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Cablegate: Gas Plant Project Controversy Highlights

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

UNCLAS SECTION 01 OF 02 MONTREAL 000451

SIPDIS

SECSTATE FOR WHA/CAN, IIP, INR/IAA

E.O. 12958: N/A
TAGS: ASEC OEXC OIIP KISL KPAL PTER IS
SUBJECT: GAS PLANT PROJECT CONTROVERSY HIGHLIGHTS
QUEBEC'S NEW ENERGY CHALLENGES


1. SUMMARY: Quebec's energy board is holding hearings
on whether provincial energy needs require the
construction of an 836 megawatt gas plant, the Suroit,
in Beauharnois, located 25 miles from Montreal and the
U.S. border. The Board's recommendations, and the
report of a provincial legislative commission in
October, will have a major impact on Quebec's
electricity generating capacity. END SUMMARY.

2. In fall 2001, the Parti Quebecois government of
Bernard Landry first announced the $500 million 836
megawatt combined-cycle natural gas plant, to be built
in Beauharnois, a town located 25 miles between
Montreal and the U.S. border. The plant, named "le
Suroit" (southerly wind in English) was billed as
necessary to help Quebec bridge a projected energy gap
until larger new hydro-electric projects come on-line
between 2008 and 2010.

3. Quebec's new Liberal government had initially hoped
that some of its budgetary woes, inherited from the
former Parti Quebecois government, could be resolved
through increased profit generation by Hydro Quebec
(last year HQ contributed $1.1 billion to provincial
coffers). Liberal Finance Minister Yves Seguin had
even suggested that HQ could generate an additional
$600 million in annual income for the province. But,
in the face of increasing opposition to the Suroit from
environmental and community activists, in February
Premier Jean Charest delayed approval of the project
and asked that Quebec's independent energy board, the
Rgie de l'nergie, study Quebec's energy needs and
make recommendations on how these needs can best be
met. The Regie is in the process now of hearing
g
presentations on the Suroit from environmentalists and
Hydro-Quebec officials. The Regie is scheduled to
present its report on June 30.

4. Hydro Quebec itself is adamant that the Suroit
project is necessary, making the case that provincial
energy demand alone requires the plant's construction.
According to HQ, provincial demand increased to 165
terawatts (Twh) in 2003, three years sooner than the
utility had projected. But critics of the project
charge that the plant is only needed in order to
generate more profits from exports to the U.S. market.

5. To convince the Regie and the Quebec public of the
precariousness of energy supply in the province, Hydro
has taken the unusual step of releasing data on the
water levels behind its dams, information that the
company has kept secret for the past six years because
of market competition concerns. A sharp drop in
precipitation combined with greater provincial and
export sales accounted for the lowest water levels
since 1991, HQ president Andre Caille revealed on
February 20 in a report presented to the Regie. The
report detailed that on January 1, 2004, Hydro Quebec
held electricity reserves of 75.1 Twh down from 96.2
Twh a year before, according to HQ figures. Compared
to 2000, the dams have 40 Twh less potential. The lack
of rain accounted for a loss of 23 Twh in 2003 alone.
On any given day, Hydro-Quebec's goal has been to have
60 percent of its yearly projected demand in reserve.
However, in 2002, those reserves averaged 67 percent of
projected demand; in 2004, reserve averages fell to
43.7 percent, the lowest percentage since 1991,
according to the HQ report presented to the Regie.

6. Environmental NGOs believe Hydro is over-
dramatizing the supply situation, saying that the
province can wait until new hydroelectric projects,
considered "cleaner," than gas, come on line in 2008,
even if it means importing more energy from the U.S.
for a few years. The Quebec media has repeatedly
published figures, released by Greenpeace, stating that
the Suroit increase Quebec's greenhouse gas emissions
by 2.6 percent. Opponents to the Suroit say the need
for the plant would vanish if Quebecers simply used
electricity more efficiently. The very negative press
has raised alarms in Beauharnois, where the mayor and
the population fear the plant's emissions will be
harmful to health and quality of life.

7. Some analysts have pointed out that while
environmental groups are fighting the Suroit plant
ferociously, they have essentially ignored a similar
550 MW natural gas-fired cogeneration power plant in
Becancour, 100 miles to the north of the Suroit.
Becancour will be developed by the TransCanada Corp.,
which will supply its entire production to Hydro-Quebec
under a 20-year power purchase contract. The $500
million Becancour plant is scheduled to be in service
in late 2006.

8. Hydro Quebec officials claim that the Suroit will
use the most efficient and cleanest technology
available. As currently conceived, the Suroit would be
the first plant in North America to use the 60-hertz
version of General Electric's H System, touted as
providing an efficiency range of 60 percent. But GE
Quebec spokesperson Sylvain Bulota said on March 17 that
if delays persist, GE will withdraw the advantageous
financial package it offered Hydro. On March 16, GE
officials met with Ontario Power Generation (OPG) and
Hydro One representatives who are reportedly also very
interested in GE's 7HMD technology. Under the present
plan for the Suroit, GE would assume all of the
projected ($550 million) construction costs of the
Suroit and operate the plant for several years before
turning it over to Hydro. If the GE technology is
introduced first in Ontario, Hydro-Quebec would not get
the advantageous financial package linked to introducing
a new technology.

9. According to Hydro Quebec Environment Director Pierre-
Luc Desgagns, if the Regie unequivocally reports that
the province needs the production from the Suroit, no
other study would be needed to go ahead with the
project. However, if the Regie's recommendation is
tepid or contains caveats, a provincial legislative
commission -- with the specific mandate of deciding the
Suroit's fate -- would start meeting in July or August.
The opposition to the project has already delayed the
start of construction by 18 months. The latest
optimistic schedule has Suroit coming on line in Spring
2008.

10. National Energy Board figures for January 2004 show
Hydro exported 562,205 megawatt hours (export figures
include all sales outside the province, including the
U.S., Ontario and New Brunswick) while it imported
392,789 MWh for profits of $28.7 million, a drop from
the previous year when the company exported 1,304,666
MWh and imported 562,205 MWh. In percentages, imports
increased by 75 percent while exports dropped 57
percent. Hydro disputes the import figures saying they
do not take into account sizeable HQ purchases made in
Ontario and New Brunswick.

11. The fact that the province of Quebec became a net
importer of electricity in 2004 will not prevent Hydro
from exporting to the U.S. Northeast markets this
summer, says Gilles Favreau, HQ's Director of External
Regulatory Affairs. In summer, provincial consumption
is at its lowest, making surplus production available
for export sales as usual. "However, the next few
winters could be hectic. Moreover, with the competition
now informed about our low water levels, the
electricity we will need to import could be more
expensive," says Favreau.

12. COMMENT: It is clear that the Charest government
would like to see the Suroit built. But their party's
current unpopular standing in public opinion has made
the Liberals timid about confronting environmental and
community groups, and addressing the expectations of
Quebecers that their electricity will be forever
provided cheaply, cleanly and abundantly. Further, the
notion that the province should limit itself to
supplying Quebec demand, regardless of profitable
opportunities to export energy, seems to be gaining
traction in the public debate, if not in political
circles.
ALLEN

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