How the sale of NB Power affects residential customers

What will residential or commercial customers get from this deal? Will anybody really notice a freeze in prices as gas and food rise? Perhaps over time. Here’s a quick way to determine your five year theoretical savings from the sale of NB Power. Just take your total electric bill for the year and multiply by 47%.

The 47% comes from avoiding compounding increases of 3% per year for five years. We all received in the mail the example of a house that uses roughly 29,000 kWh per year, who will save $1,392 over the five year period as compared to NB Power remaining owned by us.

In contrast, an apartment dweller like me, heated by natural gas, would save $327 over the same five years on an annual bill of $700. I’ve been able to control my excitement over this potential $65 a year bonanza? That’s maybe two tanks of gas or 5 bottles of cheap wine.

Before I get overwrought with our good fortune, consider how much the average Quebec resident will pay less than our frozen rates – $4,000 less over five years.
The deal is being presented as a money saver but if our goal is to save a lot of money on our power bills, then the logical step would be to get real Quebec rates for residential power. That, however, would only happen if we were citizens of Quebec. Wait now, don’t laugh, there’s big money savings here! No nasty contracts to worry about! Just one big happy family.

OK, if you’re not buying that amalgamation thing right now, what are the residential contract terms being offered to us by Premier Graham?

The proposed deal freezes NB Power residential and commercial rates for five years. Starting in year six, the energy portion of the bill (roughly 65%) would be increased at the level of the NB consumer price index. The other 35% of the bill, costs related to the transmission and distribution networks, would be regulated by the EUB, include a rate of return on investment, and be passed on to customers. Lepreau replacement energy cost deferral would fall into distribution costs and raise rates in year 6, perhaps substantially. If the deferral is $500 million, then we are talking about a 5% rate increase. As well, any costs of supply due to usage above the 9.5 TWh heritage power would accumulate and be charged in year six.

This contract is for eternity, and must conceive of unknown future conditions. Newfoundland now receives less than ¼ of a cent for each kWh they sell from Churchill Falls. Not so good a deal for them. We are going to pay roughly 8.3 cents after the deal (average of all customers)

World oil production will decline and will stress the contract in ways not considered. Although the Minister of Energy Jack Keir indicates that the heritage pool has a small margin for growth of load (I’m guessing 5% if distribution losses are included). He may not be considering the plight of oil heated homes, whose owners were starting to panic in 2008 as light fuel oil price skyrocketed. Only the fall of the economy and oil prices prevented a disaster towards wintertime.

New Brunswickers use 282 million liters of furnace oil annually as compared to the Atlantic Provinces total of 1.4 billion. As oil prices rise, about 25% of NB Power customers could turn to electric heat, and that’s 2.5 TWh of possible new load. Because this oil is used over five months of winter, conversion would require a high capacity that we would need to meet. (700 MW of peaking power, or more) Not a lot of those customers can migrate to gas due to lack of pipes in their street and we don’t have an energy plan or even a real “conversion to wood” plan.

As Claude, a reader from Quebec, quite rightly points out, the peaking character of electric heat presents a serious problem for power suppliers to meet. NB Power’s peak summer load is 1600 MW and 3200 MW in the winter. The difference is electric heat. Electric Thermal storage units (ETS) are a device that can work for residential or commercial customers and Time of Use (TOU) meters to store heat from off peak times and use it during the day but little interest has been shown by this province. We haven’t seen the need to adapt.

So we don’t want to be driving electric heat onto fossil fuel plants like Coleson Cove which has an efficiency of less than 40%, and very high fuel costs. But that is exactly what will happen without a plan. And we will go over the heritage pool limit and it will cost more than we are told.

For those who don’t believe oil prices will rise again, consider this article in the English newspaper, the Guardian: a second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organization was that it was “imperative not to anger the Americans” but the fact was that there was not as much oil in the world as had been admitted. “We have [already] entered the ‘peak oil’ zone. I think that the situation is really bad.”

Really bad? I don’t hear a word from our government about these problems.

Is this an offer we can’t refuse?

There is a natural resistance to change that resides deep inside every one of us. Researchers indicate that acceptation of change is easier when the decision is fully explained – how it was made, why it was made, what the alternatives were, and how it will impact the corporation (in this case, province) and individuals. Based on public reaction so far, the information campaign of the government may have been deficient.

It’s been difficult for many to “buy-into” the sale of NB Power due to the change in story. For years, NB Power has been praised as a crown jewel, one that contributes greatly to the well being of the province. Now we have the spectacle of the government turning on the company, suggesting that is mortally debt-ridden, that it has been mismanaged for generations, and we need to sell it off. If the first story is now a lie, then is the present story actually the truth?

The demonization of NB Power may have merit to some extent, or be necessary to provide the “why it was made”, but it is at the political level where the buck should stop. It is the political classes who have insisted that necessary rate increases be rolled back, that their friends be hired, or not generally allowed professional management.

If NB Power is operated as a business, then it cannot respond to political influence and it’s only benefit to the province is via lower rates. On the other hand, if it submits to the chicanery of political influence, then it becomes ineffective and perhaps a burden on the public by its indebtedness. This is the classic conflict of the capitalist versus state-owned enterprise. While either can work, the principal difference is that financial discipline imposed by the state is less rigorous than the private model.

What is interesting is the path of two public utilities. In the 60’s, Quebec Hydro became the sole developer of new hydro facilities, started nationalizing the patchwork of power companies and created a huge state-owned revenue generator for their province. In 2008, HQ paid a dividend of $2.25 billion built on the wealth of hydro power.

Here, in New Brunswick, we have been on the downhill trail financially for the past thirty years for a number of reasons. In a number of instances, starting with integration of Lepreau into the rate base, inadequate rate increases encouraged debt to soar. There is a saying by mechanics that you can pay me now or pay me later. Well, we’re at that “later” time, it seems.

Our government has been negotiating with Quebec for the better part of a year and recently unveiled a framework for an agreement, called a memorandum of understanding (MOU). It is now signed and further discussion will bring forward a detailed agreement for signature in the spring of 2010.
So let’s talk about the deal as it has been presented to us. HQ proposes to pay us $4.75 billion dollars for the assets of NB Power that it wants. This includes the hydro plants such as Mactaquac, among others, the transmission and distribution system but not the thermal plants such as Dalhousie, Grand Lake and Courtenay Bay which will be closed. Coleson Cove (heavy oil) and Belledune (coal) will remain the assets of New Brunswick but be contracted to supply power at the request of HQ when needed. When judged no longer necessary, they will be decommissioned at New Brunswick’s expense.

What brings some real benefit to New Brunswick is that HQ will sign a supply contract to deliver two blocks of power annually – firstly, 4.5 Terrawatt-hours for industrial customers above 100 kW minimum demand (HQ rate M), and above 5000 kW (rate L). The existing rates would drop about 30% upon signing (6.99 cents to 4.79 cents per kWh), and follow HQ increases for the first five years
After five years, the rate increases would be determined by several items. The energy component would rise by the New Brunswick Consumer Price Index (CPI-NB).

Although the CPI has typically run at 1.9% in recent years, it could rise considerably higher in inflationary times. Given the printing presses pumping out US dollars south of the border, we could be in for significant inflation in the near future.

As well, any power usage greater than the 4.5 TWh heritage pool would be supplied by prices bid in a competitive process governed by the EUB, our public regulator. We don’t know much about this process but we can safely assume that the price would tend to increase rates of the original pool. The transmission and distribution component of the rates would be determined by the EUB based on giving HQ a return on its investment in those facilities. How much will this add to the “1.9 %”? Given that we must upgrade the links with HQ, it could be significant.

We do know that the savings in the first year to industries is $91.6 million or roughly 80% of the benefit, according to a CBC report. According to the President of HQ, Thierry Vandal, it was New Brunswick who decided how the division of benefits would be accorded. If we were to consider only the industrial benefits package, this would indeed be an offer quite difficult to refuse. But there is much more to this story.

NB Power sale to Hydro Quebec – The jury is still out

Like a few brave souls, I haven’t yet made up my mind on the possible sale of NB Power. To me, one should listen to all of the facts first.

Most New Brunswickers have one concern about the proposed sale of NB Power to Hydro-Québec: what will the impact be at their power meters?

Last week, it wasn’t immediately clear to me what motivates the Hydro-Québec purchase of NB Power. After all, we’ve been next door since forever; we’ve traded power back and forth (mostly towards N.B.) and I’m sure it’s been good for both utilities. So why the purchase proposal at this point?

Since then, I’ve done a little research – looking into Hydro-Québec’s strategic planning document on their website. They foresee an 8.5 terawatt-hours reduction of sales to industry and business based on the recent economic downturn. That figure is equivalent to 60 per cent of NB Power’s total annual load. Most interesting is that 25 per cent of the reduction is from the pulp and paper sector in Quebec (2.2 Tw-h). Industry in New Brunswick sees the lower priced energy coming from HQ as part of the solution to their survival. In the Quebec example, lower power rates alone do not guarantee survival.

According to Hydro-Québec, with upcoming expansions in their capacity, “by 2013, we will have nearly 24 TWh at our disposal.” The plan is to export more to Ontario, New England and even into the American Midwest. Now New Brunswick will feature more significantly.

Close to 40 per cent of Hydro-Québec’s profits come from export sales. That’s only natural when your average cost of production is presently 2.2 cents per kWh and the retail cost of energy in New England is roughly between 15 and 20 cents U.S. for residential rates. However, the average retail cost of energy in New Brunswick is only 9.5 cents, giving a lower return than in the U.S. Perhaps New Brunswick is an export road to New England – or, as Newfoundland suggests, perhaps this is a way to tie up existing capacity through New Brunswick.

Historically, N.B. has exported considerable power through its major tie line with Maine. Seeing further possibilities, it constructed a second line in coordination with U.S. utilities in recent years. According to new rules by FERC, the regulatory agency of the U.S. government, utilities must provide access to other utilities to transmit power across their network (for a regulated fee, of course). The auction of capacity on the new line was reserved by Hydro-Québec in 2008 for an annual fee of $10 million. Bingo – the new transmission line blocked off, even though it is little used at this moment by Hydro-Québec. Now, if the proposed sale of NB Power goes through, the original export transmission line is in the hands of Hydro-Québec.

The first benefit to Hydro-Québec is that N.B. will serve as a flexible market for Quebec’s hydro power, ramping up or down local plants as required by Quebec system operators to make the most profit. Plants like Coleson Cove, which burn expensive fuel, will be under contract to Hydro-Québec, probably for winter peaking power. Theoretically, it should operate fewer hours, and that’s a good thing.

Secondly, the proposed agreement would secure a large part of the New England market for Quebec hydro power. That means that P.E.I., trying to export 500 MW of wind power, or Newfoundland with dreams of the Lower Churchill project, will be at the back of the bus. One exporter to New England means no pesky competitors to drive down margins.

Newfoundland could request more capacity from New Brunswick (as per FERC rules) and it would eventually happen, but south of the border, it could be blocked in by a lack of transmission capacity in the U.S. There have been numerous examples of public opposition stalling lines, causing bottlenecks across the U.S. – ironically demonstrating how U.S. law may be more effective in Canada than in their own country.

Perhaps the most significant impact, by delaying transmission paths for Newfoundland either through Quebec or New Brunswick, is the financial uncertainty that accrues to Newfoundland’s financing of the Lower Churchill project, a project that could cost up to $10 Billion and provide 2800 MW’s of power (16.7 TWh).

The legacy of the original Churchill contract between Newfoundland and Quebec remains until 2041. It’s a complicated story, but suffice to say that nobody has disputed Danny William’s assertion that $22 billion of the benefits have gone to Quebec and $1 billion to Newfoundland. The business purists among us would say that a deal is a deal, but shouldn’t we, among provinces, brothers and sisters, search for a greater justice than simple legality? Can I feel comfortable as a Canadian if either Quebec or Newfoundland were unjustly mistreated?

Quebec deserves great credit for their vision and perseverance to develop the hydro resources of its province. However, the lessons learned by Newfoundland have relevance to any contract that New Brunswick may sign with Quebec. As well, for us to sign a contract without ensuring that the aspirations of Newfoundland are fully addressed is detrimental to my vision of a just Canada. In the absence of leadership from the federal government, it remains crucial that Premier Graham modify this agreement in a way that respects all members of this confederation.

What is tragic in this energy competition is that we (in Atlantic Canada) will need all of the hydro power that we can find in coming years to replace fossil fuel for heating homes and businesses in New Brunswick (20%), Nova Scotia (65%), PEI (80%) and Nfld. We burn 1.4 billion litres of furnace oil each year in Atlantic Canada. That’s equivalent to 12.7 TWh or close to the output of the proposed Lower Churchill Falls project. The needs of Atlantic Canada could use most of it’s output before even sending it south of the border. It’s not a case of whether we must have only one winner, Quebec or Newfoundland. We need both and right now.

My next column will look at the deal being offered.

Let’s look at the facts

The announcement of the tentative agreement to sell NB Power is a game changer on the Atlantic Canada political scene, with severe reverberations hitting Newfoundland and to a lesser degree, Nova Scotia. Only Quebec, the originator of the storm, seems immune. Of course, Quebec is 10 times larger than New Brunswick, so the $4.75 billion proposed purchase of NB Power is relatively small potatoes compared to Hydro-Québec’s debt of $35 billion. With total assets of $67 billion their debt-to-asset ratio of 53 per cent is quite healthy.

One of the facts of business life is that most businessmen don’t make difficult choices until it becomes absolutely necessary. Shawn Graham, as CEO of this province, is no different. Nearing the end of his first mandate, he has two financial problems looming – first, the provincial deficit is ballooning and $1 billion may be added for the current year.

Secondly, delays in the refurbishment of Point Lepreau have delivered extra costs to NB Power for the purchase of replacement power. This would make a rate hike unavoidable, and certainly unwelcome before an election.

Given that discussions began early in 2009, it is likely that a sale of NB Power was seen as the neutralizing agent to fix these potentially fatal electoral roadside bombs.

Let’s look dispassionately at the proposal. What is the reality, what is just spin and what is just not true? There are many talk radio shows going on and I’ve listened to a few. Citizens are concerned and want answers.

One of the recurring themes of callers is the idea that Quebec is suspect and their hydro company cannot be trusted to provide power to New Brunswick. We might call it fear of the unknown or fear of significant change in our lives, xenophobia or in some cases Francophobia.

Leaving aside the Quebec-Newfoundland issues related to Churchill Falls for the moment, most observers would say that Hydro-Québec is a well run-utility that is professional and technically competent. Like all large organizations within the state sector and often the private sector, the productivity of employees may leave room for improvement. This also is the case at NB Power, which has consistently avoided making those tough management decisions. (NB Power does find the time to address and implement management bonuses.)

Hydro-Québec regularly delivers power or contracts with utilities south of the border and one doesn’t hear of broken contracts or poor performance. In fact, given the worst case of a separate Quebec outside of Canada, wouldn’t it be extra important for credibility of the new state to fulfill all contracts signed by state organizations like Hydro-Québec?

Could we set aside the Quebec-baiting or fear factor and understand that our own failure to manage NB Power is not the fault of Quebec or their utility?

A second theme mentioned by the government and by some citizens is that NB Power’s debt is unmanageable and we would be unable to reduce it. Not so. For example, under the management of Jim Hankinson between 1996 and 2001, NB Power reduced net debt by $423 million. There is a natural pattern of capital expenditures on new plants in some years and subsequent debt reduction in following years. It happened again after the Coleson Cove rebuild. What remains crucial is good operational cost control and that ongoing capital costs are cut to allow debt to shrink quickly after a major project.

If we compare NB Power’s rates with many others, we can see that the rates are very reasonable. Residential rates in N.B. are 11.66 cents; N.S. is 12.88, and P.E.I. at 17.3 cents; Calgary charges 12.13 cents and New York, 25.3 cents. Only the provinces with significant hydro power, such as Manitoba, B.C. or Quebec, are lower. The same is true for large industrial rates. Ontario charges a cent and a half more than N.B., and who has more industry than our Upper Canadian brothers?

Let’s not fool ourselves that debt at our utility was the reason for the sale or the most important factor. But ever since the building of Lepreau, we haven’t wanted to pay the real cost of electric power, and political leaders from Richard Hatfield down the line wouldn’t bite the bullet and allow rates to rise to lower the debt level. As well, management at NB Power hasn’t controlled costs on a consistent basis. The debt is high but manageable on every level but political, it seems.

We’ve only begun the peeling of this particular onion. This story is quite complex for one column, so let’s look at the self-sufficiency agenda, emissions, peak oil, Newfoundland and lower power rates, on another day. Hopefully, our eyes won’t water too much when we discover the rest of the story.

Develop an energy strategy that serves New Brunswick

Building a new oil refinery with a price tag of $8 billion was never going to be an easy task, but saying goodbye to a project where millions have been already spent must be quite difficult.  Collateral damage may include employees losing work and the investments made by individuals in the community expecting a boom.

There is always a risk of becoming emotionally invested in a concept, whether it’s private or public sector managers.

According to news reports, Irving Oil now sees declining customer demand for gasoline “from 2015 out for the next 25 years.” They didn’t divulge the reason for the decline, despite an expanding U.S. population. One likely cause is the reinvigorated corporate average fuel economy standards (CAFE) in the U.S. gas market and hence in Canada. The new refinery would have added capacity into a declining market.

But looking beneath the surface, rising oil prices in 2007 and 2008 made it clear that we are reaching a tipping point in world oil supply. About 40 of the world’s 54 oil producing countries have passed peak production and are declining. Reduced supply means fewer refineries, as I noted in a previous column from 2007.

Has the present government become so emotionally attached to its self-sufficiency agenda and “energy hub” job strategy that they reject the reality of an oil production decline in coming years with its consequential economic chaos? Or is it just saving face until the next election?

Self-sufficiency, as proposed by Shawn Graham, was fatally flawed from the beginning.

It was based on growing a larger population, a strong industrial economy and sufficient cheap energy, all of which are unlikely in the next decade.

With the passing of the refinery project, the “energy hub” seems an empty shell.

There is talk of an Irving wind power export project, which is like assembling Lego blocks made elsewhere – few construction jobs, and few or no permanent jobs. A related concern: do we want to use the best wind sites for export power rather than local use? A proposed natural gas plant is comparable, giving some short-term construction work but few permanent jobs.

The fallout from the refinery decision means expected tax revenue will not materialize.

Based on reduced revenue expectations, one would hope that the expenditures of government (both capital and ordinary) would be reviewed. As an example, New Brunswick’s latest budget proposes spending $160 million on new technical schools and programs, which were partially intended for training of refinery construction trades.

Demographic forecasts of a 20-per-cent reduction in student population in coming years and with more distance education, would see significant spare capacity in existing“bricks and mortar”institutions.

Does this expenditure still make sense? Perhaps lowering tuition would keep the institutions filled in coming years.

Having misunderstood the threat of an impending energy crisis, it’s time for Premier Graham to return to the basics of government.“Government intelligence” could produce an energy policy that meets our needs.

Should new homes have to meet an energy code? Is Efficiency NB making a serious impact on heating costs for existing homeowners? I recently talked to a hard-working woman in the process of being cut off from electricity. Due to misfortune and remarkably high bills, she couldn’t catch up from the high winter costs. This is real life for the less fortunate among us.

What is the role of wood in New Brunswick for heating homes? Why can’t NB Power reduce its winter peak? Should NB Power be consolidated and work on improving operational efficiency and reducing costs? Should new appliances sold have to meet energy efficiency standards? Since we are facing an impending crisis of very high gasoline prices and energy shortages in the near future, should we be setting a floor price for gas to encourage the purchase of high-efficiency vehicles? Would incentives help us? What about mandatory standards for vehicle mileage or speed limits?

These are but a few of the questions that I would ask the premier. Will he change course? What will be his legacy? His three years of power have shown little progress in setting a new course on energy. Considerable time was occupied in the energy department marketing the “energy hub” idea.  Being a strategy for job generation, it should have been handled by Business New Brunswick.

Who are the losers with three years of an energy policy abyss? The people of New Brunswick, who won’t be prepared for hard times.

But it could be worse, I suppose. Mexico is again facing large decreases in government revenue, as their oil exports declined 14 per cent during the first half of 2009. That decrease of 200,000 barrels a day amounts to $4 billion less revenue for Pemex, the state oil company.

Why solar thermal energy still shines

Is the sun a renewable resource?  Well, technically it isn’t, as it will burn out in about five billion years.  But for all practical purposes, 5 billion years is the same as a renewal source.  In contrast, world oil production started in 1859 and will start declining sometime in the next five years.  So, what’s the most reliable natural resource to provide our hot water from for our homes? The sun, oil wells, or electricity?

Remember that electricity in New Brunswick is roughly 60 per cent from fossil fuels.

If you chose the sun, you may be on to something sustainable.  People thinking about solar energy systems may confuse solar thermal with solar photovoltaic (that provides the electricity for your calculator).  One of the types of solar thermal uses a liquid, propylene glycol, to avoid freezing concerns while effectively transferring heat from the sun to your hot water.

A typical collector consist of a number of black-painted aluminum fins or plates bonded to copper tubing in a box that’s covered by a tempered glass cover. The glycol is pumped through the collector on a roof or wall, absorbs heat and transfers it, through an exchanger, to a storage tank for use when required. The interesting part is that there’s no charge for the energy provided by the sun, so it’s inflation-proof.

At the surburban home of Gordie Smallwood of Moncton, you can find a solar thermal system he’s built with reclaimed collectors. The collector area on his roof is 160 square feet (roughly 8 x 20 feet). That’s bigger than your typical system. His hot water is totally solar heated, with the excess going to partially heat the house.

As Gordie explains, “this is not rocket science. The technology has been around for a long time and there are lots of good manufacturers out there.” The day I saw his unit, the collector output was at 140 degrees Fahrenheit.

I also spoke with Gordon MacDonald of Harvest Energy Solutions about solar thermal. He suggested that people take all of the energy conservation steps that they can as a first step to energy independence, being the biggest bang for your dollar. Each site has challenges as the building may not have a good southern orientation, the angle of the roof may be less than optimum and shading may exist. The roof structure should be in good physical shape to support the weight of the collectors, and space is required for the storage tank, among other considerations.

The cost of a system will vary depending on your requirements – how much heat can you effectively use? For example, the heating demand of a home varies greatly in a winter and is not required at all in the summer. However, hot water heating requirements are relatively stable throughout the year and therefore more economic to design for.

Apparently, commercial and industrial users of large quantities of water are the big winners with solar thermal, as the economies of scale kick in and many companies use hot water only during the day, minimizing storage requirements. Paybacks are quick.

So, if there is an economic advantage, why aren’t more residences and businesses using solar thermal? Very simply, initial installation costs are in the thousands of dollars, and you can rent an electric water heater from N.B Power for less than $10 a month. Which would most people logically choose? Lower first cost wins almost every time. In addition, there are few installed systems in New Brunswick to serve as comfort for those of us who only believe in what we see. Lastly, with a small number of retailers and trained installers, you may understand why solar hasn’t heated up our interest.

The federal government has several programs that reduce payback time and stimulate the industry. The EcoEnergy Retrofit program provides $1,250. The temporary Home Reno Tax Credit has a maximum benefit of $1,350. And there may be others. Be careful to ensure that you qualify and that you follow all the right steps.

In Kingston, Ont., the utility will provide a two-panel unit for $49 a month. Larger sizes are slightly higher. You can also purchase the system for $5,000, not including installation. Other utilities in Canada are getting involved as well, including Manitoba Hydro, Enmax and FortisBC.

What could New Brunswick do to encourage solar water heating? NB Power provides hot water tanks that use electricity at a monthly rental rate. That electricity mostly comes from non-renewable sources (oil, coal, and natural gas). The province could require NB Power to lease solar thermal hot water systems, as well. At 10,000 new systems per year, that’s 20,000 collectors or more. These could be produced locally if we chose to do so.

If you include all of the installation work, you have the start of a new green industry in New Brunswick.

Can our society avoid the next ‘Black Swan’

We’ve been getting a little refresher recently on what an economic contraction feels like.  Canadian figures show that our GDP increase dropped from 2.7% in 2007 to .5% in 2008.  The US economy contracted by 5.9% and Japan felt a staggering 12.7%.    We can expect further contraction in 2009 based on job losses and declining consumer confidence.

The optimist in me believes that the economy will recover as the toxic loans and derivative products are spun out.  In 2010, confidence could return and people may open their wallets for purchases.  But is there a perfect storm waiting for us after that?

Nassim Nicholas Taleb describes black swan events in his book entitled naturally “The Black Swan”.  World War I or the September 11 attack, are examples of how unexpected events can dramatically change human history.  Taleb suggests that a black swan is a complete surprise but afterwards is ‘explained’ by hindsight.  Wouldn’t it be nice to predict a perfect storm / black swan event and hopefully divert the course of history.

Fact 1 – The population of the world is increasing at slightly over 1% per year or roughly 80 million new inhabitants crowding onto the planet every year.  These people all want the good life with a car and other typical consumer items. Greater population with level or declining oil production means 1% more competition for that oil each year.

Fact 2 – The president of Total Oil, Christophe de Margerie recently predicted that world oil supply will peak at 89 million barrels per day, a rather astounding admission from an industry source.  A significant number of analysts think that production has either peaked or will in the next few years.  At the very least, everyone agrees that the era of cheap oil is over, with new offshore developments costing between $60 to $80 dollars a barrel.  Although $40 oil helps our present economic woes, the low price forces cuts in oil discovery and development budgets and also renewable energy projects.

Over the last few years production capacity has flattened out at roughly 86 million barrels / day so his views seems closer to reality than most oil company leaders are willing to publicly admit.  The International Energy Agency now predicts a production peak 10 years earlier in 2020.  Expect further adjustments to their prognostications are reality shakes their irrational exuberance.

So why does world oil production matter anyway?  Very simply, oil equals economic growth.  Without oil, there is no economy.  We can print all of the dollars we want, but they won’t power a car or a backhoe, or a ship to deliver goods around the world, unless oil is available and at a reasonable price. Declining oil means economic contraction with higher oil prices – the worst of all possible worlds.

A possible black swan starts after an economic recovery in 2010 when oil demand recovers and supply tightens.  By 2011 a rapid price spike similar to 2008 occurs.  The economy weakens again and the oil price slips briefly.   Supply, weakened by under-investment and natural depletion, no longer meets demand.  This cycle of spikes and economic slippage proves fatal for our economy.  Our growth economy changes to a continual decline economy.  Further stimulus programs are out of the question as no willing lenders such as China can be found.  Our 2009 stimulus funds were spent on frivolous issues like four lane highways.

As with any sad story, there is a happier version where the wise leader directs and encourages a transition to a sustainable localized resilient community.  Significant investment is made in localized food production and manufacture of goods.  Conservation of energy in homes and business is made a priority, and shifts off-oil to other renewable supply is promoted.

Is it already too late to save our society? The list of missed opportunities is endless.  The Lower Churchill hydro project would take six years.  Photovoltaic cells won’t be ready for prime time economically for several years.  The present rate of retrofitting our existing homes could take 50 years.  We don’t even insist on an energy code for new buildings.

England now requires that all homes being sold have an energy performance certificate and by 2016 all new homes must be zero carbon.

In the courtroom drama “A few good men”, the lawyer Tom Cruise interrogates the Colonel, played by Jack Nicholson shouting, “I want the truth.”  Jack responds “You can’t handle the truth.”

Are we ready to understand a truth that globalization without adequate oil is almost impossible? Unless we’re ready with sailing ships, nuclear powered or coal burning ships.  Approaching is the perfect storm of population growth, energy decline and economic fragility, but our leaders won’t tell us the truth or help us get ready.  Perpetual economic growth requires increased supply of oil.  That party is over.

Could we adapt prior to a “declining oil / permanently contracting economy” black swan and avoid the end of our modern society? Maybe. Try renewable energy and extreme conservation.  If spent wisely, stimulus funds or routine capital expenditures could begin that transition.  At the moment, only Barack Obama “gets it” to the extent of spending billions on rail transit.  For Canadian politicians like Stephen (energy superpower) Harper, it’s just business as usual. Energy leadership in New Brunswick is equally unimaginative and bleak.

Wanted: Higher energy standards for housing

A real concern for many is the cost of heating our homes. It’s a cold country so we should logically adapt our housing to reflect the reality that housing uses 17% of Canada’s total energy budget. To some extent we have started down that road with the R2000 program but there is a major gap between R2000 housing and what is really possible.

Decades of cheap energy have sapped our creative thinking, and left us with a legacy of energy pigs masquerading as houses. That is changing. If the price of oil hadn’t declined this fall and winter, we would have had a major crisis on our hands. It’s only a temporary reprieve, but are we ready to react to the long-term trend that is evident? Whether you heat with electricity, oil, natural gas or wood, prices are going to rise quicker than your wages or inflation. For many, that means a choice of cutting other expenditures and it could be food. What are we to do?

There are some reasons for optimism. First, the advent of new housing concepts like the “net-zero” energy home, which integrates advanced energy efficiency design and building materials with onsite renewable energy, which is then capable of producing an annual output of energy that is equal to the total amount of its annual purchased energy. Going closer to zero energy costs more because photovoltaic, is still a little pricey today. This leads us to the near zero energy home which may be reasonable right now.

Rob Dumont from Saskatchewan was in New Brunswick recently giving presentations on a remarkable “Factor 9” house built in 2007 in Regina. It was designed to use nine times less energy than a house built in the 1970’s and use only 50% of the water. It consumes only 3 kWh per square foot per year or $450 for the energy (1500 ft2 home). On the south wall are active solar panels that heat water for space and hot water heating. In addition, the air infiltration is reduced from 1.5 (R2000) to .5 air changes per hour. An air exchanger ventilates and recovers heat. The R-2000 home, the top energy standard for New Brunswick, would use 13 kWh for each square foot or more than four times the energy. Is it worth it?

The idea of investing a little more money initially to save on energy bills in the future isn’t as exciting to some as granite countertops. But looking into the figures – the older standard 1500 ft2 home uses 28,000 kWh per year, the R2000 uses 19,500 and the Factor nine uses 4500 kWh, which is $2800, $1950, and $450 respectively. (at 10 cents /kWh) Of course, the cost of energy will rise over the years so let’s use an average figure of 14 cents when calculating the present value of the energy savings over the years.

The energy savings by insulating above the standard home of the past to R2000 is $12,600 over 20 years. The benefits of going Factor 9 would be almost $35,000. Supposing the standard house cost $200,000. The R2000 would cost $206,000 based on a 3% premium. The Factor 9 could cost $220,000 to build. The savings in each case are greater than the initial cost increases.

So, the numbers suggest that super insulation and smart building techniques save money, and we know that the local economy benefits from energy dollars remaining in the community. Environmentally, using less energy reduces greenhouse gases. Energy security for Canadians is enhanced by using less fuel and generally contributes to less price volatility. We know all of these good things yet we continue to build with poor energy performance. How could we change?

First, we have to understand why change is necessary. Most people know little about Factor 9 or close to net zero energy homes. Paul Arsenault of AlternaHome Solutions was recently selected as the builder of the first CMHC Equilibrium eco-friendly demonstration home in Atlantic Canada. Moncton is the site.

We need model homes in every major region in the province. Efficiency NB could incorporate a model home subsidy for a number of legitimate builders to aid in the design, construction and monitoring of their first super-efficient home. Let’s build home grown expertise and visibility.

Secondly, the province must adopt a high energy standard for all new construction, even higher than the R-2000 program. Poor energy performance means a cold and bleak future. A bright self-sufficient future for New Brunswick includes conservation, passive solar gain, and eventually photovoltaic for new construction.

Finally, we need to examine the way that our communities are built, to minimize the necessity for private cars. Just reducing the energy demand of housing is only part of the total energy solution.

It’s all in the Performance

Recently, a small industrial owner asked for advice.  He was thinking about converting equipment from oil to electric as a way of saving money.  A quick look at his electric bill indicated that his average cost was 16 cents per kWh, which is relatively high.  His rate for furnace oil was actually lower than his kWh rate and conversion to electric would only worsen his situation. Although most business people are very smart, few understand the complexities of the small industrial rate and the variable first block.  NB Power’s rate design is intended to flatten demand but does it achieve anything but costing some customers more money? The solution chosen by this industrial customer was to reduce the size of compressors and install ground source heat pumps for space heating.  This case made me reflect about NB Power’s lack of progress on rate reform and much more.

In the rarified altitude of NB Power’s 9th floor, there are bigger fish to fry than rates today.  The Lepreau refit, with fuel costs at $1 million per day, must be weighing heavily on David Hay’s mind.  It’s now three months late or $90 million over budget.

His salary and bonus has been in the news virtually every day.   Over at Nova Scotia Power, their CEO is paid $600,000 per year.  Remember Jim Hankinson, the well-respected CEO of NB Power from 1996 to 2002?  He’s now working as CEO at Ontario Power Generation for $1.6 million a year.  That’s one of the companies generated when Ontario Hydro was broken up by the privatization / de-regulation ideology prevalent several years ago.

Although his salary is high by New Brunswick standards, perhaps we should be asking another question – Is David Hay doing the job that he is hired to do in a competent manner? And to be fair, how are the groups directly associated with NB Power playing their roles.  – The Energy and Utilities Board, The Department of Energy and Efficiency New Brunswick.  Are they doing a good job?

The Minister of Energy Jack Keir is ultimately responsible for NB Power.   Mr Keir has indicated that he wants to have NB Power run as an efficient business and operate at arm’s length to the government.   Let’s take the issue of company structure, something that is really outside the domain of CEO Hay.  The previous Conservative government split the corporation up into 5 units and incurred multi million dollars costs for no obvious benefit.  This Liberal government has given no clear direction to NB Power to re-integrate the corporation and reduce costs.  A report was commissioned back in July 2008 with Bill Thompson and Bill Marshall as the authors.  Has this report been given to the minister?

The Department’s major interests are the new refinery and private sector financing and building a second Lepreau unit with power to be sold to New England states.  There are a few problems blocking this project: inadequate transmission capacity south of Maine, no long term contracts signed from US utilities, an unfinished design for the new ACR-1000, and an uncertain future for AECL.  As well, the earliest in-service date would be 2017, the construction cost could be $7.5 billion dollars, and the possibility of cheaper photovoltaic energy being available to customers before that date may be the financial ruin of utilities who buy into the deal.  Aside from these immense obstacles and uncertainties, apparently it’s going well.

If we look over at the EUB and it’s predecessor’s performance over the past twenty years, most objective observers would agree that it has failed to reform and regulate rates.   A couple of examples – Any rate increase below 3% is not subject to review and the revenue-cost ratios are consistently out of the range suggested by the EUB.  Large customers get better rates than small customers and on it goes.  Our energy watchdog is just a cute poodle but it’s not all their fault.  Let’s face it, government wants it that way – An agency with responsibility but little authority.

The folks at Efficiency NB want to see more efficient use of energy and that’s exactly what we need both for NB Power and the citizens of this province.  Roughly three years into their mandate, we see little solid evidence that the agency is achieving its goals.  What percentages of homes in the province have been upgraded?   1%?  2%?    Their annual reports are astoundingly short on detail and context.

So, are EUB, DOE, ENB, NB Power doing a good job?  Respectively, how does ineffective, incompetent, ineffective and not good enough, sound to you?

May I make a few quick suggestions?

1) Give the EUB authority or eliminate the EUB and roll its functions into the Energy Department.  Without real rate reform, we have no incentive to conserve.

2) Premier Graham needs to accept that the energy hub is unlikely to produce anything of value, and re-task the Energy department to do its real job. A maybe solution in 2017 doesn’t cut it.

3) Efficiency NB has not lived up to its mandate.  It has no sense of urgency, and requires attention from government.

4) The Energy Minister should be the chairman of NB Power’s board of directors.  Recombine the corporation into one business unit.

Our modern society provides amazing benefits that result from the incredible energy of liquid fuels such as oil.  Our level of usage is not sustainable and change must begin immediately if we are to re-organize our very survival. The Graham government needs a complete energy reboot.  The question is whether he will press the button or whether the people will do it for him in 2010?

Invest in the right stimulus: Energy Independence

Stimulus is one of the buzzwords for 2009.  Every country that can afford it will be borrowing money to jump start the economy.  Canada is no exception.  You can be sure that when politicians try to spend money quickly, a considerable waste of your tax dollars will follow.  The ill-considered ideas will not be malicious; our esteemed leaders just don’t realize that the world has changed.

The economic problem facing us has its origins in financial weapons of mass destruction and the cost of oil.  Economists estimate the benefit of the recent drop in oil prices to the US at over $300 billion dollars.  That’s quite a stimulus package that Saudi Arabia has arranged for George Bush and his successor.  Our oil shock in 2008 is not the last one or even the worst that is coming.  We should expect another in 2010 or 2011 as soon as the economy revives.  Where will we find the funds for another multibillion stimulus program then?

Oil prices at $40 don’t support the kind of capital exploration budgets that are required to maintain supplies of oil and natural gas that are sapped by annual depletion.  A number of exploration companies are either selling for a loss or have shut down some production.  Most oil producers in Western Canada have cut their exploration budgets severely to survive.  The results of this under-investment will come back to haunt us.  The International Energy Agency warns that much larger investments are required to forestall disaster looming in the near future. Banks, being risk averse, remove credit where there is evidence of financial weakness caused by lower prices.

One of the things we seldom talk about is energy return on energy invested (EROEI) when contemplating investments for the future.  Looking back to the early days of oil production, it took one barrel of oil to bring 100 barrels of oil to market.  Today the ratio is much lower, so that the same barrel now only brings 10 from Saudi Arabia and probably only 3 barrels on average from the Alberta tar sands.  As we move into deep offshore wells like Brazil, we get costs in the $80 a barrel range.

So, our economy is increasingly being drawn into more investment for less energy output.  A blog entitled Calculated Risk http://www.calculatedriskblog.com/2008/07/us-energy-consumption-as-percent-of-gdp.html estimates that in 2008 energy costs jumped to 14% of US GDP as compared with a low of 6% in 1998.  A logical next step for Canada would be to actually invest in projects that would reduce our dependence on oil and other energy to the tune of 8% by conservation and substitution as a minimum starting point.  So far, one of the “replacements” for oil is corn-based ethanol.  Analysts unfortunately have concluded that with an EROEI of roughly 1.3, it takes almost a barrel of oil to produce a barrel of ethanol.  That’s hardly an investment strategy to get us off oil.

What about electric power generation from wind turbines?  They give roughly a 20x average return on energy.   For a coal-fired power plant, it’s 7.5 and a nuclear powered unit is just over five.  Hydro power plants are over 10, according to the Encyclopedia of Earth.  Photovoltaic is still expensive with a questionable return at the moment.

So, if you had $40 billion to spend, how would you create the most energy independence and oil immunity for Canada and as a side benefit create jobs?

As a longer-term strategy, how about re-building a railway freight and passenger service?  We could sure use a new national energy standard for new homes and a serious upgrading program for existing homes?

How about a national direct current electric power transmission line to efficiently move hydro power from BC, Manitoba, Quebec or Newfoundland to other areas.   What about a strategic oil reserve of perhaps 100 million barrels?  The purchase of oil with deferred delivery from hard-pressed Canadian producers would ease the pain in the Western oil patch from volatile prices.

Would we be better off with a national program of wind power development and support of hydro plans in Manitoba, Newfoundland, Quebec and BC?

I like to believe that our leaders will make choices that have an excellent energy return.  However, isn’t there a “Murphy’s law” about decision making time being inversely proportional to the cost of the project?  With $40B in play, we can expect some pretty dumb ideas in the near future.  When your local politician trots out the perennial choice of widening roads or building bridges to nowhere, one might ask them about the energy return on these $100 million a pop boondoggles.  Obviously, there is none.  In fact, the future of the personal automobile is in serious question if we don’t dramatically raise fuel efficiency.

But as a wise politician once said, “I’ll double cross that bridge when I get to it.”