What’s on New Brunswick energy horizon

We hear about people making choices between food and heat and that is not good. NB Power recently advised that December’s colder weather would generate higher bills.  But what about the long-term outlook for energy prices?  Will it get better or worse in the coming years?  It’s important that we all stay warm during these cold winter nights this winter and into the future.

Recently, I’ve been helping a Sussex based community group working on getting a wood briquette plant organized.  There are many of us who have a “warm” spot for wood heating with its link with our primeval past, and of course, its low cost.  It takes a little more work because of the physical weight of it. My domicile is heated with natural gas but in the past I have lived with electric, some wood, and oil heat.

Efficiency NB has been promoting the use of central heating systems that can use oil, natural gas or wood as the home heating source.  This policy related to oil has some serious negatives but is not entirely wrong.  On the positive side, oil burned at NB Power’s generating plants has a 35 to 40% efficiency rating, so using an oil furnace at home with an 80% rating burns less oil overall and is relatively good for the environment. However, in the past year, the price of oil has gone up from $55 to $100 a barrel, an increase of 81%.

Is this a significant event?  Yes, it signals a turning point in the world supply of oil.  Demand in China, India and the rest of the world is growing and the supply appears to be plateauing.  Typical economic theory would suggest that higher prices would bring additional supplies to market that would collapse prices.  After several years of higher prices, no supply relief is evident.  Analysts also see no combination of projects under construction that would provide abundant supply.  So the trend to higher oil prices appears very strong.  We are likely to see oil price increases making heating homes or generating electricity for heat prohibitively expensive.

Roughly 60% of New Brunswickers use electric heat, which has lower initial cost of installation, low maintenance, and relatively low cost of product – three important reasons for its success.   Government policy from the 1970’s until recently was to get Canadians off oil heat.  NB Power spent billions on a robust generation, transmission and distribution system capable of furnishing our electric heating needs.  The only problem was that a part of the generation was oil based.

Coleson Cove uses heavy fuel oil, which is also known as #6 heavy oil, or residual oil, or bunker C.  It is the leftover of the refining process.  NB Power uses roughly 5 million barrels a year that generates approximately 3.1 billion kWh’s, which is 17% of total sales.  In the current fiscal year they expect $60 a barrel and a total oil cost of slightly over $300 million.(up a hundred million)  Next year (08/09) could be $400 million as the hedging of lower prices ends and a barrel of heavy oil is closer to $80.

Electric heat comes on in the winter and it is necessary to use higher priced generation (Coleson Cove) to meet that extra demand when the power requirements goes from 1600 megawatts in summer to 3200 megawatt peak in winter.  So there is a correlation between the higher cost power and electric heat.  It’s not 100% but let’s take the worst case for an example.

Supposing a customer uses 15000 kWh of electric heat a year and this is mostly on the lower second block at roughly 8 cents per kWh.  This customer pays $1200 for the kWh’s. It takes 24 barrels of oil to provide these kWh’s, which at $60 is $1440 and at $80 is $1920.   NB Power does not even recover fuel cost.  Although an oversimplified case, we can see that $100 heavy oil would give 16-cent kWh’s just for the fuel without considering O&M or debt repayments on the plant.

It appears that NB Power will be spending $200 Million more each year on heavy oil.  Note that a $10 million increase in costs is 1% rate increase.  So we are looking at a twenty to thirty per increase in rates in the next two or three years.

We have a problem.  We spent $750 million to rebuild Coleson Cove with the expectation of cheap fuel.  Now, we can only get expensive fuel and it’s getting worse very quickly.  Pet coke will help a bit but a nuclear plant won’t be available until 2016 because all the workers will be tied up on the refinery project first.  It looks like we’ll be spending at least $2 billion extra on oil before 2016.  And maybe a lot more than that.

In my next articles, I make some suggestions on how we could work towards real energy self-sufficiency right now.

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