ELECTRIC POWER FROM CANADA: TRADE DWINDLES AS CONTINENT'S NEEDED INFRASTRUCTURE REMAINS UNBUILT

UNCLAS SECTION 01 OF 05 OTTAWA 000135

SIPDIS

SIPDIS

SENSITIVE

STATE FOR OES, EEB/ESC, WHA/CAN

DOE FOR INT'L AND POLICY AND IE-141

EPA FOR OFFICE OF THE ADMINISTRATOR AND INTERNATIONAL AFFAIRS

USDOC FOR 4320/ITA/MAC/WH/ONIA - WORD

E.O. 12958: N/A
TAGS: ENRG, SENV, PGOV, CA
SUBJ: ELECTRIC POWER FROM CANADA: TRADE DWINDLES AS CONTINENT'S
NEEDED INFRASTRUCTURE REMAINS UNBUILT

SUMMARY/INTRODUCTION
--------------

1. (U) SENSITIVE, BUT UNCLASSIFIED.

2. (U) Five years ago, based on its extensive study, Embassy Ottawa
concluded that while Canada's potential for new electric power
development had been growing, its exports of power to the United
States were likely to decline in coming decades. The main reason
was transmission constraints. Obtaining permits to build or expand
transmission lines had become very difficult, and efforts in both
countries to restructure electric power markets had created
uncertainty which discouraged investment.

3. (U) The result was too little transmission capacity. Thus,
generating plants were increasingly being built close to markets,
leading to heavy reliance on natural gas as a fuel, and reduced
long-distance trade in electric power, including across the
U.S.-Canadian border. Such factors threatened to make the entire
North American electric grid less efficient and less resilient.
These problems were subsequently highlighted by the northeastern
power outage of August 2003, which affected millions in both
countries. We reported in 2002 that Canadian stakeholders were
ready and willing to join U.S. counterparts in developing a cohesive
bi-national effort to address these problems, and this was borne out
by Canadian engagement in the Power System Outage Task Force.

4. (SBU) The analysis in this message contains both good and bad
news. The bad news is that the problems we identified in 2002
mostly remain. Electricity market restructuring has failed to
advance in many jurisdictions and the needed catch-up of investment
in North America's transmission grid has scarcely begun. Perhaps
partly as a result, Canadian players for the most part have not
moved ahead with major expansions of generation capacity. Instead,
Canadian jurisdictions have resolved the mismatch between demand
growth and supply growth by reducing net exports of power to their
neighbors. If and when new generating resources come on stream, a
lack of transmission investment in the northern tier of U.S. States
will help tilt Canadian options in favor of building links east-west
between provinces (links which are currently underdeveloped),rather
than the more usual pattern southward into the USA.

5. (U) The good news is that the opportunities we saw in 2002 also
remain present. Canada continues to have enormous undeveloped
generating potential. Many Canadian players are interested in
tapping this potential and opening up export opportunities. Our two
countries' bi-national response to the August 2003 outage clearly
demonstrated that we can coordinate successful, high-level
approaches to the sector's problems. The U.S. Energy Policy Act of
2005 strengthened the USG's capacity to address these challenges.
In particular, USDOE's 2006 National Electric Transmission
Congestion Study focused attention on the capacity issue in the U.S.
domestic grid, including specific problem areas in northern border
states.

END SUMMARY/INTRODUCTION

THE PROBLEM
--------------

6. (U) Early in 2001, with energy policy at the top of the new
Administration's agenda, then Canadian Prime Minister Jean Chretien
suggested to President Bush that transmission grid improvements
could unlock major undeveloped electric generating resources in
Qcould unlock major undeveloped electric generating resources in
Canada. While Chretien focused particularly on hydroelectric sites
in northern Manitoba (Nelson River),there was considerable
potential in hydro resources in other regions (such as Labrador and
Quebec) and in oilsands cogeneration in Alberta.

7. (U) While several Canadian provinces have abundant
environmentally and politically acceptable opportunities for new
power generation, these opportunities are constrained by sheer
distance from markets and severe obstacles of either access or
capacity on the transmission side. These obstacles are not limited
to Canada, but are continent-wide.

8. (SBU) As a result, in much of North America for the past decade,
investment in generation has been biased toward natural-gas-fired
plants. These can be sited close to markets because they are

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relatively low in emissions, and because gas pipelines effectively
substitute for power lines (being buried, gas lines are less visible
and thus more acceptable to property owners, who hate overhead power
lines). Industry observers worry that this trend over-commits the
electric power sector to a relatively high-cost fuel, that the stock
of these gas-fired plants might outlive the era of abundant natural
gas in North America, and that the lack of investment in
long-distance transmission is making the whole continental power
grid less flexible, efficient, and reliable.

SUGGESTED REMEDIES, THEN AND NOW
--------------

9. (SBU) In 2002, suggested remedies for the problem of grid
underinvestment fell into four general categories:

- The U.S. and Canada should develop a high-level binational plan
for the continental transmission grid. (This has not occurred).

- The USG should consider assuming "eminent domain" over the siting
of transmission lines. (Federal energy corridors are being
designated in areas experiencing constraints and congestion, and
FERC now has authority to issue construction permits for
transmission facilities in these corridors).

- Regional Transmission Organization (RTO) formation should be
expedited. (This has occurred, with RTOs now covering about
two-thirds of the continental USA and much of Canada.)

- Priority should be given to developing innovative transmission
technologies in order to expand grid capacity. (DOE's 2007
Strategic Plan for electricity deliverability begins to answer this
need).

U.S. POLICY PROGRESS
--------------

10. (U) The bi-national Task Force which investigated the
northeastern electric power outage of August 2003 made many
recommendations on institutional issues related to system
reliability, as well as on how to support and strengthen the North
American Electric Reliability Corporation (NERC - now the Electric
Reliability Organization for both countries). Beyond the work of
the Task Force, there remains potential for greater economic
investment in the grid's capacity to make it more efficient and
reliable and to open up new generating resources.

11. (U) While the Energy Policy Act of 2005 focused more heavily on
the oil and nuclear industries than on the electric grid, it led
FERC to develop incentive-based rate treatments for interstate
transmission of electric power. The 2005 Act also led to USDOE's
first National Electric Transmission Congestion Study (NETC study,
August 2006). This document makes good progress in examining
transmission congestion and identifying constrained areas of the
grid within the United States. (Two such areas are adjacent to the
Canadian border: New England and the Seattle-Portland area.)

12. (SBU) The NETC study also finds that large coal and wind
resources in Minnesota, the Dakotas, Montana and Wyoming cannot be
developed for electric generation without placing strains on the
existing transmission grid in those States. In our view, this
analysis could easily have been extended to cover coal, oilsand,
wind and hydroelectric resources across western Canada (and indeed
in other provinces). In order to be developed, these huge
generating resources will require new transmission capacity within
Canada and/or in adjacent States. If those investments do not occur
QCanada and/or in adjacent States. If those investments do not occur
in the United States, then Canadian proponents of new generation
will reluctantly be left with a more limited and much sparser
Canadian market.

13. (SBU) The Energy Policy Act of 2005 also directed the
Administration to designate energy corridors on federal land in the
United States, strengthening FERC's authority to permit the
expansion of transmission capacity for electricity, oil, gas and
hydrogen in areas experiencing constraints or congestion. While
this is a great step forward, the proposed corridors barely reach
the northern tier of states which are adjacent to Canada.

CANADIAN GENERATION AND TRANSMISSION OUTLOOK

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--------------

14. (SBU) BRITISH COLUMBIA (which accounted for 11.5 percent of
Canada's power generation in 2005) relies on a legacy of pre-1975
hydro dams built on the Columbia River and Peace River systems. The
province exported large quantities of power to the western States in
subsequent years while in-province demand "grew into" this
generating overcapacity; demand is now catching up with supply and
the governing philosophy is one of provincial self-sufficiency. For
future demand, the priority is to purchase more power from
independent producers. A potential large hydroelectric site known
as "Site C" on the Peace River is the most likely large generating
investment, but there is currently no time-line for its development.


15. (SBU) Transmission investment in B.C. has lagged in recent
decades. A few modest transmission line reinforcements are in the
works, none of which would cross the border. The GOC expects
British Columbia's net power exports to the USA to decline from
about 3 terawatt hours (TWH) in 2004 to about 1.1 TWH in 2020. Key
obstacles to new infrastructure in B.C. are unresolved native land
claims, which cover nearly all of the province's area.


16. (SBU) ALBERTA (9.5 percent of national generation) relies mainly
on inexpensive local coal and natural gas as generating fuels.
Increasingly, electricity is co-generated while natural gas is
burned to extract bitumen from the province's vast northern oilsand
deposits. This electricity is consumed locally by industry, which
reduces the growth of industrial demand on the grid, helping to keep
on-grid demand growth below 1 percent annually. Cogeneration could
also make a net contribution to electricity supply, perhaps even
changing the province's traditional status from small net importer
of power to net exporter if transmission capacity in Montana and
Wyoming can be expanded. (Moreover, some in Alberta are seriously
considering use of nuclear reactors to fuel bitumen extraction,
which could boost the amount of power co-generated in this process).
Alberta has gone much further than other provinces in introducing
competition to its electric power market. Several transmission
investments are contemplated, including two which are cross-border:
the likely-to-be-completed Montana Alberta Tie (240 kilovolts over
346 kilometers) and the ambitious Northern Lights project from the
oilsands to Oregon (500 kilovolts over 1743 km),with a projected
in-service date of 2012.

17. (SBU) MANITOBA (5.6 percent of national generation) has plans,
but no timeline, for a low-unit-cost 1380 megawatt hydroelectric
station at Conawapa on the lower Nelson River. While the
environmental and land-claims obstacles to development appear to be
moderate, the Conawapa site is remote from power markets and would
require a major long-distance transmission line southward to
Minneapolis/Chicago or eastward to the Toronto area. While Toronto
is more distant from Manitoba than Chicago is, the eastward
transmission route to Toronto is relatively uninhabited. This means
that an all-new line to Toronto, costing over C$1 billion, may be
more feasible than expanding the grid's capacity in adjacent U.S.
States, which according to Manitoba Hydro appears nearly impossible
QStates, which according to Manitoba Hydro appears nearly impossible
due to "not in my backyard" resistance. Around 2005-06, Ontario and
Manitoba held discussions aimed at reinforcing and expanding their
power interconnections, in what they describe as "a first step in
creating a national east-west power grid." The GOC predicts that
Manitoba's annual power exports to the USA will remain at about 11
TWH through 2020, but that sales to Ontario will roughly double to
over 3 TWH even if Conawapa remains undeveloped, with greater growth
if that project goes forward.

18. (SBU) ONTARIO (28.5 percent of national generation) has
committed to close its four remaining large coal-fired generating
facilities by 2014 due to air quality concerns, despite having
limited options for new generating capacity. Recently, most new
generating investment has been in natural-gas-fired peaking plants
built close to demand centers in southern Ontario, and dozens of
small renewable (wind, biomass, solar and hydroelectric) projects.
The province is edging toward permitting new nuclear reactors (there
are 18 power reactors in service or being refurbished) to provide
the baseload power that will be needed in the future. Because those
new reactors will not enter service before 2018, total nuclear
capacity will actually decline over the coming decade. The Ontario
Power Authority (OPA) has clearly stated that natural gas plants are

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effectively projects of last resort - "when additional conservation
and renewable resources are not feasible or cost effective."

19. (SBU) As it works to replace the baseload power currently
generated by its coal plants, Ontario would like to have the
flexibility to purchase energy generated from renewable sources from
neighboring provinces and U.S. States. The OPA estimates that
demand could exceed in-province supply from 2015 until new nuclear
capacity comes online. The GOC's prediction for Ontario's net
imports is strongly dependent on assumptions about the province's
construction of new nuclear generating plants. Ontario is currently
focused on building the internal transmission infrastructure needed
to carry power from its new renewable energy projects and upgrading
transmission lines linking the Bruce nuclear facility to large
electricity demand centers. The province plans to expand its very
limited east-west interprovincial transmission links in order to
accommodate more imports. Use of provincial funds in this way is at
least partly rationalized as an environmental investment which
facilitates the shutdown of the coal-fired plants. The vast
distance (over 1,200 road miles, some of which cross native lands)
from the Manitoba border to the Toronto-area demand center,
significantly complicates construction of this portion of the
east-west transmission grid across Ontario.

20. (SBU) Currently only one of the transmission line projects under
construction - a 20 kilometer, 230 kilovolt link to neighboring
Quebec - would cross the province's boundary. With the exception of
the 2006 replacement of a 230 kv transmission line between Sarnia
and Marysville, Michigan, Ontario's north-south transmission grid
links to the U.S. have not been upgraded or expanded in recent
years. In the near term, increased Ontario-U.S. transmission
capacity is not a priority for Ontario policymakers and the
Independent Electricity System Operator (IESO).

21. (SBU) QUEBEC (28.7 percent of national generation in 2005) has
enormous hydroelectric capacity, both developed and undeveloped.
Historically Quebec built transmission lines to support long-term
net exports to the northeastern United States. The province has
successfully added new medium-sized hydro generating plants in
recent years, and has plans for at least one large development (La
Romaine - 1500 megawatts) in the coming decade. Quebec is also
investing in wind generating capacity, which is expected to reach
5.5 gigawatts by 2020. All these developments are located far from
markets, so the ability to link them to the grid and strengthen
overall transmission capacity is a crucial factor, as is the
negotiation of long-term supply contracts with U.S. customers.
Outside of developed areas in the province's south, Quebec seems to
be making more progress than other provinces in expanding its
transmission grid. However, all currently planned expansions appear
to be either bringing new capacity into the grid, or strengthening
export capacity to Ontario. Grid reinforcements in densely settled
areas, notably those into the Montreal urban area and near the
boundary with New York State, remain politically very difficult to
achieve, and we understand that there are similar challenges on the
U.S. side of the border.
QU.S. side of the border.

22. (SBU) NEW BRUNSWICK (3.1 percent of generation) is expected to
increase its power exports into Maine from 0.9 TWH in 2005 to 2.3
TWH by 2020, due to slow in-province demand growth and a diverse
range of supply options (hydro, coal, nuclear, gas, wind). A 230
kilometer, 345 kilovolt line to the Bangor, Maine area is currently
being completed.

23. (SBU) NEWFOUNDLAND AND LABRADOR (7.3 percent of generation) has
most of its generating capacity at a remote location in Churchill
Falls, Labrador, from which power is exported to the Quebec grid and
into the northeastern United States. While large developments are
contemplated for new sites on the Lower Churchill River,
transmission depends on interprovincial arrangements with Quebec.
If Quebec continues to invest in interprovincial ties with Ontario,
the majority of new generation from Labrador could end up in the
Ontario market. A more expensive export alternative for
Newfoundland/Labrador would involve building transmission lines and
undersea cables across the Island of Newfoundland and Cabot Strait
to Nova Scotia and thence to New England, an ambitious (and
early-stage) idea which Nova Scotia and Newfoundland have agreed to
consider.

CONCLUSION/COMMENT

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--------------

24. (SBU) Canada's annual net electric power exports to the United
States halved in the first six years of the current decade, sliding
from 36 TWH in 2000 to 18 TWH in 2006. The GOC expects Canada's net
power exports to decline somewhat further over the next dozen years,
to 15 TWH in 2015 and 14 TWH in 2020. U.S. markets will probably
have access to increased net exports from two provinces (a modest
increase from Alberta, more from New Brunswick),but as the 2006
U.S. NETC study implies, grid congestion in adjacent States may yet
limit these opportunities.

25. (SBU) While the drive to open up electricity markets in both the
U.S. and Canada appears to have slowed since around 2003, at least
this slowdown has mitigated the uncertainty which may have been
impeding investment previously. Compared with 2000-2002, we are
reassured to find signs of an upswing in capital investment in the
electric power industry. Still, too little of this investment is on
the transmission side. Also, while the 2005 Energy Policy Act made
great strides toward facilitating such investment, it treats the
grid essentially as a domestic system and does not promote
investment in cross-border transmission. Where Canadian players are
planning inter-jurisdictional connections, the biggest players -
Ontario and Quebec - are thinking along east-west rather than
north-south lines. Assuming provinces individually do not give in
to parochial "self-sufficiency" thinking, power trade on such
inter-provincial connections will bring benefits, but still, the
benefits will be largely confined to Canada. As Prime Minister
Chretien told President Bush seven years ago, removing obstacles to
transmission investment, and growing the capacity for north-south
power trade, would unlock major new electric power supplies and
bigger economic gains for both countries.

WILKINS