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Cablegate: Atlantic Canada/Stateof Maine: Electric and Natural Gas

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 HALIFAX 000040

SIPDIS

COMMERCE FOR 4320/MAC/WH/ON/OIA/BENDER
DOE FOR INT'L AND POLICY (PDAS DEVITO) AND IE-141 (DEUTSCH)
OES/EGC (MIOTKE AND DEROSA)
STATE FOR EB/TPP/BTA EB/ESC/ISC (MCMANUS AND ERVITI), WHA/CAN (WHEELER)

STATE PASS FERC FOR CHAIRMAN WOOD, KEVIN KELLY AND DONALD LEKANG

E.O. 12958: N/A
TAGS: ECON EPET ENRG ETRD CA
SUBJECT: ATLANTIC CANADA/STATEOF MAINE: ELECTRIC AND NATURAL GAS
SUPPLY AND MARKET DEVELOPMENTS

REF: A) 03 OTTAWA 1924; B) 03 OTTAWA 566; C) 03 OTTAWA 503; D) 03 HALIF
58; E) 02 OTTAWA 3205


SUMMARY/INTRODUCTION
--------------------

1. Several energy infrastructure projects being contemplated in
New Brunswick and Nova Scotia promise to bind Atlantic Canada
further into the northeastern U.S. gas and electric grids, with
likely benefits for New England energy consumers:

- Refurbishment of NB Power's Point Lepreau nuclear generating
station (awaiting GoNB political approval).

- Construction of a major power line from Point Lepreau to
Bangor (awaiting State of Maine approval).

- Break-up of provincially-owned NB Power into five new entities
(awaiting GoNB legislation). A long run objective among New
Brunswick energy leaders is to encourage an integrated electric
power market covering New Brunswick, Nova Scotia, Prince Edward
Island and much of northern Maine.

- Proposals for liquefied natural gas (LNG) terminals in both
provinces (one near Saint John, New Brunswick is expected to
start construction by June).

- Either LNG terminal, if completed, would require expansion of
the Maritimes and Northeast Pipeline (M&NE -- which runs from
offshore Nova Scotia through New England) to approximately twice
its current capacity.

2. Mission ECON staff paid calls on several government and
industry players in New Brunswick and Nova Scotia during late
January. This report, which is based on those conversations, is
a joint effort of Amconsul Halifax and Amembassy Ottawa.

END SUMMARY/INTRODUCTION


ELECTRIC POWER
--------------

3. Northern Maine's power grid is closely integrated with that
of Atlantic Canada. Bangor Hydro is controlled by Halifax-based
Emera, the dominant power firm in Nova Scotia. NB Power
officials say that the grids in two Maine counties - Aroostook
and Washington - are in effect "part of the New Brunswick grid."
In 2003, NB Power exported roughly 2 terawatt-hours of electric
power to Maine (net of imports). Given recent declines in net
power exports from the rest of Canada, NB Power now accounts for
around 30 percent of Canada's net power exports to the United
States. NB Power has also historically supplied virtually all
of the power needs of neighboring Prince Edward Island.

4. In New Brunswick, the electric power industry is dominated
by provincial government-owned NB Power. NB Power has a mix of
hydroelectric and fossil-fuel generation plus a single-reactor
nuclear plant at Point Lepreau, about 30 miles from Calais,
Maine. A decision is required soon on whether to replace,
refurbish, or decommission the 22-year-old reactor.

5. New Brunswick's options for additional generation are
limited. Despite the presence of the M&NE pipeline (see below),
natural gas is not currently available in New Brunswick at
prices which would make it economic for power generation. Few
undeveloped hydroelectric sites are available. The remaining
options - burning imported coal or oil - are relatively
polluting and carbon-emitting. They are thus likely to conflict
with the Government of Canada's commitment to implement the
Kyoto Protocol. Industry representatives await clarification of
this policy, which will probably take several more months -
meanwhile, they summarize this problem in the words "regulatory
risk".

6. REACTOR RENEWAL: Provincial government energy officials and
NB Power executives are currently hanging on a GoNB decision on
the future of the Point Lepreau nuclear plant. Regulatory
approvals are already in place for refurbishment, but the
financial cost would be high to purchase large amounts of
replacement power while 380 fuel channels in the reactor core
are replaced and the turbines and generator are reconditioned.

7. In 2002, citing "no significant economic advantage" from
refurbishing, provincial regulators recommended against it.
However, Department of Energy officials believe the arguments in
favor of refurbishment have strengthened since then, as the
price outlook for natural gas (the main alternative) is now even
higher. Moreover, they say the regulators did not consider the
value of refurbishment in avoiding future greenhouse gas
emissions, particularly vis-`-vis coal, which is the lowest-cost
option. Finally, the nuclear option has the added attractions -
particularly for a relatively low-income, high-unemployment
province - of being both high-technology and relatively
labor-intensive.

8. Whether or not the GoNB decides to refurbish Point Lepreau,
building a second reactor at that site is also a possibility.
Without outside financing, this would be even more costly than
refurbishment. The GoNB is exploring the potential for private
sector participation in either option, and/or for Point Lepreau
to be a "demonstration site" for the latest reactor design
offered by Atomic Energy of Canada Limited (AECL). The latter
idea is based on hopes that AECL would foot most of the bill -
but AECL in turn awaits a decision from the GOC, its sole
shareholder, on options for AECL's future access to financing.

9. TRANSMISSION LINE TO BANGOR: Whatever happens at Point
Lepreau, NB Power also hopes to proceed with construction of a
transmission line from the Lepreau area to the vicinity of
Bangor, Maine (where the receiving utility, Bangor Hydro, is
owned by Nova Scotia's Emera Inc). This line could be completed
by 2007 and would carry power in either direction depending on
seasonal and other requirements. NB Power officials say that
all approvals still needed are on the U.S. side, and are
environment-related: some Maine stakeholders continue to demand
that the line to follow an existing (but longer) corridor
farther inland, which would be less economic.

10. ELECTRICITY MARKET DEVELOPMENT: Atlantic Canada and Maine
are lightly populated and their electric demand is strongly
winter-peaking. New Brunswick energy officials expect this
entire region to have a significant power scarcity problem by
the winter of 2007-08 due to the shutdown of aging generating
assets before new plants are built. Gains in both cost and
reliability can be expected from integrating the regional grid
and facilitating power trade with the rest of the U.S.
Northeast, and this makes up much of New Brunswick's current
strategy for addressing the scarcity problem. They add that it
has the potential to greatly reduce the vulnerability of
northern Maine to power outages. (While neighboring Quebec is a
major exporter of electricity from hydroelectric dams, it has
few interconnections with New Brunswick and virtually none with
Maine - and these small markets are a very long way from
Quebec's reservoirs).

11. As of April 1, 2004, NB Power will be split into five new
corporate entities (generating, transmission, distribution,
nuclear, and a holding/services company) plus an Independent
System Operator (ISO). NB energy officials told us that, while
they use U.S. FERC requirements to justify this publicly, they
are really planning for the anticipated power scarcity in
2007-2008 - when the new structure will allow them to invite
proposals from independent power producers. They also hope to
share experience/models with counterparts in Nova Scotia, which
plans to initiate a wholesale power market in 2005. NB
officials admit that a really integrated regional power market
in Atlantic Canada will take "another generation," and that for
the current decade, they are working toward "seamless" clearing
of power trades between the provinces' still-separate power
grids.

NATURAL GAS TRANSMISSION
------------------------

12. Nova Scotia's offshore Sable Island energy project began
producing natural gas in early 2000. Most of this gas is
transmitted to New England via the Maritimes and Northeast
Pipeline (MNE), which also has lateral lines serving industries
near the Strait of Canso plus the urban areas of Halifax,
Moncton and Saint John. For more on the prospects for
production of oil and gas from Atlantic Canada's continental
shelf, see refs D and E and other reporting from Halifax.

13. The terms on which New Brunswick and Nova Scotia
communities and industries can access this gas has been a
sensitive political issue. Energy exports into the United
States are licensed by Canada's National Energy Board (NEB),
which generally defers to market forces. In order to buy gas
from the MNE pipeline, Atlantic Canadians must pay prices which
are tied to short-term markets in the Boston area (minus the
additional cost of transportation to Boston). New Brunswick
interests have two complaints about this system. First, they
argue that the Boston-based prices are in some sense "excessive"
(presumably, this means, higher than they would be if most or
all of this gas were piped to markets in eastern Canada - which
was one of the options before MNE was built). Second, they
complain that that it has become impossible to purchase MNE gas
on secure, long-term contracts - which is a prerequisite for New
Brunswick's industrial needs, and particularly for electric
power generation.

14. In 2001-2002 the GoNB raised this issue formally with the
NEB, which declined to take action, other than agreeing to
"monitor" the gas transmission situation in New Brunswick. GoNB
officials remain unapologetic about having raised the issue,
stressing that it is not a matter of "Canada first" (as their
position was sometimes characterized in the media) but rather
"Canada too." They say they are no longer pressing the issue
because at current prices, natural gas is simply not a viable
option for industrial uses or electric power generation in New
Brunswick. One event that might change this, they said, would
be the construction of a liquefied natural gas terminal in
Atlantic Canada.

15. LIQUEFIED NATURAL GAS: Like other parts of North America,
Atlantic Canada is hearing proposals to construct terminals
which would receive liquefied natural gas (LNG) from pressurized
tanker ships and distribute it on the continental pipeline
network. Currently, there are two proposals:

-- Access Northeast Energy Inc. (ane-inc.com), an infrastructure
development firm, proposes to build an LNG terminal ("Bear
Head") in an established heavy-industrial zone near Point Tupper
on the Strait of Canso between mainland Nova Scotia and Cape
Breton Island. This site has very good natural features and the
project enjoys local political support. The proponent submitted
environmental applications in 2003.

-- Irving Oil Ltd. (irvingoilco.com), part of a family-owned
industrial conglomerate which is currently a large buyer/shipper
of gas on the MNE pipeline, proposes to build an LNG terminal on
the Bay of Fundy about 5 miles east of Saint John, New
Brunswick. While this project is said to be less favored by
geography (and local politics) than Bear Head, the proponent's
industrial and financial autonomy may allow it to move ahead
quickly, perhaps in an effort to pre-empt its competitor.
Irving Oil says it plans to begin construction during 2004.

16. Either of these projects would require at least a doubling
in size of the MNE pipeline, and either one would require the
negotiation of gas supply contracts on a long-term basis in
order to secure financing for both port and pipeline. MNE
representatives say that either project could fit well with
their plans.

17. New Brunswick energy officials told us that they are open
to either LNG project, provided New Brunswick buyers obtain
adequate access to the gas. They expect either project to
revive natural gas as a fuel option for industrial development
in New Brunswick.

CONCLUSION/COMMENT
------------------

18. An array of interesting new energy infrastructure projects
are on the horizon for Nova Scotia and New Brunswick, all of
which have the potential to significantly benefit neighboring
U.S. states. However, we also see the potential for great
frustration, discord, and disappointment. The key reason is
that optimism has consistently run ahead of reality in Atlantic
Canadian energy developments. This is painfully evident in Nova
Scotia's offshore industry, which, thirty years after the first
resource discoveries, still struggles to deliver on popular
expectations - particularly with respect to royalty flows. Part
of the problem is the multi-agency, multi-jurisdictional
complexity of offshore regulation in Canada, which makes this
one of the world's highest-cost areas of active exploration.

19. With respect to LNG ports and natural gas transmission,
there is little doubt that further development of such
infrastructure - if it occurs - would heat up a simmering debate
about local industries' access to natural gas. In Nova Scotia,
this issue is moderated by the provincial government's closeness
to the needs of gas producers, and by the benefit of jobs
created by gas exploration and production. New Brunswickers,
without such offsetting gains, are likely to be irritated by
news that increasing volumes of gas would transit their province
en route to New England markets.

20. In electric power, there could be difficult years ahead.
If New Brunswick cannot or will not finance the refurbishment of
the Point Lepreau reactor, the prospects for power generation in
that province will be bleak. The province could then be on a
collision course with the GOC's climate change policy - and
decisions on new fossil-fuelled generating plant will likely be
slowed and clouded. The results will affect residents of Maine
for the rest of this decade.

HILL

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