New Brunswick’s approach to natural gas is full of cracks

The Green Party has a number of concerns regarding the development of natural gas in New Brunswick.  The Province has no long term energy plan, a poor royalty structure, and citizens have a real lack of confidence in our government to protect their property rights.  As well, there is a poor understanding of the economics of natural gas industry and a lack of respect for the environment.  This report, although brief, may improve the understanding of the issues.

A long term energy policy.

Our NG supply is presently coming from Sable Island.  By roughly 2017, it will be nearing depletion and unable to supply New Brunswick.   Western Canada gas is not connected to Atlantic Canada by pipeline.   One alternative is the use of LNG arriving from countries like Algeria and Qatar, which introduces questions about security of supply and prices in coming decades.  Our world will increasingly be defined by energy shortages, energy nationalism, resource wars, and competition for those dwindling supplies.  It is possible that we might import from the US, itself a large user of natural gas.                                                                                                                                                                                                                                 Note that 3% of Canada’s natural gas production is from Atlantic Canada and only a very small percentage of that is from New Brunswick – Corridor Resources.   As the conventional natural gas supplies in NB and NS play out, the size of unconventional reserves (shale gas) is still unclear.  Recent wells by Apache (a partner of Corridor), who drilled horizontally into the shale level, were unsuccessful.                                                                                                                                                                   The recent provincial Energy commission report suggests expanding the use of natural gas within the province, but makes no mention of restricting usage or export levels of New Brunswick gas to ensure adequate supply for our children and grandchildren.  We have no solid evidence of a viable in-province supply at this time.   There is plenty of hype surrounding the expectations of shale gas resources in North America.

The existing royalty structure

New Brunswick has little rational incentive to exploit its natural gas given the return on energy supplies.   Any businessman would be reluctant to rent a property for 5% of its value, let alone sell off a non-renewable energy resource of strategic value in the future.

Our present royalty is 10% of the wellhead price.  Given the subsequent deduction of costs, we see in 2010, a recovery of 2% of the revenue of the production from Corridor.  The current glut on the Boston market and the structure of the royalty ensure that we receive a minimal return.

Public confidence in the government of New Brunswick.

The extensive development of natural gas proposed requires the consent of the people of New Brunswick.  The experience of about 60 families in the Penobsquis area with water problems and subsidence cracking basements and creating sinkholes in fields has caused a confidence gap between citizens and their government.  Based on government responses to the problems caused by the Potash mine, we can predict that anyone having water quality issues related to hydrofracking will be “on their own” in regards to seeking justice.

The government of New Brunswick has refused to release the data related to subsidence gathered by a consultant required as part of the mining process so that the families can defend their rights before the mining commissioner.   Will the same approach apply to water testing by shale gas companies?  How is it possible that we allow the socialization of the environmental problems of industrial activity to innocent citizens while the Potash Corp made $1.8 billion of profits in 2010?

The economics of natural gas.

Horizontal drilling and fracturing are necessary to get gas out of the shale rock and this costs more than conventional vertical drilling.  A shale gas well’s production will decline at significant rates of 65% per year or more, which means that constant drilling is necessary to maintain production levels.   Although the cost of a well in Arkansas may be as low as $3 Million, the Apache wells in Elgin cost about $12 million each.  The breakeven point for shale gas may vary from $5 to $8 /mmbtu.

The initial rush of drilling in the US has driven market prices for natural gas down to $4 per mmbtu or less.   This is below the cost of production leading to less drilling taking place now.   It is now 20% of US production, which has reduced the export volume and prices of Canadian natural gas sent to US markets.

The Energy Report by Thompson / Volpe suggests that natural gas prices will remain stable in New Brunswick for the next ten years.   This seems unlikely given that availability of gas is dependent on companies actually making a profit.   It is more likely that as depletion takes effect, oil prices rise and natural gas displaces some functions of oil, then NG prices will again rise.

The problem remains that New Brunswick is poorly positioned to compete against shale gas originating in the US.  One can see from the chart of prices, that although volatile, the price has rarely stayed over $8 / mmbtu for significant periods.  The cost of transport to market is about $1.40 per mmbtu or 20% of the market price.   Our prediction – Natural gas will remain a boom and bust industry with hardship for companies drilling in New Brunswick.   We might consider a different economic model for this industry.

The distribution of natural gas -Enbridge

Starting a new distribution network is an expensive business and building a customer base requires time.  Enbridge expected to lose some money in the initial years.  However, the conversion rate of customers has been slower than anticipated.  So far, Enbridge has lost about $170 million which would be paid back once they start to make money.  To attract customers, they have offered between 10 and 20% savings over oil and electric rates.  When oil prices went up, so did the delivery charge and this has caused some concern among the industrial customers, like Flakeboard.  The very large industrials get a bypass license so they get the very best price.  The government is presently renegotiating the terms of the 20 year agreement which ends in 2020.

Fracking, a questionable practice

Fracking is a complex process.  Without fracking, shale will not release natural gas.  To get large volumes of gas, many wells would need to be drilled each year.  How often does fracking result in cross – contamination of the water supply?  We know the answer is not zero.  Is it 1%, or is it 10%.  Is there an acceptable level of failure?  The people who are affected would say no.  They take the risks with no compensation or protection.   We are drilling without acceptable standards, and without adequate inspection.    Will the prior water testing be in the public domain?

Conclusions:

Our present approach to natural gas fails on many levels.  One senses the desire to export at any cost and with limited economic return.  We are at the end of the fossil fuel era, clearly evident by the costly development of a low quality resource – shale gas.    We are left with many questions and decisions to be made.  We need a moratorium on drilling to have time to answer many of these questions.

• What is the level of industrialization of the province that we are prepared to accept?
• How can we protect those citizens affected (Penobsquis) and rebuild the confidence of the people?
• Can we improve the royalty structure or should we have a totally different model.
• Should we use natural gas to produce electricity given its lower efficiency rating? Should we consider gas New Brunswick’s ‘transition’ fuel easing the difficult switch to renewable energy sources?
• Should we export the resource, or use it in-province over a century? Do we want the responsibility for US energy supplies as fossil fuel cost skyrocket?
• What are the standards, the inspections, the water quality testing and the insurance that provides the best protection possible?
• Might leaving shale gas underground be the best gift we could leave for our grandchildren?

I know the term “Banana Republic” is overused, but….

Giving it all away

True or False?   Our common heritage, the natural resources of the province, is being managed in a competent manner by the government.   Recently, I looked at the money being received by the province from natural gas production. Here are the results of my investigation.

A royalty is a payment to the owner of an asset for its use.  For example, if you pay rent of $900 per month on an apartment that is worth $80,000 per unit, that’s effectively a royalty of 13.5% per year that you pay for the use of that asset.

To develop a natural resource, governments often assign a block of land based on a bidding process, prospective sites are drilled by a company, connected to a pipeline and the gas produced is sold until the wells are empty.

So the valid questions seem to be – First, are we getting a fair price for our non renewable gas resource? Secondly, how fast is the resource being depleted and will there be any left for our children and grandchildren?  In other words, are we using the resource in the best possible manner?

In the years from 2003 to 2010, the major producer of natural gas in New Brunswick, Corridor Resources paid royalties of between .5% and 8.2% when expressed as a percentage of natural gas revenue.  The average over the period has been 5.3%.    Typically, one would compare royalty regimes with other jurisdictions as a basic sanity check.

For example, Alberta collected $5.8 billion in natural gas royalties in 2009 – that’s 17% on sales of $34 billion, with a sliding royalty scale of 5 to 36% depending on various factors.  Nova Scotia’s on-shore royalty is similar to New Brunswick.  Generally speaking, if you collect higher royalties, you are better off.

The New Brunswick regulation reads, “The royalty on natural gas shall be ten per cent of the actual selling price or fair market value at the time and place of production, whichever is the greater, free and clear of any deductions”

The key phase being “place of production” (being the wellhead), is interpreted to mean the company can deduct many things (amortization of processing equipment and connection pipeline, and transportation tariffs to Boston), prior to its 10% calculation.  10% of a reduced figure can be quite small.

Worse, the North American price is exceptionally low this year and will be into the future, due to a North American glut of gas caused by increased production by horizontal fracking of shale gas in many areas.  In 2010, the company expects to pay New Brunswick less than 2% of the value of sales as a royalty. (Roughly $500,000 on $26M).   In fact, the amount due to the province will be less than stock based compensation given to executives of the company.

Corridor certainly isn’t complaining about its royalty conditions.  A report entitled “Global Petroleum Survey 2010” by the business-friendly Fraser Institute surveyed the differing investment climates based on corporate responses to royalties and other factors.   New Brunswick isn’t even mentioned, unlike NS, NFLD, Que, Man, Sask, AB, BC and the rest of the world.

The nature of the natural gas exploration business means that once you have committed many millions of dollars to drilling, you almost have to sell no matter what the price.  Selling at a loss at least gives some cash to hold on for better times.

The 3^rd quarter results of Corridor Resources shows each unit of gas (1 million Btu’s) sent through a pipeline all the way to Boston for a $1.46 tariff, the gas sold for $3.50 per unit.  The company lost $2.17  on each unit of energy delivered, and New Brunswick received a 3 cent royalty.   Put another way, the typical home uses 100 million Btu’s to heat it, so Corridor is selling the energy wholesale for $350 per home in Boston and losing $217. The New Brunswick government received the princely sum of $3 per home as a royalty.   Can it get any worse for the government or Corridor?

New Brunswick has the downside of extremely low royalties when the market price is low or production is low, and just plain low royalties when prices are high.

When a tenant can’t pay the rent, he gets thrown out.  Here in New Brunswick, we’ve designed the royalty of natural gas to go so low that nobody gets evicted.   We seem to be happy to give the resource away, just to have a few truckers hauling fill for roads or water for fracking the well.

We don’t seem to realize that we can have both – a decent royalty and jobs.  Horizontal drilling of shale gas is the last hurrah before the end of natural gas.  We can set the terms and companies will eventually come to a viable resource. But it will take creative thinking to devise a win/win situation.

The story of natural gas continues in the next installment of this series.

Roy MacMullin is the energy critic for the Green Party of New Brunswick and a writer on energy topics.

Is the NS – NB tie line the best use of NB Power money? / Es-ce-que la deuxième ligne entre le N-E et le N-B le meilleur choix pour EnergieNB?

(le français suit)

“The Liberal government of Shawn Graham has proposed a transmission tie project between New Brunswick and Nova Scotia, which will provide little benefit to New Brunswick.  It’s a magic trick to distract voters from the failed Liberal attempt to sell NB Power” according to the Green Party energy critic, Roy MacMullin.  “With their credibility gone, they can’t do the right thing, what Vermont did – Just buy energy from Quebec.”

An SNC Lavalin report on the Nova Scotia electrical system suggests that “another intertie with New Brunswick would be very desirable to assure reliability and continuity of the supply.”  But the cost for New Brunswick may be as high as $250 million depending on the level of reinforcement required within the province.  We could see an increase in power rates of 2%.

NS Power’s system is presently susceptible to outages if the NB Power line disconnects during a time in which power flow is in the direction of Nova Scotia.  The proposed line would provide a parallel path that corrects the weakness of their system.

All three Maritime Provinces are increasing their wind power portfolios and while a stronger connection may allow easier balancing of wind power variability, these short-term load transfers do not make a business case for this line.

The Green Party instead believes that the first priority for New Brunswick, PEI, and Nova Scotia must be to jointly negotiate a power purchase deal with Quebec, and to support the associated strengthening of transmission capacity from the Quebec / NB border eastward into Nova Scotia and PEI.

This Atlantic Canada link could be part of a national “East-West” program of High Voltage Direct Current (HVDC) transmission links to move hydro power from areas of surplus to provinces trying to reduce their carbon footprint.

“Ideally, the federal government would show leadership in this area by providing green loans to provinces for the construction of renewable energy generation and transmission initiatives like this.  We would see significant reduction in Greenhouse gases, and provide an alternative for some of the nearly 400,000 homes in Atlantic Canada that are heated by fuel oil, using 1.4 billion liters a year.”

MacMullin warns that “our dependence on fossil fuels is a national security issue.  We require urgent action to retrofit our homes, to build renewable energy, to transmit hydro and many other initiatives.  We will see increased oil prices by 2012 and into the future.  If we do nothing, it will cost Canadians annually billions of dollars above today’s costs.”

This HVDC electrical transmission line would allow Newfoundland to connect its Lower Churchill project and send power to the Maritime Provinces when its project is completed.

Reference documents:

http://www.nbso.ca/Public/_private/10-Year%20Outlook%202010.pdf

http://www.gov.ns.ca/energy/resources/EM/renewable/NS-Transmission-SO-Options.pdf

http://www.acad-eng-gen.ca/documents/VolumeI-Eng.pdf

http://www.acad-eng-gen.ca/documents/VolumeII.pdf

http://www.nrcan-rncan.gc.ca/eneene/sources/petpet/reprap/2008-11/supoff-eng.php

Pour publication immédiate – le 28 juillet 2010

Pour des renseignements -

Roy MacMullin, critique en matière d’énergie – Parti Vert NB

506-962-3500 (cell)

La coopération est merveilleuse, mais ceci est le mauvais projet.

« Le gouvernement Libéral de Shawn Graham a proposé un lien de transmission entre Nouveau Brunswick et Nouvelle-Ecosse, qui fourniront peu d’avantage au Nouveau Brunswick. C’est un tour magique pour égarer des électeurs le plan Libérale ratée pour vendre l’EnergieNB » selon le critique d’énergie de Parti Vert, Roy MacMullin. « Avec leur crédibilité fini, ils ne peuvent pas faire la chose intelligente, que Vermont a fait – l’achat de l’énergie du Québec ».

Un rapport de SNC-Lavalin sur le système électrique de Nouvelle-Ecosse suggère que « un autre intertie avec Nouveau Brunswick sera très désirable pour assurer la fiabilité ». Mais le coût pour Nouveau Brunswick peut être aussi haut que $250 millions qui dépend du niveau de renforcement necessaire dans la province.  Nous pourrions voir une augmentation dans les taux de l’électricité de 2%.

Le système du NS Power est susceptible aux interruptions de courant si la ligne à haute tension du N-B débranche pendant un temps dans lequel N-B alimente le N-E.  La ligne proposée fournirait un circuit parallèle qui corrige cet faiblesse de leur système.

Toutes les trois Provinces Maritimes augmentent leurs portefeuilles d’énergie éolienne et pendant qu’une plus forte connexion peut permettre la balance plus facile de variabilité d’énergie éolienne, ces transferts de chargement à court terme ne font pas un cas d’affaires pour cette ligne.

Le Parti Vert plutôt croit que la première priorité pour le Nouveau Brunswick, L’IPE et la Nouvelle-Ecosse doit être conjointement négocier un achat d’énergie avec le Québec et fortifier la capacité des lignes de transmission de la frontière du Québec jusqu’a la Nouvelle-Ecosse et L’IPE.

Le lien entre les provinces Atlantique et le Québec pourrait faire partie d’un programme national Est-Ouest des lignes de transport. Ces lignes utiliseraient courant continue haute tension (CCHT) pour déplacer hydro-électricité des secteurs de surplus aux provinces qui essaie de réduire leur bilan carbone.

Idéalement, le gouvernement fédéral montrerait la direction dans ce secteur en fournissant des emprunts verts aux provinces pour la génération d’énergie renouvelables et d’initiatives de transmission comme ceci. Nous verrions la réduction significative dans les gaz à effet de serre, et fournir une alternative pour certains de presque 400,000 maisons dans les provinces Atlantique qui sont chauffé par le pétrole, utilisant 1,4 milliard de litres par an.

MacMullin avertit que « notre dépendance sur les carburants de fossile est un problème de sécurité national. Nous exigeons l’action urgente pour rééquiper nos maisons, construire de l’énergie renouvelable, transmettre l’hydro et beaucoup d’autres initiatives. Nous verrons des prix du pétrole augmentés par 2012 et dans l’avenir. Sans actions, les Canadiens payeront annuellement des milliards de plus qu’aujourd’hui ».

Avec la nouvelle ligne CCHT, Terre-Neuve pourrait brancher son projet de bas Churchill et envoyer l’énergie aux Provinces Maritimes dès que son projet est complété.

There’s a better deal out there

Locked in the grasp of winter, the snow is crisp underfoot and the cold air concentrates our minds. And with the sun reflecting off the pure white snow, there’s enough light to clarify any problem.

Well… maybe not. We’re still in the dark when it comes to the case of NB Power’s proposed deal with Hydro-Québec.

Reading a story from journalist Hélène Baril in the newspaper La Presse helps out a little. She suggests that the complaints of Quebec’s large industries, which wanted to keep a competitive advantage, forced a reduction in the discount to New Brunswick large industries. It seems Quebec has already more influence on New Brunswick rates than our own Energy and Utilities Board.

Reports were released last week by two different citizen panels. One was from the advisory panel appointed by the Liberal government with the mandate to examine “whether the proposal would represent the best interests of New Brunswickers.” We should thank the six members of the panel for their participation while working under some major handicaps. The mandate that they were given was extremely narrow, the witnesses appearing before the panel were generally proponents of the deal, and the testimony of the experts was not released to the public. As with other parts of this deal, the process was flawed.

Despite this, some of the positive aspects were its recommendations in favour of a provincial energy policy, that energy conservation measures be greatly augmented, that rates not be frozen for five years to absorb the cost of the deferral account from Lepreau replacement electricity, and that the EUB be strengthened.

What is particularly ironic is the rates of a power purchase agreement being arbitrarily set in the back room by the crudest power politics we have seen in this province. Has the government purposely avoided the EUB because they understand that the 23-per-cent rate subsidy to large industrials is unjust public policy? The EUB has historically pushed for rate equity among differing classes of customers. But luckily, we are told that the EUB will be strengthened (after this stab in the back). It’s just too funny for words.

The idea of a long-term power purchase agreement from Quebec is certainly a win-win situation for both parties. The major benefits to New Brunswick in the areas of carbon emission mitigation, fuel risk, pollution control and financial stability all flow from the power purchase agreement.

We should be considering a 7 TWh block of power, as Point Lepreau Nuclear Generating Station and the hydroelectric plants (in our hands) would provide close to 8 TWh. One concept that might be interesting to discuss with Quebec is a wholesale contract with time-of-use pricing. Customers using off-peak power would benefit from even lower rates.

The Ganong panel did not address whether annual increases to the contract tied to the Consumer Price Index should have a cap to protect against times of high inflation, which is a real possibility.

The sale of power plants adds considerable complexity to this deal but little benefit.

Without the release of documents that support the fairness of the sale prices, doubts will remain.

For example, a rebuilt Point Lepreau will have cost us close to $2 billion to refurbish. We have a special discount on today for $1.4 billion, and we will be giving Quebec the $400 million decommissioning fund, so the net gain to us from the sale will be just $1 billion. The cost of a kWh from Hydro-Québec-owned Lepreau would be roughly 5 cents, given synergies with Gentilly, their nuclear plant. They will sell it back to us at 7.35 cents.

There could be an argument made for the sale of Lepreau, given its size related to our power system, but only if the price is right.

The second report released last week was from a coalition of 20 prominent New Brunswickers of varying professions. This group believes that a power purchase agreement is necessary but rejects the transfer of generation facilities to Hydro-Québec and the subsequent lack of control over our power system. We should also thank this group for adding to the quality of discussion on the deal.

Many believe there is an alternative path instead of the memorandum of understanding or the status quo that will solve the problems that the government has highlighted. These New Brunswickers are not prepared to follow Premier Shawn Graham beyond a simple power purchase agreement.

While Premier Graham is free to choose his destiny, perhaps this deal should be referred to the EUB for analysis and recommendations prior to signing?

We all want to find the best solution, so asking the right questions may ensure that our future is indeed bright.

No information available from Government on sale of NB Power

Weren’t we promised a public debate about the merits of the NB Power sale? So far, the debate is rather stale with questions being spun, or not answered on the government web site.

The Province hired a public relations team called Hill and Knowlton to sell this deal. Are they doing a good job with so many people upset and without answers? Is that the intent?

So far, this deal presentation reminds me of the way that parents, at some point in time, take the easy way out when dealing with their children. You give the child two choices, one terrible and the other becomes the one that you want the child to choose. Then, you pressure the child to decide quickly. That makes the con work better.

Are we seeing that tactic is this case? NB Power – bad, big debt, unmanageable, uncertain future with never – ending power rate increases. On the other hand, sell to HQ – good, lower debt, managed by others, great stable power rates. Oh, and by the way, the deal is closing in March. Why do I feel like I’m being spun like a top?
Here’s three questions I sent to the Energy department over three weeks ago. While I wait, maybe one of my readers can answer me.
Question 1 – Will Saint John Energy be receiving a freeze in the wholesale rate they pay to NB Power? Or some discount to allow them to provide the proposed discounts to their industrial customers. Moosehead, served from the SJE system is not on the list of 41 companies released by the government. Are they going to receive the significant industrial rate discount like their competitor Molson from Moncton?
The MOU qualifies “direct or indirect industrial customers in the Province of New Brunswick who would qualify for the HQ “L” or “M” rates if in the Province of Québec” and class M is for customers above 100 kW demand. One would think there could be hundreds in this province. Are they not included in this deal? Perhaps some clarification is in order.

Question 2 – How does the Quebec regulatory system that we are being asked to install in NB differ from the EUB now in place in New Brunswick. More on this later.

Question 3 – I requested a copy of the background spreadsheet for the NERA report so that I could review some of the assumptions that compose the $5.6 billion rate savings. Later, I read in a news report that it doesn’t exist. We’re talking about big money here. We really should have something other than fifteen pages of words saying it’s a good idea.

One of the bigger questions that we haven’t asked ourselves: What are the economic impacts of having a takeover of a local industry?(NB Power) We are reassured that nothing will change, yet experience tells us differently.

The eventually reductions in personnel of perhaps 1000 employees at NB Power are left unspoken. That’s a normal occurrence with a takeover. Synergies will be found between the nuclear plants at Lepreau and Gentilly, Quebec. Back-office items like accounting, engineering, customer service, accounting may be relocated and about $100 million annually in payroll savings will impact on the New Brunswick economy. With income taxes and spinoffs it could be twice that.
Another stream of revenue that will slowly disappear are some contracts to local companies to provide services to NB Power. Some of these may to migrate to Quebec in-house expertise or contractors from elsewhere. It’s a natural process. Call this figure conservatively $25 million.

A third reduction is “income taxes” of $50 million charged annually to NB Power and the $25 million loan guarantee fee that will no longer be obtained.
Taken together, we could see a reduction of economic activity and revenue in the province of $200 million annually. Over a period of 20 years, the present value of that series of losses is $2.3 billion (at 6%).

Then we could add in a few one-time items like the decommissioning of thermal plants at $125 million (just a guess) and future discounts on oil from Venezuela settlement, valued at $147 million. This gives us a negative impact of roughly $2.5 billion or more.
Since a lot of the $5.6 billion in rate savings is back-end loaded, the proposed benefits of the deal would be erased in the first twenty years by negative economic impacts related to the takeover process. How will we really know if we don’t have a full and open discussion?

The process of answering questions is flawed and prevents serious debate on the bigger issues. There is no forum for serious discussion and eventually public consent to a future path. Without that public consent, Quebec undertakes serious risks related to contract legitimacy that were not present in their Newfoundland deal on Churchill Falls.

UPDATE….
8 hours after this article was published in the Telegraph Journal, I received what I like to call a “non-response” or a “response with little useful information” from a government spokesperson.

1- The background spreadsheet to which you refer is an internal and proprietary financial model which is not available for general consumption or review. However, the report highlighting the conclusions of the spreadsheet is available online. (http://www.lowerratesnb.ca/downloads/Rate_Impacts_of_MOU_en.pdf) ROY’S COMMENT – I GUESS THIS MEANS “TRUST US, WE GOT THE MATH AND ALL OF THE ASSUMPTIONS RIGHT”

2- The possible impact of the proposed agreement as it relates to the municipalities in New Brunswick continues to be under negotiations between the Provinces of Quebec and New Brunswick. ROY’S COMMENT – HERE WE ARE ALMOST A YEAR SINCE THE BEGINNING OF NEGOTIATIONS AND WE DON’T HAVE THE BASIC WHOLESALE RATE FIGURED OUT FOR SAINT JOHN ENERGY?

3- It is important to note that Quebec’s regulatory system is more stringent than ours. For example, Hydro-Quebec must go before its regulatory board if seeking a rate increases, regardless of the amount. In New Brunswick, rates can be increased by three per cent without the approval of the Energy and Utilities Board. ROY’S COMMENTS – MINOR CHANGE

As well, Hydro-Quebec must follow the regulations of the U.S. Federal Energy Regulatory Commission to continue to export energy into the United States. Those regulations require that New Brunswick operate an open transmission system, just as it does now, that allows all jurisdictions to bid for any excess transmission capacity. ROY’S COMMENTS – NO CHANGE FROM OUR PRESENT SYSTEM

For New Brunswick, a heritage pool is a new concept. The regulatory framework in Quebec is designed around a heritage pool which would become an important part of New Brunswick’s electricity system as well therefore our regulatory framework would have to reflect that.

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.