Four reasons why Quebec’s electricity surplus is not necessarily great news
Posted on November 19, 2013
While other provinces, states and countries around the world worry about their energy needs, Quebec will have electricity surpluses until at least 2027. This abundance of riches is turning out to be a headache for the government.
Here are four reasons why:
1. Higher Costs: Building and maintaining this excess capacity means higher borrowing and operating costs for Hydro-Quebec (HQ). This in turn puts pressure on HQ’s ability to pay a dividend to Quebec, its sole shareholder. Quebec expects a HQ yearly dividend of at least $2 billion. As Quebec is running a current deficit, a lower dividend puts pressure on its treasury. Quebec is already one of the two most heavily taxed jurisdictions in North America, so increased taxes are not an option.
2. Limited Pricing Power: Hydro-Quebec’s customers are voters or the employers of voters. These voters and their employers have paid low electricity prices for two generations. They have little appetite for increased prices, especially when common sense and economic orthodoxy would dictate that surpluses should result in lower prices.
Also, the government does not set electricity prices. This is the prerogative of the Régie de l’énergie, Quebec’s independent regulator. In 1997 the U.S. Federal Energy Regulatory Commission conditioned HQ’s entry into the U.S. power market with the establishment of an independent regulator. As a result, Quebec must be careful to respect the Regie’s jurisdiction. While An Act respecting the Regie de l’énergie allows government to make its needs known to the Régie, the latter is independent within its jurisdiction and ultimately decides. In recent years the Régie has increasingly shown its independence. The proposed 2014 increase is above inflation and it is unlikely that the Regie will fully accede to HQ’s wishes.
3. Low Export Prices: Much of this over-capacity was built with a view to export “green” electricity to load centers in New York state and New England. Unfortunately, such exports have been hampered by: (i) transmission constraints (it takes a long time to build new transmission capacity in the densely populated US Northeast); (ii) the reluctance of U.S. customers to green-label electricity from HQ’s large hydro electricity projects (Vermont has done so but remains an exception); (iii) the refusal of U.S. customers to pay a “green” premium and, most importantly, (iv) competition from U.S. generating facilities using inexpensive shale gas. Shale gas has been a game changer. In the last five years HQ has lost much of its cost advantage in its target markets. How long will such low prices remain? There is no consensus but Quebec is hoping for higher gas prices in the U.S. over the medium term.
4. Few Immediate Uses: Officially, Quebec views its surpluses positively. The government is hoping that it will allow the Quebec economy to pivot towards a greener economy (see my October 15, 2013 post). Unofficially, Quebec is scrambling to find new uses for its electricity. To date, Quebec has identified transportation, data centers and natural resource processing.
On November 2, 2013, Quebec rolled out its 2013-2017 strategy to promote greater electrification of transportation and earmarked $516 million for this effect. While government will be a catalyst, much of the effort will have to come from the private sector and it remains to be seen how strongly the private sector will embrace the strategy.
Quebec has reversed the previous government’s aversion to data centers and is promoting Quebec as a friendly jurisdiction. Ericsson’s June announcement of a 40,000–square meter Global ICT investment in Vaudreuil-Dorion outside Montreal is hopefully the first of many examples of this strategy.
In its 2013-2017 economic policy launched October 7, 2013 (again, see my October 15, 2013 post), the government proposes lower electricity prices for new investments requiring 15MW or more. The catch is that these incentives last only 10 years and are limited to investments in a few sectors, including the transformation of natural resources and the manufacturing of renewable energy components.
Unfortunately, this proposed measure had the unintended consequence of confirming that HQ’s current electricity prices were no longer a sufficient inducement. It also gave the impression that existing businesses were not a priority. An impression voiced very publicly by the aluminum industry — Aluminum is Quebec’s number one export — and the forestry industry.