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.

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Will wood replace oil?

The cost of oil is rising and will continue to rise. At what price do we say enough is enough and abandon oil as a home heating fuel? That’s a decision that each person has to make. Do governments have a role to play in ensuring warm homes via reasonable heating choices in Canada? Most of us would say yes.

Governments may be still unaware of the nature of this emergency. They can recognize hurricane or flood damage. If there were no fuel it’s would be easy to understand. But rising prices can be tricky. Is it a permanent condition? How bad will it get? The funny thing is that world oil production hasn’t even started to decline yet. It’s just a little less than demand. Imagine when the real decline starts. So let’s talk about our vulnerabilities.

80% of homes in PEI, 25% in New Brunswick and roughly 65% of Nova Scotia use oil as the heat source. Approximately 1.3 billion liters of fuel oil are burned each year in Atlantic Canada. At last years price of 91 cents, that was $1.2 billion. At present day prices of $1.43 / liter, the new bill is $1.86 billion, a difference of $660 million. Next year, who knows? If families locked in a good price last fall, the sticker shock will only hit them later this year.

Over the next few years there will be a large-scale migration from unaffordable oil to other sources of heat due, as peak oil becomes a reality. There will be a burning platform with people diving to another fuel. The key question is what the alternate heating source will be and what are the implications of this massive shift?

First of all, we should realize that the limited Enbridge network will provide little relief outside of portions of Fredericton, Moncton and Saint John. Unfortunately, Efficiency NB hasn’t existed long enough to make a dent in the efficiency levels of our antiquated housing stock. Elizabeth Weir and Enbridge recently announced that they are contributing $2250 / $7,000 towards a $10,000 per person conversion program from electric heat to natural gas.

To put our oil refugee’s plight into perspective, 1.3 billion liters of fuel oil is equivalent to 11.5 billion kWh’s or 11 times the annual usage of Saint John Energy. It is 61% of the output of NB Power’s system. The peak that it would create on the Atlantic grid would be 2500 MW or more, which is equivalent to four new Lepreau 1 units or 2.5 units of the new AECL 1000.

Looking at a wood alternative, we would have to cut 2.8 million cords of wood to replace this volume of oil. To compare, the existing residential usage of hardwood in New Brunswick is roughly 500,000 cords each year.

But what about New Brunswick? My guess is that 60,000 homes are heated with oil. Assuming an average usage of 2500 liters per home, that’s 150 million liters or $214 million out of NB consumers pockets annually at today’s price. The replacement of this energy by electricity would require 1.4 billion kWh’s, from a power station of 420-Megawatt capacity, which is similar in size to the Belledune coal station. Note that this oil is consumed in the winter causing a large peak load. The cost of Belledune plant was $1 billion, if I remember correctly.

Francis McGuire, chairman of NB Power’s board indicated recently that even if the private sector doesn’t build Lepreau 2, then NB Power could proceed on it own by 2022. Has NB Power considered where New Brunswickers using oil heat are going to jump when the price of oil is $250 a barrel? Last time, it was towards NB Power. How would NB Power make up for the kWh shortfall? By burning heavy oil at Coleson Cove at a loss?

Jack Keir, Minister of Energy, has been suggesting Lepreau 2 as an economic development tool leveraged by private investment. Are the promoters presently waiting for government to meet some conditions? It’s a moot point as its completion date is too far into the future for application to the present problem.

Using wood as a solution requires an additional 332 thousand cords to be harvested annually to displace the New Brunswick fuel oil requirement. This shouldn’t be a problem with mills shutting down. Pellets and briquettes can use softwood that is compressed to provide the same heat density of hardwood, with less moisture content.

Wood heat could very quickly meet the requirements of a conversion program. The reduction of oil purchases of 943,000 barrels would retain $137 million a year in the New Brunswick economy as opposed to sending it offshore. Over the years, this would be the equivalent of investing over a billion dollars in the local economy. If Efficiency NB extended their offer of $2,250 to oil heat customers converting to wood, it would go a long way toward alleviating the problems of oil prices. The cost of the providing stoves would be $135 million (60,000 x $2,250), probably spent over a number of years.

The use of EPA rated stoves ensures an efficiency of 70% and emissions that are less than 10% of previous generation stoves. In urban areas, the use of pellet or briquettes may have to be mandatory with round wood as a rural option.

We are at the beginning of an emergency, perhaps a low intensity war. This change from low cost energy to high cost energy will sap our resources, leave us poor and eventually cold. If we fail to adapt to the heating oil challenge as well as the other aspects of peak oil, we lose. Do you see the leadership that we need to ensure that we don’t freeze in the dark?

Oil Crisis calls for innovation

In previous articles of this series, I suggested that high oil prices are a significant danger to electrical rate stability and we need to take energy self-sufficiency seriously. A big tilt towards high efficiency, low emission wood burning is a start. There are many other ideas, some with little or no cost that can make a big difference. You may find some items a little boring and technical so just skip over any items that don’t interest you.

2) Institute a province wide changeout of Christmas lighting to LED technology. Based on the figures in my article of January 07 entitled “The value of thinking small”, NB Power could save up to 35,000 barrel of heavy fuel oil a year ($2.8 M @ 80 / barrel). In addition greenhouse gases are reduced by 18,000 tonnes a year (worth $450,000 @ $25 / ton)

The cost of a changeout program would be about $5 million with a payback of less than two years. Saint John Energy made a start in this direction in November 2007

3) Advance legislation on light efficiency from 2011 to 2008.
Going from incandescents to higher efficiency lighting isn’t rocket science. It doesn’t cost a lot to government either. The government of Shawn Graham has indicated that it will legislate the issue in 2011. Why wait for 2011? Ireland is implementing legislation in 2009.

The value of conversion to higher efficiency lights is probably in the range of 188,000 barrels of heavy oil but could be more or less. The annual fuel savings to NB Power could be as high as $15 million. Subtract lower kWh sales of $9.3 million and you have a net benefit to NB Power of $5.7 million.

4) Introduce Electric Thermal Storage (ETS) furnaces or heaters similar to those used in Nova Scotia or Quebec. Supplying electricity poses some difficulties because the demand changes greatly over the course of 24 hours. There is very little demand at night when people are sleeping and much higher when everyone showers or is getting ready for work in the morning. Peak load timing may vary depending on the components of commercial or industrial load.

Utilities meet the varying load curve with the lowest cost generation first, such as nuclear or hydro, followed by coal, with natural gas, oil and diesel being the last to run. The sequence may vary somewhat depending on the cost structure of each utility. Not surprisingly, flattening the load curve can pay big dividends. The ETS device turns on and stores heat in a ceramic brick core during the night when the electrical load is low and releases heat as required during the day. Nova Scotia has implemented a time of use scheme where the power rates are much lower at night facilitating these devices.

Not every building will be converted off electric heat. This technology has a place in the mix of solutions. This EUB may wish to investigate.

5) Revisions to demand charges on commercial and industrial customers.

Utilities like NB Power introduced a demand charge to certain classes of customers to entice customer to flatten their load. In most cases the result has been less than satisfactory. The demand meter records the monthly peak and a charge per kW is added on the bill. Although the customer cannot mathematically reduce his demand below the average demand he is charged between 0 kW and the average demand.

A better approach would be to charge demand on only the difference between the peak and average monthly demand because that is what the customer could actually affect. Done with a higher $ / kW and a revenue neutral approach, it would actually encourage more customers to invest in load control. This may interest the EUB.

6) Review the specifications for wind turbines supply contracts.
The use of wind turbines has the potential to reduce the use of heavy fuel oil in the province. However, there are some technical problems to overcome before more than 10 or 15% of the system load can be supplied by this technology.

First, most types of wind turbines are induction motors, which cannot supply “vars” to the system and create stability problems under certain conditions. One company at least, Enercon, builds a synchronous generator with no direct coupling to the power system. Power electronics simulate the attributes of a typical power generator including var supply. This might permit higher system participation assuming the other issue of scheduling of the wind can be resolved to some degree.

Not the last or the least of ideas is the use of combined heat and power (CHP), which will be the subject of an article soon. But the journey of a thousand kilometers begins with the first step. We are ready to take that first step but in what direction? The Department of Energy has, as its prime function, the security of supply and the reasonable cost of the energy supplied to the citizens of New Brunswick. There is little spare oil production capacity in the world according to some OPEC sources.

Our department seems to hold the belief that the near doubling of crude oil prices has little significance and that the market system will soon correct the temporary supply problems. From the outside, it appears that the principal departmental activity is marketing the energy hub concept – exporting of power or energy.
The recent appointment of Shelley Rinehart, whose expertise is in marketing, would seem to confirm that.

The government is 17 months into its mandate without an up to date energy policy. The issue of rising oil prices and particularly heavy oil cost for NB Power may become an albatross around the neck of Shawn Graham, his own “Hurricane Katrina” on a scale that will mark his legacy.

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.

Burning down our capital

“Fossil fuels resemble capital in the bank” – Admiral Hyman Rickover (1957 speech)

Fifty years ago, the author of the US nuclear navy was remarkably prophetic about the situation that we now encounter. “In the face of the basic fact that fossil fuel reserves are finite, the exact length of time these reserves will last is important in only one respect: the longer they last, the more time do we have, to invent ways of living off renewable or substitute energy sources and to adjust our economy to the vast changes which we can expect from such a shift.” He identified the auto as “the most ravenous devourer of fossil fuels, accounting for over half of the total oil consumption in this country.” The speech clearly indicated that “our civilization rests upon a technological base which requires enormous quantities of fossil fuels. What assurance do we then have that our energy needs will continue to be supplied by fossil fuels? The answer is – in the long run – none.”A year before in 1956, a geologist named M King Hubbert presented a paper to the American Petroleum Institute where he predicted a peak production of US oil between 1965 and 1970. The actual date turned out to be 1971. His paper also indicated a world peak of oil in the year 2000. This has been found to be slightly erroneous, as the peak is now believed to occur between 2006 and 2013 by many analysts. In hindsight, his report is quite remarkable.

What do these ancient predictions mean for us today in New Brunswick or Canada? Essentially, the chickens have come home to roost. Our lack of discipline on usage of oil has come back to bite us. Christophe de Margerie, CEO of the French oil giant Total, told the Financial Times recently that even the target of 100 million barrels a day is an optimistic one for an industry that currently produces 85 million — far short of the 116 million barrels a day the IEA projects will be needed by 2030 to fuel the global economy. De Margerie said “Definitely we have been – all of us – too optimistic about the geology, not in terms of reserves, but in terms of how to develop those reserves, how much time it takes, how much realistically do you need. There had also been a false assumption that North Sea-style recovery factors could be achieved.”

It has become clear that producers outside of OPEC have no spare capacity and many have declining production. OPEC apparently does have spare capacity and could influence the price to some degree downward at the moment. But they seem to have discovered that the world economy can endure oil at a higher price than previously thought. When your choices are to raise production, have a lower price for fewer years or retain existing production levels at higher prices for a long time, the answer is simple. Who could blame them? I would love to own an oil well and sell a barrel for $100. The new floor price is probably $80 per barrel and will rise at least $12 per barrel per year, given no market turbulence. There is no upper limit to the price.

Here in New Brunswick, the price of heavy oil used at Coleson Cove and Courtenay Bay for the current fiscal year is forecast to cost $291 million. This is up 25% over the previous year. The production cost of Coleson Cove power is roughly 11 cents per kWh. When the pet coke project is completed the cost will be reduced to 9.2 cents. This doesn’t include any 10% discounts from Venezuela or any large increases when the present hedging agreements are finished. The average cost of a kWh produced by NB Power last year was 8.6 cents per kWh (kWh’s sold / revenue).

Within several years heavy oil will be $80 a barrel or much more – too expensive to burn at Coleson Cove. Can we find another fuel that is acceptable? Can we reduce our consumption of energy? Can wind power play a part? Where do we find the replacement power for 3.3 billion kWh’s? Or do we just accept 7% rate increase each year?

2007-november-heavy-oil-prices.jpg

The Minister of Energy Jack Keir indicates that a second nuclear plant could be in service by 2016 if the economics and other variables are favourable. Unfortunately, I see a perfect storm well before that date. The combination of our dependency on oil and world oil production limits doesn’t look good for our pocket books. The world is burning our capital in the bank (oil) like a drunken sailor.