Ontario Signs Deal to Refurbish Two Nuclear

UNCLAS SECTION 01 OF 02 TORONTO 002737 SIPDIS USDOE FOR PI (Pumphrey, Ward and Deutsch) STATE FOR EB/ESC/IEC/EPC (Erviti and McManus) DEPT PASS FERC (Longenecker) SENSITIVE E.O. 12958: N/A TAGS: ENRG ELAB PGOV SENV CA SUBJECT: Ontario Signs Deal to Refurbish Two Nuclear Reactors on Lake Huron Ref: Toronto 1901 Sensitive But Unclassified - Protect Accordingly. ¶1. (SBU) Summary: On October 17, the Ontario government announced an agreement with the private Bruce Power consortium to refurbish two nuclear reactors at a capital cost of C$4.2 billion dollars. The resulting 1,500 megawatts (MW) of additional electricity will alleviate Ontario's tight power supply. The deal was sealed when Bruce Power (the private consortium operating the Bruce nuclear facility) agreed to shoulder the capital cost and to accept the risk for cost overruns - which, with past nuclear refurbishing, have been substantial - leaving no financial risk with Ontario's taxpayers. In return, the province of Ontario agreed to guarantee a floor price of C$63 per MW of electricity - slightly below this year's average electricity cost of C$67.65 per MW. This deal is widely seen among analysts and industry insiders as a model for the future - both in terms of the financing model and in terms of greater reliance on nuclear power. The province must replace 25,000 MW of electricity supply over the coming 15 years while making drastic cuts to emissions in order to live up to Canada's Kyoto commitments. End summary. Ontario Signs Nuclear Deal -------------- ¶2. (U) On October 17, the Ontario government announced an agreement with the private Bruce Power consortium to refurbish Bruce A's nuclear units 1 and 2, which have been out of service since 1997. This deal will secure some additional 1,500 MW of electricity and somewhat alleviate the province's tight supply. Bruce A's nuclear units 3 and 4, also taken out of service in 1997, were refurbished in 2003. Four reactors at the Bruce B power station were never taken out of operation. Ontario's Bruce Power facility is owned by the province of Ontario and operated by the private Bruce Power consortium under a long-term lease arrangement. Partners in this consortium include Canada's largest uranium miner, Cameco Corp., energy infrastructure giant, TransCanada Corp., and a unit of the Ontario Municipal Employees Retirement Board. A Finance Model Takes Shape -------------- ¶3. (SBU) Critical to the success of this nuclear refurbishing deal was Bruce Power's willingness to shoulder the full projected capital cost of C$4.2 billion. In addition, Bruce Power accepted full liability for any cost overruns. These two elements were critical in light of Ontario's history of racking up over C$20 billion in nuclear cost overruns to date. Recent refurbishing at both the Bruce and Pickering nuclear stations turned to cost billions more than estimated. Under the current financing deal, the province's taxpayers face no financial risk at all. In August 2005, the government scrapped plans to have government-owned Ontario Power Generation (OPG) refurbish two laid-up nuclear units at the Pickering A station as economically not viable. ¶4. (SBU) In return, the province of Ontario agreed to offer the Bruce Power Consortium a guaranteed floor price of C$63 per MW generated - slightly below this year's average electricity wholesale price of C$67.65 per MW. In essence, the Bruce consortium will sell electricity into the wholesale market and qualify for public support payments if the average annual wholesale price of electricity drops below C$63 per MW for a contractually fixed annual sales volume. For its part, the government of Ontario would, if such support payments become necessary, adjust the fixed retail price for consumers upward. According to the Ministry of Energy, the province will ensure that consumers pay the "full cost" of generating electricity in Ontario. Comment: More Nuclear Expected -------------- ¶5. (SBU) Ontario's move to refurbish the remaining two nuclear reactors at the Bruce generating station is indicative of things to come. Analysts and industry insiders agree more nuclear power is the only way in which Ontario can replace 25,000 MW of a total of 30,000 MW of generating capacity over the coming 15 years while making drastic cuts to emissions in accordance with Canada's Kyoto commitments by shutting down all of its coal-fired generators by 2009. Insiders also believe that the financing model agreed upon between Bruce Power and the province - already used in various smaller Requests for Proposals (RFPs) for green energy - is here to stay: the province will guarantee a floor price for generators willing to assume all market risk and invest in Ontario. LECROY