Manitoba’s dream of becoming a hydro superpower doesn’t add up: Taylor

This plan’s not worth a dam

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(Ed Freeman/Getty)

(Ed Freeman/Getty)

Made your plans for 2090 yet? As-yet-unborn Manitobans might want to circle that year on their holo-calendars. For only then will it be clear if they’ve been sold a bill of goods.

Mammoth hydroelectric projects have long held a particular fascination for politicians in provinces endowed with requisite water resources. They’re big, expensive legacy-building undertakings that create a lot of jobs (for a short time, anyway) in remote areas, and the power they generate is carbon-free.

“Hydro power is Manitoba’s oil,” Premier Greg Selinger likes to boast. To this end he’s promoting a plan that will see Manitoba Hydro build $7.8-billion worth of new dams and a nearly $3-billion transmission line (all figures in 2014 dollars) to export excess power to Minnesota and Wisconsin, turning his province into a clean-energy superpower version of Alberta. It sounds impressive—but only if you ignore all the other options.

A close look at how Manitoba is justifying its dreams of hydro supremacy reveals the many ways in which mega-project plans can be crafted and manipulated to distort economic reality and promote politically motivated folly.

Instead of spending $11 billion on dams and power lines, for about one-seventh the price Manitoba could build numerous clean-burning natural gas power plants to generate all the power it will ever need. How to decide?

In plumping for its grand vision, Manitoba Hydro claims the future value of its proposed power exports over the next 76 years will be many times greater than any capital cost savings from building cheaper natural gas plants. American electricity users will thus subsidize Manitoba ratepayers for the next eight decades. But picking such a distant date as your reference point is risky business. A lot can happen between now and 2090, and it’s future Manitobans who bear this risk.

A revolution in fracking technology has already unleashed a glut of shale gas onto the Midwest. This alone threatens to permanently depress electricity prices and pull the rug out from under Manitoba’s export plans. The hydro scheme is also crucially dependent on the U.S. government slapping a hefty price on carbon emissions in the next few years. This would certainly make hydroelectric power more attractive—but would you take an $11-billion bet on the U.S. Congress passing a carbon tax anytime soon? You’d get better odds on Niagara Falls flowing uphill.

Then there’s the matter of the discount rate. While this can be dry business, the rate at which future costs and benefits are compared has a huge impact on whether a mega-project appears sensible or not. Picking a low discount rate puts greater weight on electricity exports decades from now and minimizes the upfront costs of all that dam-building. A high discount rate, on the other hand, weighs near-term construction costs more heavily.

According to independent consultants hired by the Manitoba Public Utilities Board to review the plan, the 5.05% discount rate selected by Manitoba Hydro looks suspiciously low and can’t “withstand simple sensitivities to changing assumptions.” Tweak the discount rate up to a more realistic level and the natural gas option comes out on top from now until 2090.

Curiously, Manitoba Hydro itself served as independent consultant in the approval process for Newfoundland’s Muskrat Falls project—a similarly grandiose $7.7-billion hydro dam in Labrador that requires a massive undersea cable to deliver its excess power to Nova Scotia. While its economics are wobbly enough to require an unprecedented $6.4-billion federal loan guarantee to get off the ground, Muskrat Falls is based on a realistic 8% discount rate. Such an assumption would instantly kibosh Manitoba Hydro’s preferred project.

At Public Utilities Board hearings this month, Manitoba’s plans for hydro greatness—built on political dreams, a shaky export market and dubious financial assumptions—is going up against boring but sensible natural gas. If future Manitobans had a vote, they’d go for boring.

Peter Shawn Taylor is a writer specializing in economic issues

5 comments on “Manitoba’s dream of becoming a hydro superpower doesn’t add up: Taylor

  1. The facts simply do not back up the claim that “A revolution in fracking technology has already unleashed a glut of shale gas onto the Midwest”. Shale gas wells are extremely expensive to drill and subject to extremely high declines in production. The 100 year supply of shale gas that the gas producers claim we have will prove to be a mirage. Gas prices are too low to cover the costs of drilling shale gas wells so the price of gas must go up. The cost of gas in North America is well below world price because there is currently no way to export gas to the world market. The first gas liquification facility is scheduled to go into service at Sabine Pass in Texas in the third quarter of 2015 and there are many other proposals to build gas liquification plants in British Columbia and the US. Once sufficient export facilities are in place gas prices in North America will track the world price and natural gas will no longer be a cheap fuel.

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  2. I googled Peter Shawn Taylor, and he shows up as ‘Editor-at-large’ at the National Post, and *none* of his articles on their site relate to ‘economic issues’. I’m suprised what should be an objective magazine (Canadian Business) offers up blog space for narrow-minded opinion pieces like this. He doesn’t even do his own research properly to be sure of his ‘facts’ (if you follow thru on his link to “independent consultants hired by the Manitoba Public Utilities Board” it’s clear that this consultant wasn’t hired by the PUB but by one of the interveners).

    If this guy has a view of the world that can stand on its own, he should have his own blog on blogspot, and then we can let his arguments stand on their own merit, instead of sitting alongside clearer-minded analysis of important business issues in Canada that I expect to see on CanadianBusiness. Shame on CB.com.

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    • Hello Interested Observer,
      You are certainly welcome to your own opinion on my work and credentials. However, I agree with you that there is an error in the online version of the column. The report I was referring to does come from an independent consultant hired by the PUB. You can find that report here . http://www.pub.gov.mb.ca/nfat/lc_main_report_jan_31_2014.pdf. The online link you found is connected to a different report that you correctly point out was paid for by an intervenor.. I did not post the column on line and have never seen this other report before. II will have the online editor make the change ASAP. Thanks for spotting the error and pointing it out.

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  3. Attention comments editor: my last comment incorrectly noted him as editor-at-large of National Post, but I should have said Macleans magazine. (my mistake)

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  4. Manitoba should not be buying natural gas turbine generators. Gas turbine are the right solution for utilities that need to complement coal power (for peak demand periods) or that need to otherwise add generating capacity quickly and cheaply (capital cost only). However, natural gas’ volatile pricing and high cost per BTU make it a bad decision for power utilities that have other options.

    A number of technologies that are currently advancing will change the balance further toward hydroelectric power. Plug-in hybrid vehicles will allow Manitobans (and many others) to take advantage of electric power resources that are far from large markets. Cracking the heavy bitumens of Saskatchewan’s and Alberta’s oil sands into usable light hydrocarbons can use natural gas as a hydrogen source, or it could use hydro electric powered hydrolysis to generate hydrogen.
    On the social front, the anti-fracking groups are gaining momentum. If fracking stops, prices will rise. And on the economic front, if LNG plants are established then prices rise.

    Any way that you look at it, natural gas prices will soar and electricity prices will follow the upward trend. And, since energy prices are driving up the cost of everything else, the value of the dollar is dropping. So spending the money now, while the money is cheap and interest rates are low, might be seen as a stroke of genius 80 years from now.

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