A View of Canadian Hydroelectric Generation Markets

By Christopher J. Ball

Canada is a world leader in hydropower and is the third largest producer of hydroelectric power. Canada has one of the cleanest supply mixes in the world, with about 80% non-greenhouse-gas-emitting generation. Recognized by the U.S. Environmental Protection Agency, states may import clean energy from Canada as a means of meeting emission targets.

Canada continues to have untapped potential, particularly in British Columbia, Quebec, Manitoba, Newfoundland and Ontario. Potential returns are under pressure from construction costs, increased regulation and the diminishing supply of economical sites.

Provincial Crown corporations have oversight of utilities. Additionally, about 1,200 independent power producers own and operate hydro facilities.

Understanding the situation

Operating costs of hydro facilities are low, but capital intensive. One of the facilities CFI financed in 2014 cost more than US$6 million per megawatt. More than 20 years ago, in 1992, costs were generally below C$2 million (US$1.5 million). Not only are labor and material costs comparatively greater, engineering and feasibility studies and consultations with stakeholders (e.g., First Nation peoples) have added to increased costs for new facilities.

Marketplace cost-related general issues

There are primarily four issues for hydro in Canada:

Interconnection: Hydro projects must be sited where hydrology is feasible, and transmission access exists with proximity to load. Immense costs related to interconnection have historically been born by the utility, but now cost-sharing is the norm.

Timing: As a consequence of permitting, other regulatory requirements and feasibility investigation prior to project development is taking much longer.

Subsidized development: The cost of new hydropower will likely have subsidization, showing up in increased incentives for green generation.

Increased competition: Hydropower faces competition from newer green technologies: wind and solar. Wind power has had a presence for about 20 years in Canada, and solar is a greater part of the mix since 2010. Solar development to date has been primarily in Ontario – a result of Ontario’s incentives.

Hydro installations typically enjoy high capacity factors compared to wind and solar. But, solar panel costs are dropping while hydropower costs are expected to continue to rise, offsetting this benefit.

Provinces

Alberta is the only full-open access market, but its market structure has not incented hydropower development. The increased focus at the federal level towards carbon emissions may well further stimulate existing interest in renewable energy sources such as hydropower. Prince Edward Island does not utilize hydro. Let’s take a look at each area, beginning east and traveling west.

Newfoundland and Labrador (NFLD) Hydro is provincially owned and generates and delivers substantial amounts of electricity for the province. The 5,428-MW Churchill Falls project, part of NFLD Hydro, also supplies Quebec and the northeast. The province has had limited independent power, in part because of its geographical separation from other markets. This could change as the utility, along with Emera, develops 3,000-MW Lower Churchill (combined 824-MW Muskrat Falls and 2,250-MW Gulf Island). The project will include a transmission link between NFLD and mainland Labrador.

Nova Scotia (NS) is also a comparatively small province that has geographical limits to its hydroelectric potential. NS Power is a public sector, publicly traded company that generates most of its power from fossil fuel. The company owns 16 hydro facilities. NS Power has a combined generating capacity of about 398 MW and the 230-MW Wreck Cove scheme accounts for more than half of the company’s rated capacity. NS Power has a joint venture with NFLD to develop the two-part 3,000-MW Lower Churchill hydroelectric project in Labrador.

Phase 1, Muskrat Falls that is 30% complete, is scheduled to be commissioned in 2017. Phase 2 is the Gull Island generation facility. Gull Island development would follow at least three years after Muskrat Falls is online.

NS and NFLD will benefit from the Lower Churchill project through the 500-MW Maritime Transmission Link that includes a 180-km-long undersea cable from Cape Ray, NFLD, to Cape Breton, NS, and will sell surplus energy to the U.S.

 

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New Brunswick (NB) has a few small hydroelectric facilities and could develop additional plants. While not a large player in the hydro market, it is trying to meet additional green energy requirements during the next five to 10 years. The province’s efforts could provide opportunity for independent power producers in NB as it strives to reach 40% of its energy produced from renewable sources.

Quebec is one of the largest hydroelectric producers/exporters in North America. While Hydro-Québec, a provincial crown corporation, has developed most of the province’s water resources, independent power producers also play a role in developing resources.

In 2009, Hydro-Québec launched a program for the purchase of 150 MW generated from hydropower plants, 50 MW or less. The goal was to encourage hydro development by local, regional and Aboriginal communities. More recently, the company has encouraged wind to remain in sync with the government’s mandated cap and trade program, but hydropower development would still be on Hydro-Québec’s radar.

Ontario contains the largest concentration of Canadians. The province mandated an increase in renewable energy production now that there is no longer coal generation in the province.

Although Ontario has a real-time market, market pricing is insufficient to support new independent hydro. The Ontario Power Authority (now IESO) provided long-term contacts that include hydropower. Since 2010, Ontario has been targeting its additional needs through renewable power.

Recent Ontario capacity additions are solar installations. On the Canadian dollar, solar prices had been as high as 80.2 cents/kWh (58.1 cents US). Pricing has fallen and is now comparable between the technologies (i.e., 27.5 cents/kWh non-rooftop solar 500 kW project versus 24.6 cents for new water power). There is greater emphasis on bid pricing; project proponents are encouraged to offer reduced rates to add to “points” to their bid submissions. Contracts incent participation by First Nations communities and coops targeting small projects – 500 kW capacity and below – a detriment to waterpower projects that are usually larger installations.

There have been opportunities to tender Large Renewable Procurement (LRP) programs (renewable projects greater than 500 kW), to help Ontario meet its production target of 50% renewables by 2025. The province’s recently planned 300 MW LRP targets water power to meet 75 MW. Proposals have been submitted to IESO and responses are expected early 2016.

Pricing is challenging. Feasible hydro sites in Ontario are there, but several environmental and transmission hurdles for hydroelectric sites exist. Project development time is protracted, so cutting through red tape will be key. Ontario is also joining a cap and trade program with California, which should support hydropower development.

Manitoba and Saskatchewan have Crown corporation utilities. Alberta has privately held, publicly traded companies providing its utilities.

Alberta’s new provincial government announced it will phase out coal power by 2030 with renewables providing 30% of energy. How this will be achieved contractually is under review. While wind will be the prime beneficiary of the province’s plan, hydropower should also benefit.

One of the negatives for hydro to date has been the fact that Alberta’s open market lacks long-term contracts needed to support high leverage in this capital intensive industry. It may be government or it may be strong corporate credits seeking carbon credits that provide long-term power purchase agreements that get projects financed.

Manitoba produces more than 5,000 MW from hydro with only about 700 MW from other generation. It exports surplus to other provinces and the U.S. It will be interesting to see if Manitoba can encourage entrepreneurs to team up with First Nations people and improve that marketplace.

Saskatchewan has 850 MW of installed hydro and it hopes to eliminate dependence on coal and gas fired through wind and solar. This could lead to hydro exports once power surpluses are present and we will probably see some introductions of First Nations joint-venturing with SaskPower in the northern part of the province.

British Columbia (BC) has the country’s largest mountain ranges and greatest potential to generate hydroelectric energy. Since 2000 and continuing today, the province has been very aggressive encouraging independent hydropower. BC has demonstrated its continuing commitment to buy power from the private sector through a standing offer. BC Hydro is also increasing its hydropower capacity by constructing the 1,100-MW Site C hydroelectric project on the Peace River for almost C$9 billion (US$6.5 billion). This is a win-win for all parties as it will be able to produce surplus energy for exports and produce the same kind of benefits seen in Quebec.

Canada’s westernmost province, BC faces challenges with First Nation negotiations that include environmental concerns, and fish habitat and land acquisition issues for transmission and interconnection.

Conclusion

The 10 provinces and three territories each have their own laws, regulations and political will about how to do things, but hydro generation continues to play a strong role. The largest provinces, in particular, continue to support hydro development, securing a space for additional hydropower in the country.

Major Canadian hydro utilities by province

  • Alberta: TransAlta
  • British Columbia: BC Hydro
  • Manitoba: Manitoba Hydro
  • New Brunswick: NB Power
  • Newfoundland and Labrador: Newfoundland & Labrador Hydro
  • Northwest Territories: Northwest Territories Power Corp.
  • Nova Scotia: Nova Scotia Power/Nalcor Energy
  • Ontario: Ontario Power Generation
  • Quebec: Hydro-Quebec
  • Saskatchewan: SaskPower
  • Yukon: Yukon Electrical Company Ltd.

Christopher Ball is executive vice president of Corpfinance International Ltd. in Toronto, Canada.

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