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Home > Speeches and Presentations > Speeches and Presentations 2008 > The Future of Hydroelectric Power in Canada

The Future of Hydroelectric Power in Canada

Presented by
Gaétan Caron
Chair and Chief Executive Officer
National Energy Board

Canadian Hydropower Association
Ottawa, Ontario

5 November 2008

The Future of Hydroelectric Power in Canada

I wish to thank the CHA for inviting me to participate in this year's Forum here in Ottawa. I understand your association was formed in 1998 so let me congratulate you on your 10-year anniversary.

The NEB has long-time experience in undertaking energy supply and demand projections, including projections of hydroelectric generation. However, in presenting our outlook for hydro to this forum I do feel somewhat in the unenviable position of "taking coals to Newcastle." Nevertheless, I believe I can provide some perspective based on our most recent Energy Futures report.

Energy will always will be extremely important to Canadians. With our northern climate, huge land mass and vast natural resources, we use energy to heat our homes, provide transport, develop our resources and produce goods and services. Energy is essential to our comfort and our economic prosperity. Electricity is sometimes referred to as the "modern fuel," as, in addition to providing essential services to homes and industry, it powers an ever-expanding array of plug-in and remote electronic gadgets.

The future of the electricity sector in Canada, as with energy overall will be challenging. Indeed, finding ways to use and produce energy that minimize the impacts on our environment is one of the key challenges Canadians face in the 21^st century.

Agenda

My presentation today will tell you a bit about the role of the NEB, then focus on the electricity outlook and the future challenges and opportunities facing Canadians. My remarks will be based mainly on our flagship energy report published last year, called Canada's Energy Future - Reference Case and Scenarios to 2030, rounded out with additional experience gained since that time.

The key objectives of this report are to provide a comprehensive analysis of Canadian energy markets and to provide a framework for public discussion on emerging issues and trends. The report examines different possible energy futures that may unfold for Canadians up to the year 2030.

The report includes a baseline projection, called the Reference Case, to the year 2015. Three different scenarios, each with its own internally consistent set of assumptions, such as economic growth, action on environmental issues and energy prices, are then used to examine Canada's energy future. As part of the report we have studied trends and issues related to electricity demand, generation and infrastructure. We looked at emerging technologies and alternative energy sources which are growing fast and will be instrumental for sustainable development in the future.

A lot has changed since our report was issued less than year ago! The world and the energy world have gone through quite a year and it isn't over yet. Oil prices moved from an "unprecedented high" in 2007 of $60 to $148 and back within a year! Jurisdiction after jurisdiction has clamoured to introduce "green" policies. Consumer behaviour, for example buying large SUVs, has changed perhaps faster than anyone anticipated. Recently credit markets have seized up, threatening the economy and challenging consumers and investors. For firms in many cases access to capital appears to be far more limited than it did a year ago.

The Board has started to work on an update for the Reference Case to reflect some of theses changes. That report is scheduled for release in the fall of 2009, following a series of consultations with stakeholders and energy experts across Canada. These consultations help us to better understand trends, including economic growth and energy demand growth, as well as emerging government energy and environment policies and programs. We want to determine how valid our detailed scenario analysis remains.

At this point, despite obvious discrepancies, the basic conclusions of our Energy Futures works seem robust. I'll speak a little about those conclusions and some related challenges and opportunities Canadians will face in the coming years.

NEB'S Role

In essence, at the highest level, the NEB has two broad responsibilities that derive from the National Energy Board Act.

Our regulatory role includes: oversight of the construction and operation of international and interprovincial pipelines and international power lines; authorization of pipeline tolls & tariffs; and authorization of energy exports (oil, NGLs, gas and electricity) and imports of natural gas.

The Board's goal is to ensure that facilities under NEB jurisdiction are safe and secure, meet environmental criteria, and respect the rights of people who may be affected. Public engagement is a key aspect of this work and we endeavour to be an efficient and effective regulator. We want to ensure Canadians are provided with efficient energy infrastructure and markets. To meet these goals we have developed strategies based on market-based principles and goal oriented regulation.

Markets work best with good information. We believe that the free flow of information is part of what makes energy markets efficient, and providing this information to the marketplace contributes to economic efficiency. Our advisory work includes informing the government, industry and the public at large about developments in energy supply and markets through our Energy Information Program. This includes undertaking reports like Canada's Energy Future, other Energy Market Assessments and making energy information available at our web site.

We cannot work alone in pursuing these goals. Our partners inside and outside government are key to our achieving success. All of the NEB's work is fundamentally based on consulting with stakeholders.

NEB's Electricity Oversight

I'd just like to expand a bit on our electricity oversight.

Apart from authorizing electricity exports, most of the regulatory oversight of the electric industry resides with the provinces, that is, with respect to the siting and operation of generation, transmission and distribution facilities. Although the IPLs constitute only a small portion of the total transmission system, they link the provincial systems to adjacent U.S. markets and thus enable important international trade. They also provide reliability benefits on both sides of the international border.

On the subject of reliability, the NEB has "recognized" the North American Electric Reliability Corporation (NERC) as the Electric Reliability Organization in North America. NERC reliability standards are now mandatory in the U.S., since June 2007. Canadian regulators, including the NEB, are working toward the implementation of mandatory standards in their respective jurisdictions. We contemplate changes to our regulations (the National Energy Board Electricity Regulations) and, in recognition of the interconnected nature of the domestic and export facilities, we are working with the provincial regulatory authorities and industry on the best way to implement these changes.

Energy Futures Scenarios

Let's go back to our Energy Futures work. I'd like to briefly review the scenarios.

If you were not convinced that we are in uncertain times, I'm sure this past year has been an eye-opener.

The scenarios are a means to look forward while addressing this uncertainty. Uncertainty which is caused by world geopolitical and economic factors, social trends, future policy decisions, or technology developments. Each scenario is based upon a set of internally consistent assumptions, designed to test our findings. We see each scenario as plausible and don't attach probabilities. It is interesting however, to observe events that may cause one to think we are “in” one of the scenarios (more later).

Reference Case/Continuing Trends was our best guess about the development of supply and demand in Canada based upon current decisions and policies and current economic and energy trends ($50 oil, $7 gas).

Fortified Islands focuses on North American energy security. It has the slowest economic growth and highest energy prices. These outcomes are a result of a security conscious world, where continued geopolitical tensions limit access to cheap global energy supplies. The emphasis is on developing indigenous energy sources ($85 oil, $12 gas).

Triple E (Energy, Environment and Economy) assumes fairly aggressive conservation goals pursued on a global level. The scenario has more moderate economic growth resulting from economic/environmental trade-offs. There is a preference given to greener fuels such as renewables, nuclear and natural gas and some form of carbon pricing is assumed. By 2030, this scenario has the lowest energy prices from a producer perspective. This is achieved through a cooperative global environment resulting in abundant energy supplies around the world, LNG trade, as well as comprehensive energy demand management programs, which slow energy demand growth ($35 oil, $5.50 gas).

I'd like to point out that we met across Canada with about 250 individuals in designing the scenarios and developing results.

Are these scenarios still valid? From a price perspective you could argue that we are in the Fortified Islands scenario with oil expected to remain around $80 over the next year. We've seen increased control of supply. However, natural gas seems to be following the Reference Case/Continuing Trends scenario. Interestingly, it hasn't been LNG trade that has dampened prices, but rather the development of shale and other unconventional supplies.

Electricity Demand

Electricity demand is closely linked to demographics and economic growth.

Demand is highest in the Reference Case/Continuing Trends scenario reflecting the highest economic growth, although declining growth over time results in a flattening of demand.

While the demand profile of Fortified Islands and Triple E appear similar the driving factors are quite different:

The impact of lower economic growth and higher prices in Fortified Islands is evident in the 2020s.
In Triple E, the greenest world, the dominant factors which dampen electricity demand are improved efficiency and lifestyle choices that reduce demand. These trends are reinforced by carbon prices passed on to consumers.

Electricity Demand - Technologies

All of these scenarios will be affected by technological change. The speed of development and adoption of new technologies will vary. But in all scenarios Canadians will be seeking to use energy and electricity more efficiently.

Here are some technologies that will shape future electricity demand. These are not all new. Veterans of the energy industry here today will recall, for example, the first wave of DSM initiatives in the 1980s. It fell out of favour in the 1990s with low prices, but is now experiencing a resurgence. On the other hand, it is only in the last few years that residential electricity consumers have been able to respond to price changes on a time-of-day basis. This comes about through advances in smart meters, which enable the electricity service provider to take remote readings on an instantaneous or time-interval basis, and bill customers accordingly.

Some of these technologies reduce demand absolutely (DSM and compact fluorescent light lighting, for example) while others reduce demand on the grid through the time-shifting of loads or utilizing other sources of energy (ground source heat pumps and solar photovoltaics, for example).

What we didn't examine in the Energy Futures report was the rapid development of electric cars which now seem more imminent.

Electric Generation Continuing Trends

Turning to the Supply Side.

Hydroelectric generation will continue to be the major source of electricity during the Reference Case/ Continuing Trends scenario.

Growth is strongest in the earlier years with extensive development of new hydroelectric projects in Newfoundland & Labrador, Quebec, Manitoba, British Columbia and smaller projects in Alberta and Ontario. The Lower Churchill facility in Labrador and major projects in Manitoba are assumed to be built, as are announced hydro projects in Quebec and British Columbia. Many of the hydro projects are located far from the customer base and will require major transmission investments.

After 2015 demand growth encourages the development of both traditional generation sources and alternatives to conventional generation. Growth is particularly strong in natural gas, wind and biomass. Nuclear grows on a net basis and coal declines, largely reflecting the phase-out in Ontario.

There is growth in small scale distributed generation, including solar photovoltaic and biomass sources. Because these generation sources grow from a very small base, they do not have a great impact, that is, as a share of total power generation, over the period to 2030. However, they constitute significant localized opportunities and potentially pave the way to an important electric generation platform for the future.

Electric Generation Technologies - A Diversity

There is a diversity of supply choices that impact the scenarios to varying degrees. While conventional technologies will tend to dominate, even in Triple E, the action (or change) will be mostly in these other categories.

As in the case of the demand technologies, not all of these are new. Wind has been around a long time, but a modern turbine is a world away from the humble windmills that lined the canals of the Netherlands in Hans Brinker's day, and are becoming more efficient all the time. Apart from the turbine itself, technology, including wind forecasting, is playing a huge role in integrating wind power to the grid.

I understand now that a combined-cycle gas turbine in cogeneration mode (combined heat and power) can achieve a thermal efficiency approaching 90 percent, a far cry from the 35% efficiency of the gas steam turbine. It seems that natural gas generation continues to be attractive to market participants. It is relatively cheap to construct, easy to site near to the markets and, as I indicated earlier, natural gas prices are relatively low. If you assume it displaces less environmentally efficient production, there are environmental gains as well.

Carbon capture and storage may be the enabler for "clean coal;" it seems the interest in this area has skyrocketed over the past year or two.

It is interesting to speculate whether the uncertain financial markets will affect the ability to make major investments in long term high cost facilities like nuclear and clean coal.

Electricity Generation

Given the potential diversity of supply choices, it is interesting to observe the outcome for hydro in our other scenarios.

Reflecting the domestic demand profile, the total generation in each of the Triple E and Fortified Islands scenarios is lower than Continuing Trends. However, the hydro generation outlook remains essentially unchanged. Why is that?

Hydro performs well in the "green world" of Triple E. It has environmental advantages relative to fossil fuels from the standpoint of air quality and GHG emissions. As well, hydro's relatively low unit costs maintain its competitive advantage, given the lower prices in Triple E.

Hydro also does well in the security conscious world of Fortified Islands where investors favour domestic resources. Low unit costs reinforce hydro's advantage in the face of volatile energy prices in that scenario.

Thus the outlook for hydro appears robust across a range of potential market conditions.

Interregional Transfers - Continuing Trends

Another interesting outcome of Energy Futures is the projected increase in interprovincial and international trade in electricity.

This is largely the result of the projected increase in hydro generation, and to some extent the surplus generation resulting from oil sands cogeneration. These trends could result in more generation capacity being built (in large blocks) than is necessary, for some time, for the local markets. The surplus would be exported or transferred to adjacent provinces, which implies a need for additional transmission infrastructure. In addition, depending on the specific circumstances, this may enable the displacement of more expensive, and possibly less environmentally benign, generation in the importing region.

While the amounts vary, increased interregional transfers also occur in the Triple E and Fortified Islands scenarios.

Potential New Electric Transmission

A stylized representation of potential new transmission paths suggests significant new transfers:

from Labrador and Quebec to Ontario and the U.S. northeast
from northern Manitoba to Ontario and the western U.S.
from Alberta to B.C. and to the U.S. Pacific northwest and California

Such projects, if they went ahead, would go some way toward strengthening the east-west interconnections and increasing the international trade in exports.

Of course, such a representation conjures up the concept of an east-west grid. We have not analyzed that here, recognizing that large financial commitments would need to be made in both generation assets and transmission.

The other point this raises is the increasing interconnectedness of the North American grid and the need for strong reliability practices.

Infrastructure Challenge

In our Energy Futures report we address the challenge of building new energy market infrastructure, generally, and for electricity specifically. Concerns relate to siting new generation and expanded or new transmission right-of-way.

Apart from the huge capital investment and risks that normally accompany such investments, the construction of new facilities implied by the scenarios will require addressing concerns raised by parties that will be affected. This will be an important task, where proponents, governments, regulators and affected citizens play significant roles.

The need for increased cross-country facilities is not unique to power transmission lines. Pipelines face the same challenge. Recently, the NEB embarked on a Land Matters Consultation Initiative (LMCI) that attempts to bring the interests of pipeline company owners together with that of landowners and improve the accessibility of the regulatory process.

Another important initiative that may facilitate large energy projects across jurisdictions is the federal Major Projects Management Office (MPMO). The intent of the MPMO is to provide a one-stop window into the federal regulatory requirements, including socio-economic and environmental matters.

We plan to undertake a report on energy infrastructure over the winter in which we will address the transportation needs and associated issues

Hydroelectric Power Challenges and Opportunities

We think the overall conclusions of the Energy Futures report remain robust, so the opportunities and challenges facing Canadians remain essentially the same. The challenges and opportunities facing hydro developments also seem to be well established.

The current volatility in commodity and financial markets no doubt adds to the uncertainty in undertaking long-term energy projections, and the timing of specific events and projects are likely to be impacted. We will have an opportunity to assess these changes in our coming update of the Reference Case.

In our update we will carefully review the underlying assumptions, and market developments since we undertook the last report. We will then consult a diversity of stakeholders across the country, including representatives of the energy industry - including those here today, consumer associations and other public interest groups, as well as other regulators and policy makers in government. The analysis will then be completed and released later in 2009.

Interest in the Energy Futures work appears to be growing, so participation in our consultations could well be greater than our last report. We look forward to this rich public engagement.

Conclusions

The next 25 years are likely to look much different than the recent past. Fortunately, Canada has the gift of abundant natural resources and Canadians have the opportunity to make important choices that shape our energy future. NEB's role is to act as an efficient partner helping Canadians shape a bright and sustainable future. Canadians have a fantastic energy tool box and various options to modify and adapt to these new times. Hydroelectric resources are an important part of our heritage and are thus one of those tools. It is up to all of us to do what it takes to maintain and improve our quality of life.

When we work on energy matters, we work on the present, and we invest in the future. Canadians are counting on us to ensure responsible development of the energy sector.

Contact us

I also encourage you to get in touch with us for feedback on how we are doing, for suggestions on our energy analysis, and also simply to discuss energy matters. While we are an independent regulator, we are not a cloistered agency. Our ongoing interactions with energy sector stakeholders, landowners, persons with environmental interests, and citizens from all walks of life, continually improve our understanding of what is on the mind of Canadians when it comes to energy matters. Having this understanding allows us to improve our performance and fulfill our accountability for results on behalf of Canadians. So please do contact us.

In the mean time, I will be pleased to answer your questions. Thank you for having heard me today, and enjoy the rest of the conference.