Why Should New England Subsidize Large-scale Canadian Hydropower?

Christophe Courchesne

(photo credit: Jack Zalium/flickr)

Get ready: long-simmering chatter among lobbyists and officials in state houses and administrative agencies is about to become a loud, insistent chorus proclaiming that New England needs to give Canadian hydropower financial incentives so that our region can meet renewable energy and climate goals. This policy change would be a wrong turn for a region that is trying to build a truly clean energy future.

As we’ve been discussing for several years now, Québec and other eastern Canadian provinces are eager to increase power exports to New England, including through proposed transmission projects like Northern Pass. Our neighbors to the north have developed and are building more power than they need, and, until New England power prices began their historic decline, the economic motivation for increasing exports was clear: Canadian utilities like Hydro-Québec could sell power to customers in New England and the northeastern U.S. at much higher prices than their own domestic customers are paying. Profits from existing exports to the United States were and remain a major contributor to those utilities’ bottom lines, and they saw and planned to take advantage of a major opportunity to increase profits with new transmission capacity and newly developed hydropower facilities.

The economics behind this long-term Canadian strategy are increasingly in question. Following on the heels of recent technical analysis questioning the strategy’s underpinnings, the most recent projections from the U.S. Energy Information Administration show that total U.S. imports of all energy and electricity in particular are slated to decline over the next fifteen years, with electricity imports never again to achieve the peak level of imports seen in 2012. Given the availability of U.S.-based energy supplies at lower long-term prices, especially natural gas but also wind and other renewable sources, there will be less market demand in the U.S. for Canadian power. These projections reflect a very different reality from the prevailing expectations in 2008, when Hydro-Québec’s strategic plan and the Northern Pass proposal were taking shape. In a research note published last week, Stéphane Marione of Canada’s National Bank Financial warned that “none of the Canadian energy-producing provinces can ignore the profound changes that are taking place in the U.S.”

Montréal, we have a problem. In this new world, the potential market profits from Hydro-Québec’s export strategy are far less compelling. Hydro-Québec may not be able to sell power in New England at the prices it needs to recover the costs of building new transmission like the Northern Pass project and new hydropower projects like the Romaine complex and also return substantial export-driven dividends to the provincial budget.

One possible way that Hydro-Quebec could restore some of these profits is by convincing New England states to increase the price New England customers will pay for Canadian hydropower above the market price. While this may directly contradict the widely held assumption (and marketing claim) that Canadian hydropower is a low-cost power source that is economic without any special incentives, the cognitive dissonance has not prevented Hydro-Québec and Northern Pass developer Northeast Utilities from lobbying New England states to achieve just this goal, an effort CLF has opposed around the region, including in New Hampshire. (Hydro-Québec succeeded several years ago in convincing Vermont to allow its power to count towards a portion of the state’s renewable targets.)

Although the utilities’ lobbying is mostly outside the public view, it is increasingly occurring out in the open, with a direct and urgent new tone. Case in point: Hydro-Québec and Northeast Utilities recently filed comments on Connecticut’s draft energy strategy, which contained some language favoring expansion of Connecticut’s renewable portfolio standard program to include Canadian hydropower, the very policy change that the utilities are seeking. (Incidentally, the final strategy, released last week, made a few changes to the language, and Connecticut is now considering whether and how it might incentivize new imports in a separate study, which is due out soon.) So what did they say?

Hydro-Québec, through its U.S. trading subsidiary HQUS, commented that hydropower should be counted towards meeting Connecticut’s renewable objectives and that its hydropower is less costly than other renewables, but not all power in the marketplace:

HQUS urges Connecticut to recognize Hydro-Québec hydropower as a renewable resource and consider how it might contribute to achieving renewable objectives, as well as other important energy and economic goals. HQUS recognizes that Connecticut has multiple objectives for its renewable programs including to support the development of in-state and in-region resources and emerging technologies. However, if Connecticut’s priority is to maintain its commitment to renewable supply in a cost-effective matter, consideration should be given to the participation of Canadian hydropower. Allowing these resources to contribute to renewable objectives offers a pragmatic way for the state to lower program costs in the near term and, if desired, to extend and increase renewable goals into the future. An approach that values the multiple benefits of Canadian hydropower could also create a market signal necessary in today’s market to promote the infrastructure needed for incremental deliveries into the region for the benefit of all consumers….

Some stakeholders suggest that Hydro-Québec hydropower facilities are “cheap” or low cost to construct. This is incorrect. In fact the cost of building hydropower facilities is significant and generally also requires the construction of new transmission facilities to deliver generator output to load centers, which is also very costly. (Hydro-Québec has also proven successful in the development and construction of transmission facilities to deliver large quantities of electricity over long distances.) However, even with the added cost of transmission to deliver hydropower from Quebec into New England, HQUS estimates its costs to be significantly less than the cost of the delivering equivalent quantities of renewable power from other potential renewable resources in and near New England.

Northeast Utilities, through its Connecticut subsidiary Connecticut Light & Power, commented that hydropower delivered through new transmission projects should get incentives, which would count against the state’s current renewable requirements:

Connecticut has an opportunity to tap into Canadian hydroelectric facilities that are available now or under development, through the development of new transmission infrastructure. A Connecticut RPS market design, which acknowledges that RPS can not only enable new generation, but also support new, clean energy transmission infrastructure could, in this instance, provide for significant Connecticut customer savings….

CL&P believes Connecticut could create a new class of RECs for incremental hydro-electric supply that is delivered over a new transmission interconnection that has been built as an economic project (as opposed to a reliability-based one) which would supplant the need for meeting some portion of Class I RPS requirements….

CL&P believes that embracing large scale hydro power delivered on new transmission as a qualified renewable would meet all three of the State’s energy goals:

  • It would be cheaper than other clean energy resources,
  • It is clean with very low lifecycle CO2 emissions, established by independent scientific reviews, and
  • It is reliable, and would lessen the region’s dependence on natural gas for power generation needs.

It’s clear from these comments – and the utilities’ growing campaign to secure changes to New England’s renewable energy policies – that they are looking for subsidies from electric ratepayers to support new hydropower imports into the region. In fact, the Northeast Utilities comments constitute a direct effort to secure ratepayer subsidies for Canadian hydropower transmitted over Northern Pass, something Northeast Utilities repeatedly claimed it would not seek and does not need (e.g., herehere,  and here).* (For the record, they are mischaracterizing the emissions benefits to support their argument for subsidies. But that’s another story, well chronicled in prior posts.) Certainly, Hydro-Québec’s own comments reveal that its power can no longer beat the market on its own.

It’s also clear that, depending on how it is pursued, this kind of policy change threatens to put New England’s renewable energy industry at a deep and unfair disadvantage and to undermine its growth. Even Northeast Utilities, in the comments linked above, acknowledges this risk.

CLF has been clear that more Canadian hydropower could be a good thing for the region under the right conditions. But why should New England customers be forced to pay an above-market price? State renewable portfolio laws are intended to get new renewable projects built here, not to force ratepayers to pay extra to improve the economics of Québec’s new hydropower facilities and specific transmission development plans. That’s why CLF strongly objected to the draft Connecticut strategy’s mention of potential inclusion of Canadian hydropower in Connecticut’s renewable portfolio standard law. You can read our full comments, which address other major Connecticut energy issues as well, here.

It’s not too late for the New England states to get smart about new imports and make sure that new imports only happen, if at all, in cost-effective ways that allow alternative power sources and companies to compete on a level playing field, respect local communities, and provide meaningful economic and environmental benefits, accounted for in fair and open processes. Committing New England residents and businesses to pay above-market prices for Canadian hydropower isn’t one of them.

* from Northern Pass’s website, accessed today:

Providing economic clean energy—without a government subsidy

This will be one of the few—if not the only—renewable energy projects in the region that does not need a government subsidy to move forward. Hydro-Québec can generate and sell the power to us at prices that will compete with the average market prices that are being set today by fossil fuel power plants.

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2 Responses to “Why Should New England Subsidize Large-scale Canadian Hydropower?”

  1. Jim Dannis

    Thanks Christophe for the analysis. Hydro-Quebec should obviously not be entitled to US ratepayer subsidies.

    Quick question. Does Hydro-Quebec stand to receive governmental subsidies in Canada in connection with the Canadian transmission upgrades needed for the new US export projects? Specifically, are all or some of the costs of the Canadian transmission upgrades that are needed to tie HQ’s hydro plants into HQ’s US export links (Champlain-Hudson, Northern Pass, etc.) somehow being borne in Canada and not being fairly built into the price HQ charges US customers for its export power?

    This came up recently in the context of the Champlain-Hudson transmission project, another Hydro-Quebec export initiative that is somewhat ahead of Northern Pass in the approval queues. CH’s February 1, 2013 brief filed with New York state authorities seems to suggest that, at least in the context of the CH project, Hydro-Quebec will not recover from US power buyers all or some part of the costs of the Canadian part of the transmission upgrades.

    In other words, a significant part of the costs — Canadian transmission costs from the hydro plants to the US border, and interconnection costs — appears to be excluded, at least in part, from the charges HQ will ask US customers to pay for power delivered over the export lines. If this is correct, it would seem to undermine the notion that HQ is using fair, market-based pricing. If HQ’s US exports can be priced at levels that don’t reflect all the cost, this would seem to suggest the potential for unfair competition against US power suppliers. And if part of the actual costs of generation and export of HQ’s electricity are being skimmed off the cost base for US customers and stuck somewhere else, HQ’s publicly-stated premise of fair, market-based power pricing would seem to fall apart.

    Here are two quotes:

    “As the ALJs noted in the RD, the correctness of Dr. Paynter’s testimony regarding the need for adjustments to the cost of these transmission facilities was borne out by two facts: (1) the Québec Energy Board limited the cost of the transmission upgrades out of the Romaine project that could be assigned to purchasers of energy produced by that facility to only $918 million, or about half, of the $1.8 billion total cost of those transmission facilities; and (2) the Open Access Transmission Tariff (“OATT”) of TransÉnergie provides a credit against the
    costs of interconnecting with the Facility that will substantially exceed the costs of the upgrades in Canada required to connect with the Facility, preventing any of those costs from being passed on to shippers.” (p.11)

    “Applicants would note that in light of the plain provisions of the TransÉnergie OATT prohibiting the collection of the $346 million in upgrade costs from shippers using the Facility…” (p.14)

    Thanks Christophe for any light you can shed on this.

    • Christophe Courchesne

      Jim –

      Many thanks for your question. Conceptually, I believe you’re right about Canadian subsidies for transmission upgrades, particularly given the enormous scale of the transmission investments to connect new generation with both the existing HQ grid itself and the northeartern U.S. grids. Merchant generators competing with Canadian power sources would be hard pressed to internalize such costs, and it is clear that Canadian provinces and ratepayers are subsidizing generation and transmission build-outs to facilitate exports, with uncertain returns. To wit, we still have very little idea, even after four years of active discussions of these Canada-U.S. transmission projects, what HQ and other Canadian utilities ultimately intend to charge for power.

      That said, the New England wholesale power market does not necessarily require U.S. power suppliers to recover capital costs through power sales, and there are instances where generators choose not to include the costs of their transmission links to the grid in their prices by supplying their power to particular locational “nodes” in the grid at the generators’ marginal generation costs. So the fact of the subsidies is not necessarily anti-competitive or anti-market.

      However, comparing generators like power plants in New England and Canadian hydropower projects is very much an apples-to-oranges comparison; questioning the massive level of (expressly hidden) Canadian transmission subsidies seems very fair game. Those subsidies make the economics of the exports that much more tenuous and also undermine the transparency of the ultimate power pricing, which is about as clear as mud.

      Christophe Courchesne

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