%?  I say yes, but it will require a major change in plans and a very serious energy conservation and efficiency effort.

Instead of building Bipole III and two new northern dams, the government would have to push the pause button on Hydro’s development plan. Proceeding with a massive expansion is a big deal, particularly in a province with a small population. The Government already owes $30 billion, yet continues recording annual deficits requiring even more borrowing. This despite rising revenues brought about by high tax rates, levies on Crown corporations, service fees and federal transfers.

Government needs to recognize that no major new industry has arrived in over 10-years, while some areas of industrial demand are problematic (Tembec is shuttered, while two smelters and a refinery up north have either closed down or are expecting to close). Large power users like Facebook and Rogers recently bypassed Manitoba, despite our attractive central time zone and presently low electricity rates. As for Hydro’s major export market, America’s mid-west, its economic recovery is not complete and its utilities, while still dependent on coal-fired electricity generation, look to subsidized wind farms and locally sited low-cost gas-fired generation.

In a market that changed five years ago, the NDP Government continues to see Hydro as Manitoba’s oil, and Hydro negotiates long-term contracts with American utilities that have lower cost alternatives.

Circumstances, once promising, have dramatically changed for the worse:

• The 2008 credit crisis led to a recession and stunted industrial growth.

• Abundant shale gas collapsed both natural gas and wholesale electricity prices.

• There is no price on carbon, nor a premium price for Hydro’s renewable exports.

• Cost forecasts for Hydro’s major development plan have soared (will they go higher yet?).

Wuskwatim was built at twice the forecast cost, while spot export sales plummeted to a fraction of what was expected. Pointe do Bois, acquired in the purchase of Winnipeg Hydro, is on its last legs; rebuilding the spillway alone will cost $560 million. Overall, Hydro now projects over $10-billion just to fix, replace and enhance its present infrastructure, this on top of the $22-billion now forecast for Bipole III and the two new dams. The Province will likely require $20-billion in new debt to finance Hydro’s expansion. Then, with overall government debt exceeding $50 billion, how much flexibility will the Province have in the next economic down-turn?

How much lower could future rate increases be if Hydro sought a cheaper expansion?

Unfortunately, Wuskwatim is ‘water over the dam’; its annual losses will have to be factored into future rates.  So will much of the costs already incurred preparing for Bipole III, Keeyask and Conawapa.  Rather than building them, why not defer and await better times? Hydro should build an efficient combined-cycle 850-MW gas generating station while really promoting energy conservation and efficiency.

At no more than $1.25-billion, an efficient gas plant would require only slightly more than 5 per cent of the cost and borrowing now forecast for Hydro’s expansion. And the risk that comes with drought would be reduced by the diversity of supply. The construction of a gas plant would also encourage gas exploration and production in Manitoba – good jobs and resource revenues.

Hydro’s contracts with American utilities would need to be renegotiated and a more aggressive effort to improve electricity conservation and efficiency launched. With a new strategy focused on reliability at lower cost, we could preserve the Manitoba Advantage. No doubling, no tripling of rates.  Also, there would be less vulnerability to exploding construction cost estimates, currency swings, interest rate increases and export prices at a fraction of marginal costs.

PUB’s much too late restricted review, which wrongly considers Bipole III as a sunk cost, is a useless and expensive exercise, not only in the form of money but also of wasted time. The deck, now stacked to favour an outdated, costly and highly risky business plan, needs to be re-shuffled.

Government should reflect on its actions, wake up and return Hydro’s objectives to reliability and the lowest cost for Manitobans.  The Government lacks the social license to over-build and over-spend, sending consumer rates soaring.