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08OTTAWA549 2008-04-21 11:52:00 UNCLASSIFIED Embassy Ottawa
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1. This message originates from the U.S. Consulate in Winnipeg.

2. SUMMARY: The announcement of a major hydroelectricity purchase
agreement between Minnesota Power and the Canadian province of
Manitoba brings the development of some of the 5000 mw of
hydroelectricity generation capacity in Manitoba's north an
important step closer. Significant amounts of this hydroelectricity
will be available to U.S. markets in the upper Midwest, if the
trans-border transmission capacity exists to deliver it (reftel).

3. The decades-old logjam preventing the development of Manitoba's
extensive hydroelectricity potential may have been broken with the
announcement on January 29 of an agreement between Minnesota Power
and Manitoba's government-owned hydroelectricity monopoly Manitoba
Hydro. The deal between Manitoba Hydro and investor-owned Minnesota
Power allows Minnesota Power to purchase surplus energy beginning
this year, and commits it to a 15-year agreement to purchase 250
megawatts of hydroelectricity (worth a total of approximately $1
billion) beginning in about 2020. Minnesota Power provides
electricity in a 26,000-square-mile electric service territory in
northeastern Minnesota and provides wholesale electric service to 16
municipalities and retail service to 141,000 customers.

4. This agreement builds on a much more modest deal signed several
years ago where Minnesota Power agreed to buy 50 mw of electricity
from Manitoba Hydro from 2009-2015. Last year Manitoba Hydro
exported C$592 million worth of electricity, mostly to the United
States. Manitoba Hydro exports electricity to more than 30 electric
utilities through participation in four wholesale markets in Canada
and the Midwestern United States.

5. The new 250 mw sale will hasten construction of hydroelectric
generating facilities in northern Manitoba that have long simmered
on the backburner due to Manitoba Hydro's inability to attract a
long-term commitment for the purchase of the power. Two generating
stations have been proposed for the lower Nelson River, which flows
into Hudson Bay. Conawapa, a 1250 mw generating station, is further
along in development, and is likely to be completed by 2021 at an
estimated cost of $5 billion. Gull Rapids, a proposed 600 mw
generating station, has been discussed with local Indian tribes, but
no design plan has been developed yet. In addition, the smaller
Wuskwatim generation project on the Burntwood River is ready for
construction and is expected to come on-line in 2012, generating 200
mw of electricity for export.

6. The other major hurdle to development of Manitoba's hydroelectric
potential has been the lack of transmission capacity to bring the
power to markets in the upper Midwest and the Canadian heartland of
Ontario. According to a Manitoba Hydro contact, there is sufficient
excess capacity to move Manitoba's surplus power to Minnesota Power
for now, but the parties plan to build a cross-border line to
accommodate the 2020 sale of 250 mw of electricity. Our contact
explained that under the terms of the deal with Minnesota Power,
Qexplained that under the terms of the deal with Minnesota Power,
Manitoba Hydro will likely be responsible for getting the
electricity to the border, where it will link up with a transmission
line constructed by Minnesota Power to bring the electricity into
its grid.

What to do with the rest of the electricity?


7. Minnesota Power will not be able to use anywhere near the 1250 mw
generated by the Conawapa project, so where would the rest of the
electricity go? Manitoba Hydro projects that increases in
in-province demand for electricity will utilize some of the
additional power, and small increases in exports to other markets in
neighboring Canadian provinces and U.S. states may take up some more
of the excess. But clearly Manitoba Hydro will have surplus
electricity in 2020, with more available if the Gull Rapids project
comes on-line with 600 mw. Manitoba Hydro would welcome an
expansion of transmission capacity: either east-west, to facilitate
more exports to other provinces, or north-south, to enhance its
export options. The electricity would be available to potential
customers either in the upper Midwest or neighboring provinces, but
there is not sufficient transmission capacity to get all of it to
either market.

8. In recent years Manitoba and Ontario have studied the possibility
of building an ambitious east-west line to get Conawapa power to

OTTAWA 00000549 002.2 OF 002

Ontario markets. Though the cost of this line would be daunting,
the persistent lack of investment in the grid in border U.S. States
has encouraged some Canadian players to advocate more east-west
infrastructure as a way to open up Canada's undeveloped generating
potential. The Manitoba-Minnesota agreement is a strong signal that
long-term trade on the established cross-border pattern can
facilitate Canadian resource development in the future as well as it
has in the past.