ATLANTIC CANADA/STATEOF MAINE: ELECTRIC AND NATURAL GAS

UNCLAS SECTION 01 OF 04 HALIFAX 000040 SIPDIS COMMERCE FOR 4320/MAC/WH/ON/OIA/BENDER DOE FOR INT'L AND POLICY (PDAS DEVITO) AND IE-141 (DEUTSCH) OES/EGC (MIOTKE AND DEROSA) STATE FOR EB/TPP/BTA EB/ESC/ISC (MCMANUS AND ERVITI),WHA/CAN (WHEELER) STATE PASS FERC FOR CHAIRMAN WOOD, KEVIN KELLY AND DONALD LEKANG E.O. 12958: N/A TAGS: ECON EPET ENRG ETRD CA SUBJECT: ATLANTIC CANADA/STATEOF MAINE: ELECTRIC AND NATURAL GAS SUPPLY AND MARKET DEVELOPMENTS REF: A) 03 OTTAWA 1924; B) 03 OTTAWA 566; C) 03 OTTAWA 503; D) 03 HALIF 58; E) 02 OTTAWA 3205 SUMMARY/INTRODUCTION -------------- ¶1. Several energy infrastructure projects being contemplated in New Brunswick and Nova Scotia promise to bind Atlantic Canada further into the northeastern U.S. gas and electric grids, with likely benefits for New England energy consumers: - Refurbishment of NB Power's Point Lepreau nuclear generating station (awaiting GoNB political approval). - Construction of a major power line from Point Lepreau to Bangor (awaiting State of Maine approval). - Break-up of provincially-owned NB Power into five new entities (awaiting GoNB legislation). A long run objective among New Brunswick energy leaders is to encourage an integrated electric power market covering New Brunswick, Nova Scotia, Prince Edward Island and much of northern Maine. - Proposals for liquefied natural gas (LNG) terminals in both provinces (one near Saint John, New Brunswick is expected to start construction by June). - Either LNG terminal, if completed, would require expansion of the Maritimes and Northeast Pipeline (M&NE -- which runs from offshore Nova Scotia through New England) to approximately twice its current capacity. ¶2. Mission ECON staff paid calls on several government and industry players in New Brunswick and Nova Scotia during late January. This report, which is based on those conversations, is a joint effort of Amconsul Halifax and Amembassy Ottawa. END SUMMARY/INTRODUCTION ELECTRIC POWER -------------- ¶3. Northern Maine's power grid is closely integrated with that of Atlantic Canada. Bangor Hydro is controlled by Halifax-based Emera, the dominant power firm in Nova Scotia. NB Power officials say that the grids in two Maine counties - Aroostook and Washington - are in effect "part of the New Brunswick grid." In 2003, NB Power exported roughly 2 terawatt-hours of electric power to Maine (net of imports). Given recent declines in net power exports from the rest of Canada, NB Power now accounts for around 30 percent of Canada's net power exports to the United States. NB Power has also historically supplied virtually all of the power needs of neighboring Prince Edward Island. ¶4. In New Brunswick, the electric power industry is dominated by provincial government-owned NB Power. NB Power has a mix of hydroelectric and fossil-fuel generation plus a single-reactor nuclear plant at Point Lepreau, about 30 miles from Calais, Maine. A decision is required soon on whether to replace, refurbish, or decommission the 22-year-old reactor. ¶5. New Brunswick's options for additional generation are limited. Despite the presence of the M&NE pipeline (see below), natural gas is not currently available in New Brunswick at prices which would make it economic for power generation. Few undeveloped hydroelectric sites are available. The remaining options - burning imported coal or oil - are relatively polluting and carbon-emitting. They are thus likely to conflict with the Government of Canada's commitment to implement the Kyoto Protocol. Industry representatives await clarification of this policy, which will probably take several more months - meanwhile, they summarize this problem in the words "regulatory risk". ¶6. REACTOR RENEWAL: Provincial government energy officials and NB Power executives are currently hanging on a GoNB decision on the future of the Point Lepreau nuclear plant. Regulatory approvals are already in place for refurbishment, but the financial cost would be high to purchase large amounts of replacement power while 380 fuel channels in the reactor core are replaced and the turbines and generator are reconditioned. ¶7. In 2002, citing "no significant economic advantage" from refurbishing, provincial regulators recommended against it. However, Department of Energy officials believe the arguments in favor of refurbishment have strengthened since then, as the price outlook for natural gas (the main alternative) is now even higher. Moreover, they say the regulators did not consider the value of refurbishment in avoiding future greenhouse gas emissions, particularly vis-`-vis coal, which is the lowest-cost option. Finally, the nuclear option has the added attractions - particularly for a relatively low-income, high-unemployment province - of being both high-technology and relatively labor-intensive. ¶8. Whether or not the GoNB decides to refurbish Point Lepreau, building a second reactor at that site is also a possibility. Without outside financing, this would be even more costly than refurbishment. The GoNB is exploring the potential for private sector participation in either option, and/or for Point Lepreau to be a "demonstration site" for the latest reactor design offered by Atomic Energy of Canada Limited (AECL). The latter idea is based on hopes that AECL would foot most of the bill - but AECL in turn awaits a decision from the GOC, its sole shareholder, on options for AECL's future access to financing. ¶9. TRANSMISSION LINE TO BANGOR: Whatever happens at Point Lepreau, NB Power also hopes to proceed with construction of a transmission line from the Lepreau area to the vicinity of Bangor, Maine (where the receiving utility, Bangor Hydro, is owned by Nova Scotia's Emera Inc). This line could be completed by 2007 and would carry power in either direction depending on seasonal and other requirements. NB Power officials say that all approvals still needed are on the U.S. side, and are environment-related: some Maine stakeholders continue to demand that the line to follow an existing (but longer) corridor farther inland, which would be less economic. ¶10. ELECTRICITY MARKET DEVELOPMENT: Atlantic Canada and Maine are lightly populated and their electric demand is strongly winter-peaking. New Brunswick energy officials expect this entire region to have a significant power scarcity problem by the winter of 2007-08 due to the shutdown of aging generating assets before new plants are built. Gains in both cost and reliability can be expected from integrating the regional grid and facilitating power trade with the rest of the U.S. Northeast, and this makes up much of New Brunswick's current strategy for addressing the scarcity problem. They add that it has the potential to greatly reduce the vulnerability of northern Maine to power outages. (While neighboring Quebec is a major exporter of electricity from hydroelectric dams, it has few interconnections with New Brunswick and virtually none with Maine - and these small markets are a very long way from Quebec's reservoirs). ¶11. As of April 1, 2004, NB Power will be split into five new corporate entities (generating, transmission, distribution, nuclear, and a holding/services company) plus an Independent System Operator (ISO). NB energy officials told us that, while they use U.S. FERC requirements to justify this publicly, they are really planning for the anticipated power scarcity in 2007-2008 - when the new structure will allow them to invite proposals from independent power producers. They also hope to share experience/models with counterparts in Nova Scotia, which plans to initiate a wholesale power market in 2005. NB officials admit that a really integrated regional power market in Atlantic Canada will take "another generation," and that for the current decade, they are working toward "seamless" clearing of power trades between the provinces' still-separate power grids. NATURAL GAS TRANSMISSION -------------- ¶12. Nova Scotia's offshore Sable Island energy project began producing natural gas in early 2000. Most of this gas is transmitted to New England via the Maritimes and Northeast Pipeline (MNE),which also has lateral lines serving industries near the Strait of Canso plus the urban areas of Halifax, Moncton and Saint John. For more on the prospects for production of oil and gas from Atlantic Canada's continental shelf, see refs D and E and other reporting from Halifax. ¶13. The terms on which New Brunswick and Nova Scotia communities and industries can access this gas has been a sensitive political issue. Energy exports into the United States are licensed by Canada's National Energy Board (NEB), which generally defers to market forces. In order to buy gas from the MNE pipeline, Atlantic Canadians must pay prices which are tied to short-term markets in the Boston area (minus the additional cost of transportation to Boston). New Brunswick interests have two complaints about this system. First, they argue that the Boston-based prices are in some sense "excessive" (presumably, this means, higher than they would be if most or all of this gas were piped to markets in eastern Canada - which was one of the options before MNE was built). Second, they complain that that it has become impossible to purchase MNE gas on secure, long-term contracts - which is a prerequisite for New Brunswick's industrial needs, and particularly for electric power generation. ¶14. In 2001-2002 the GoNB raised this issue formally with the NEB, which declined to take action, other than agreeing to "monitor" the gas transmission situation in New Brunswick. GoNB officials remain unapologetic about having raised the issue, stressing that it is not a matter of "Canada first" (as their position was sometimes characterized in the media) but rather "Canada too." They say they are no longer pressing the issue because at current prices, natural gas is simply not a viable option for industrial uses or electric power generation in New Brunswick. One event that might change this, they said, would be the construction of a liquefied natural gas terminal in Atlantic Canada. ¶15. LIQUEFIED NATURAL GAS: Like other parts of North America, Atlantic Canada is hearing proposals to construct terminals which would receive liquefied natural gas (LNG) from pressurized tanker ships and distribute it on the continental pipeline network. Currently, there are two proposals: -- Access Northeast Energy Inc. (ane-inc.com),an infrastructure development firm, proposes to build an LNG terminal ("Bear Head") in an established heavy-industrial zone near Point Tupper on the Strait of Canso between mainland Nova Scotia and Cape Breton Island. This site has very good natural features and the project enjoys local political support. The proponent submitted environmental applications in 2003. -- Irving Oil Ltd. (irvingoilco.com),part of a family-owned industrial conglomerate which is currently a large buyer/shipper of gas on the MNE pipeline, proposes to build an LNG terminal on the Bay of Fundy about 5 miles east of Saint John, New Brunswick. While this project is said to be less favored by geography (and local politics) than Bear Head, the proponent's industrial and financial autonomy may allow it to move ahead quickly, perhaps in an effort to pre-empt its competitor. Irving Oil says it plans to begin construction during 2004. ¶16. Either of these projects would require at least a doubling in size of the MNE pipeline, and either one would require the negotiation of gas supply contracts on a long-term basis in order to secure financing for both port and pipeline. MNE representatives say that either project could fit well with their plans. ¶17. New Brunswick energy officials told us that they are open to either LNG project, provided New Brunswick buyers obtain adequate access to the gas. They expect either project to revive natural gas as a fuel option for industrial development in New Brunswick. CONCLUSION/COMMENT -------------- ¶18. An array of interesting new energy infrastructure projects are on the horizon for Nova Scotia and New Brunswick, all of which have the potential to significantly benefit neighboring U.S. states. However, we also see the potential for great frustration, discord, and disappointment. The key reason is that optimism has consistently run ahead of reality in Atlantic Canadian energy developments. This is painfully evident in Nova Scotia's offshore industry, which, thirty years after the first resource discoveries, still struggles to deliver on popular expectations - particularly with respect to royalty flows. Part of the problem is the multi-agency, multi-jurisdictional complexity of offshore regulation in Canada, which makes this one of the world's highest-cost areas of active exploration. ¶19. With respect to LNG ports and natural gas transmission, there is little doubt that further development of such infrastructure - if it occurs - would heat up a simmering debate about local industries' access to natural gas. In Nova Scotia, this issue is moderated by the provincial government's closeness to the needs of gas producers, and by the benefit of jobs created by gas exploration and production. New Brunswickers, without such offsetting gains, are likely to be irritated by news that increasing volumes of gas would transit their province en route to New England markets. ¶20. In electric power, there could be difficult years ahead. If New Brunswick cannot or will not finance the refurbishment of the Point Lepreau reactor, the prospects for power generation in that province will be bleak. The province could then be on a collision course with the GOC's climate change policy - and decisions on new fossil-fuelled generating plant will likely be slowed and clouded. The results will affect residents of Maine for the rest of this decade. HILL