MANITOBA HYDRO ANNOUNCES MAJOR ELECTRICITY DEAL WITH MINNESOTA

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STATE FOR OES, EEB/ESC, WHA/CAN



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E.O. 12958: N/A

TAGS: ENRG, SENV, PGOV, CA

SUBJ: MANITOBA HYDRO ANNOUNCES MAJOR ELECTRICITY DEAL WITH

MINNESOTA



Ref: Ottawa 0135



OTTAWA 00000549 001.2 OF 002





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).

END SUMMARY.



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.



WILKINS