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

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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

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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