Where Canadian Hydro is Heading

By Michael Harris

With a number of significant projects in development, turnover in the federal government, commitments to international policies, and more impacting Canadian hydropower, the sector is as vibrant and dynamic as ever. We asked three industry experts to offer their views on where the Canadian hydro market is going and reflections on the past year with an eye toward trends and issues that could spread beyond Canadian borders.

Q: What issues, topics or projects have represented the most significant victories and advancements for Canadian hydropower over the past year?

Jacob Irving, President, Canadian Hydropower Association: Over the past year, the Canadian federal government’s ratification of the Paris Climate Agreement, and its follow-up commitment to price carbon nationally, represent important advances to the Canadian hydropower industry.

The Canadian price on carbon will begin at $10 per tonne in 2018 will rise by $10 per year thereafter, reaching $50 per tonne by 2022. With the external costs of carbon pollution beginning to be internalized, the benefits of Canadian hydropower will become more apparent and attractive. The Canadian Hydropower Association has been advocating for a price on carbon since its inception back in 1998.

Mario Mazza, Vice President of Strategic Operations, Ontario Power Generation: In 2015-2016, significant milestones include the continuing construction of our new 28-MW Peter Sutherland Sr. hydroelectric generating station in northern Ontario. This $300 million project is expected to be completed in mid-2017. Progress in 2016 included construction of the powerhouse, intake, spillway, earth dams, steel penstock, and transmission line. Impoundment of the reservoir is expected to start in mid-December.

In 2016, OPG started a $59 million major rehabilitation of a 60-year-old, 7.4-km-long earth dyke that encloses the storage reservoir for the 174-MW Sir Adam Beck pumped-storage project. The project, located in Niagara Falls, Ontario, includes partial relining of the reservoir and grouting of the bedrock. It is expected to be completed in early 2017.

n addition, a major rehabilitation of one of the 140 MW units at our 274-MW Lower Notch plant was completed. The rehabilitation involved a major mechanical overhaul, rewind and headgate replacement. Finally, a major rehabilitation of the 82-year-old, 5-km-long concrete dam at the 192-MW Chat Falls hydro plant in northeastern Ontario was also completed in 2016. This CAD$40 million project included the repair of deteriorated concrete and grouting of cracks and joints in the dam.

Paul McCuaig, Vice President, Corpfinance International Ltd.: Canada is blessed with hydropower potential – being the third largest world producer – with hydro comprising more than 60% of our electricity needs. In Canada, hydropower is perceived as a viable green energy resource.

Despite its long history of development, there remain opportunities throughout the country for new (or revitalized) development sites. Hydropower has demonstrated advantages against its green energy competitors (i.e. wind, solar) as a proven technology with exceptional long life, and to date it remains competitive in cost.

Significant victories (depending of course on your point of view) include the ongoing demonstrated support by both provincial and federal governments for major projects, despite their obstacles. As examples, we identify approvals for 1,100-MW Site C in British Columbia and the ongoing development of 695-MW Muskrat Falls in Labrador and 695-MW Keeyask in Manitoba.

Q: Conversely, what issues have presented the biggest challenges and obstacles?

Irving: Uncertainty resulting from the recent federal elections in the U.S. may make the benefits of Canadian hydropower less clear to some U.S. customers. CHA supports the Environmental Protection Agency’s Clean Power Plan.

With the election of the new President and Congress, the future of this regulation is far from certain. While individual U.S. states are likely to continue pursuing and realizing the economic and environmental benefits of Canadian hydropower, federal support for clean energy and climate action in the U.S. is now in doubt.

There could very well be a scenario where Canada demonstrates international leadership by developing a national price on carbon while the U.S. falls behind and does not.

Mazza: One issue that has presented challenges is related to the failure or poor performance of some major equipment that has been replaced in the past 10 to 20 years. It appears that the newer transformers, windings, turbine runners, etc. are not as robust as the original equipment that it replaced.

McCuaig: Development of the major projects I mentioned earlier has not proceeded without challenges. A number of stakeholders have voiced their lack of support, in particular, with the Site C and Muskrat Falls developments.

Cost and escalation of budgets are of concern. Muskrat Falls’ budget has increased to $11.4 billion from .4 billion four years ago. Costs are directly or indirectly supported by government. Opposition to both Site C and Muskrat Falls has included native constituencies.

Of final consideration is the challenge of accurately forecasting future load growth, and accurate forecasts are needed to support proposed major developments, and the dampening of opportunities for development by smaller independent power producers as a consequence of these large projects going forward.

Q: How have Canada’s most recent round of federal elections, in 2015, impacted the industry, if at all?

Irving: The Canadian federal election last year had a profound effect on climate change policy and carbon pricing. Canada has gone from being perceived internationally as a climate change laggard to being perceived as a climate change leader.

Mazza: The federal election has not had an impact on OPG as we are aligned with climate change initiatives of the federal government. In 2014, OPG burned its last piece of coal to make electricity.

This was one of the largest single actions to combat climate change in North America to date. Our two northwestern coal stations were converted to renewable biomass. We have also added about 500 MW (or 2.5 TWh annually) of new hydro generation since 2009. Now, together with a diverse fleet that includes 65 hydroelectric stations and two nuclear stations, OPG’s power is more than 99% free of smog and greenhouse gas emissions.

McCuaig: The elected Liberal government in Ottawa has made environmental concerns and global warming a cornerstone of their agenda. This increased focus has been reflected in international dialogue in policies including the Paris Climate Change Agreement and the North American Climate, Clean Energy, and Environment Partnership Action Plan.

Federal dialogue with the provinces culminated (over the objections of some provinces) with the federal government dictating a minimum $10 per metric tonne price of carbon pollution commencing in 2018. While overall this is to the benefit of renewable hydro, developers will have to navigate the complex processes of implementation of federal policy, which will be flexible in response to the differing approaches of their provincial counterparts. There is, as always in Canada, the tension between federal and provincial responsibilities.

Recent upgrades to Ontario Power Generation’s Lower Mattagami project included the addition of six generating units, upping its capacity by 438 MW. (Photo courtesy OPG)
Recent upgrades to Ontario Power Generation’s Lower Mattagami project included the addition of six generating units, upping its capacity by 438 MW. (Photo courtesy OPG)

Q: What new trends or issues have you seen emerge over the past year? What issues and trends remain significant?

Irving: The trend toward the increased development of more variable sources of renewable power has resulted in an increased need for the storage capacity that hydropower offers.

Globally, dedication to positive climate action has increased. The Paris Climate Agreement enjoyed strong international support and the global discussion has turned more toward finding solutions to climate change over proving its existence. Should the U.S. abandon the Paris Climate Agreement, a trend backward in the fight against climate change could develop.

Mazza: With the election of Donald Trump, the U.S. may change direction on renewable generation, climate change mitigation, carbon trading and credits as it relates to power generation. This may indirectly impact Canada.

McCuaig: Generally, hydropower development in Canada continues to require government support. In the case of opportunities for independent power producers, this is reflected in the long-term nature of government-supported power purchase agreements offered. This support may be provided in a sub-optimal way. For example, the focus on projects with capacities of 500 kW and less under the feed-in tariff program by the government of Ontario is much more deleterious to hydropower development than wind or solar.

At issue has been the long – and increasing – development cycle of hydro in relation to its “green competition” and increasing project costs due to regulatory complexity in the development process in relation to ongoing reducing costs for other technologies. Hydropower’s competitiveness in relation to its peers has been negatively impacted.

Also, there is a greater focus on native and community support and participation. Developers have generally positively and proactively responded to this change.

Q: Relationships between developers and utilities and First Nations and Indigenous Peoples are always at the forefront when discussing Canadian hydropower. Are there any stories – both successes and challenges – to be told?

Irving: CHA has created a compendium of stories entitled “Paths Forward” (available for download via CHA’s website at www.bit.ly/CHAPaths) that illustrates cooperation between hydropower project proponents and aboriginal people across Canada.

The stories reflect that early engagement and consistent relationship-building are key to achieving mutual benefit. Relationships require constant work and can never be taken for granted. No relationship can ever be perfect, but every relationship can always be improved. The stories in “Paths Forward” share these themes in common. Many projects are now developed in partnership with aboriginal communities.

Mazza: OPG partnered with Coral Rapids Power, a wholly-owned company of the Taykwa Tagamou Nation, to build the Peter Sutherland Sr. Generating Station on New Post Creek in Northern Ontario. This $300 million project employs about 300 workers at peak, with about 34 being First Nations members.

McCuaig: I would refer to the strong native opposition to Muskrat Falls – resolved through agreed-upon changes to developmental processes – as an example of both successes and challenges. This situation reflects challenges in that the level of opposition was initially not properly considered, and a success in that ultimately the issues were resolved.

Q: Cross-border exports of Canadian hydro to the U.S. have become a significant topic of discussion in both countries. Have you seen any significant movement for or against?

Irving: If the Clean Power Plan in the U.S. is abandoned and no other federal policies are adopted to lower carbon emissions and further reduce air pollution in the U.S., future additional Canadian hydropower exports could be frustrated.

Mazza: Obviously the change of government in Washington, D.C., with the new government’s critical focus on trade, contributes to this concern.

Historically, the economics of projects in the major waterpower-producing provinces (specifically, British Columbia, Quebec, and Manitoba) derive from ongoing seamless access to the U.S. market for their output.

We believe despite current government changes, the power markets between the countries will remain highly integrated, with transactional opportunities north-south in many cases exceeding those east-west. We continue to see this integration continuing – although we do identify potential areas of friction in particular areas. For instance, the integration of Ontario, Quebec and California in their conjoined cap and trade initiative, perhaps.

Q: What do you see as significant challenges for the Canadian hydro sector in the coming year?

Mazza: OPG’s biggest challenges are related to rising construction costs to build new hydro, as well as for rehabilitation of existing plants. With regard to new plants, costs for new hydro are now exceeding wind and possibly solar – both of which have declining costs – in terms of dollars per MWh (hydro is now over $175/MWh) and dollars per MW (now over $10 million/MW).

McCuaig: As always, the challenge is to streamline processes and the development timeline and reduce costs to increase project success, competitiveness, and attraction to funders.

A significant challenge will be dealing with fluctuating and changing government policy as a result of significant changes on the carbon action front – both provincially and federally.

Irving: Again, uncertainty surrounding climate action in the U.S. following the recent federal elections will be a concern.

Additionally, Canadian federal environmental legislation and regulations related to natural resource development, including hydropower, are under undergoing formal review. Modifications to the legislation and regulations are likely.

The hydropower industry will remain interested in ensuring that any changes will increase environmental protection and public trust, while enabling the responsible development of clean and renewable energy sources in a timely manner.

Michael Harris is editor for Hydro Review.

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