Keeyask and the future of Manitoba Hydro

Opinion

Hey there, time traveller!
This article was published 07/10/2021 (1176 days ago), so information in it may no longer be current.

A RECENT story in the Free Press (Keeyask dam increases Manitoba Hydro’s net income by $20 million, Sept. 24) highlights Manitoba Hydro’s latest annual report, including partial completion of the Keeyask project. Reported results have ramped up political rhetoric between opposition New Democrats and governing Conservatives over the merits, or folly, of Keeyask and the associated Bipole III transmission line, which was promoted and approved by the Selinger government.

Who are we now to believe, and how can we move ahead? In this case, it is important to focus on the numbers, rather than the politics, in order to better understand how to proceed. This sort of approach is termed “balanced presentation.”

The recent story shows consolidated net income at $119 million, with Keeyask specifically noted as increasing net income by $20 million. At first glance this looks good, suggesting Manitoba Hydro can readily manage its increased debt load. If you read the report more closely, however, it shows electricity and natural gas operations each lost $7 million before considering what are termed “net movements in regulatory balances.”

The positive net income thus did not come directly from operations, but rather via accounting readjustments. This makes the situation much less clear.

Keeyask was originally supposed to cost $6.5 billion, but, as we know, there were escalations. Cost overruns, however, are not inherent. Manitoba Hydro’s Limestone project in the 1980s was managed by Bechtel-Kumagai and was both on time and under budget.

By March 2017, the cost for Keeyask was confirmed as rising to $8.7 billion. In its latest annual report, Manitoba Hydro still cites $8.7 billion, but all costs are not in yet. The final total is not known for certain.

The same $8.7 billion figure for Keeyask was cited in the 2020 report of the commission chaired by Brad Wall, which was economically sound but highly political, and also in a 2019 report from the Canadian Centre for Policy Alternatives by Lynne Fernandez, an opponent of the Conservatives and an advocate for building Keeyask and other dams.

Similarly, both Wall and Fernandez quote an increased final cost of $4.7 billion for Bipole III. We can likely all agree on these figures, subject to finalization.

Irrespective of which party may be in power, these debt obligations must be repaid. Problematically, the two projects represent well in excess of half of Manitoba Hydro’s long-term debt but add no more than 13 per cent in new generation capacity. From this perspective, new dams at such high costs are not desirable.

As part of the 2014 Needs For and Alternatives To (NFAT) evaluation for Keeyask, a lifespan of 78 years was noted, along with “cost-of-money” for Manitoba Hydro of 4.7 per cent. Using basic finance, we can estimate annual payments to cover $8.7 billion in debt, translating to about $420 million. Given energy output of 4,400 million kWh annually, the cost translates to about 9.5 cents per kWh.

Manitoba Hydro’s average prices for domestic and extra-provincial sales were about 7.9 cents and 5.6 cents per kWh respectively. Neither is sufficient to cover Keeyask, showing the dam to be a money loser. Manitoba Hydro ratepayers are forced to subsidize Keeyask, especially on export sales, rather than the other way around.

Based on such experience, the prospects for future new dam projects look dim. For the opposition, a better focus would be directions suggested recently by former minister Tim Sale. If new generation is needed to offset drought or diversify supply, the obvious candidate is not new dams but utility-scale wind, with costs continuing to decline.

What about electricity to replace natural gas for heating, to reduce emissions? Based on Manitoba Hydro’s own data, the annual fuel cost of electric baseboard heating is more than twice that of natural gas. Carbon-tax escalation to an unimaginable $290 per tonne is needed to match. Only highly efficient heat-pumps can be lower in cost, but are expensive for individual users.

Bluntly, we no longer have a low-cost electricity advantage. So, what now? A key opportunity is available to use electricity beneficially, and in a manner hardly sensitive to electricity prices, namely electric-vehicle charging, both light-duty and heavy-duty. I have mentioned before the possibility of higher electricity prices, what is termed “application pricing” to enhance attractiveness for Manitoba Hydro.

I discovered this merely confuses potential users; it’s preferable instead to talk in terms of equivalent fuel prices.

Even relatively expensive solar-based electricity can be used here to economically charge electric vehicles, providing fuel at half conventional prices. It is thus highly feasible for Manitoba Hydro to power electric vehicles at prices equivalent to 30 to 40 cents per litre, more than a 70 per cent reduction. This also generates revenues higher than any imagined export, readily covering expensive Keeyask electricity and even the costs of associated charging station infrastructure.

This is a win-win scenario; an economically prudent approach to secure a positive future for Manitoba Hydro and Manitobans.

Robert Parsons teaches basic quantitative methods and sustainability economics at the I.H. Asper School of Business, University of Manitoba.