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RR RUEHGA RUEHHA RUEHQU RUEHVC
DE RUEHOT #0135/01 0252158
ZNR UUUUU ZZH
R 252158Z JAN 08
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC 7204
INFO RHEBAAA/DEPT OF ENERGY WASHDC
RUEAEPA/HQ EPA WASHDC
RUCPDOC/USDOC WASHDC
RUCNCAN/ALL CANADIAN POSTS COLLECTIVE

UNCLAS SECTION 01 OF 05 OTTAWA 000135 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR OES, EEB/ESC, WHA/CAN 
 
DOE FOR INT'L AND POLICY AND IE-141 
 
EPA FOR OFFICE OF THE ADMINISTRATOR AND INTERNATIONAL AFFAIRS 
 
USDOC FOR 4320/ITA/MAC/WH/ONIA - WORD 
 
E.O. 12958: N/A 
TAGS: ENRG SENV PGOV CA
SUBJ:  ELECTRIC POWER FROM CANADA:  TRADE DWINDLES AS CONTINENT'S 
NEEDED INFRASTRUCTURE REMAINS UNBUILT 
 
SUMMARY/INTRODUCTION 
-------------------- 
 
¶1. (U) SENSITIVE, BUT UNCLASSIFIED. 
 
¶2. (U) Five years ago, based on its extensive study, Embassy Ottawa 
concluded that while Canada's potential for new electric power 
development had been growing, its exports of power to the United 
States were likely to decline in coming decades.  The main reason 
was transmission constraints.  Obtaining permits to build or expand 
transmission lines had become very difficult, and efforts in both 
countries to restructure electric power markets had created 
uncertainty which discouraged investment. 
 
¶3. (U) The result was too little transmission capacity.  Thus, 
generating plants were increasingly being built close to markets, 
leading to heavy reliance on natural gas as a fuel, and reduced 
long-distance trade in electric power, including across the 
U.S.-Canadian border.  Such factors threatened to make the entire 
North American electric grid less efficient and less resilient. 
These problems were subsequently highlighted by the northeastern 
power outage of August 2003, which affected millions in both 
countries.  We reported in 2002 that Canadian stakeholders were 
ready and willing to join U.S. counterparts in developing a cohesive 
bi-national effort to address these problems, and this was borne out 
by Canadian engagement in the Power System Outage Task Force. 
 
¶4. (SBU) The analysis in this message contains both good and bad 
news.  The bad news is that the problems we identified in 2002 
mostly remain.  Electricity market restructuring has failed to 
advance in many jurisdictions and the needed catch-up of investment 
in North America's transmission grid has scarcely begun.  Perhaps 
partly as a result, Canadian players for the most part have not 
moved ahead with major expansions of generation capacity.  Instead, 
Canadian jurisdictions have resolved the mismatch between demand 
growth and supply growth by reducing net exports of power to their 
neighbors.  If and when new generating resources come on stream, a 
lack of transmission investment in the northern tier of U.S. States 
will help tilt Canadian options in favor of building links east-west 
between provinces (links which are currently underdeveloped), rather 
than the more usual pattern southward into the USA. 
 
¶5. (U) The good news is that the opportunities we saw in 2002 also 
remain present.  Canada continues to have enormous undeveloped 
generating potential.  Many Canadian players are interested in 
tapping this potential and opening up export opportunities.  Our two 
countries' bi-national response to the August 2003 outage clearly 
demonstrated that we can coordinate successful, high-level 
approaches to the sector's problems.  The U.S. Energy Policy Act of 
2005 strengthened the USG's capacity to address these challenges. 
In particular, USDOE's 2006 National Electric Transmission 
Congestion Study focused attention on the capacity issue in the U.S. 
domestic grid, including specific problem areas in northern border 
states. 
 
END SUMMARY/INTRODUCTION 
 
THE PROBLEM 
----------- 
 
¶6. (U) Early in 2001, with energy policy at the top of the new 
Administration's agenda, then Canadian Prime Minister Jean Chretien 
suggested to President Bush that transmission grid improvements 
could unlock major undeveloped electric generating resources in 
Qcould unlock major undeveloped electric generating resources in 
Canada.  While Chretien focused particularly on hydroelectric sites 
in northern Manitoba (Nelson River), there was considerable 
potential in hydro resources in other regions (such as Labrador and 
Quebec) and in oilsands cogeneration in Alberta. 
 
¶7. (U) While several Canadian provinces have abundant 
environmentally and politically acceptable opportunities for new 
power generation, these opportunities are constrained by sheer 
distance from markets and severe obstacles of either access or 
capacity on the transmission side.  These obstacles are not limited 
to Canada, but are continent-wide. 
 
¶8. (SBU) As a result, in much of North America for the past decade, 
investment in generation has been biased toward natural-gas-fired 
plants.  These can be sited close to markets because they are 
 
OTTAWA 00000135  002 OF 005 
 
 
relatively low in emissions, and because gas pipelines effectively 
substitute for power lines (being buried, gas lines are less visible 
and thus more acceptable to property owners, who hate overhead power 
lines).  Industry observers worry that this trend over-commits the 
electric power sector to a relatively high-cost fuel, that the stock 
of these gas-fired plants might outlive the era of abundant natural 
gas in North America, and that the lack of investment in 
long-distance transmission is making the whole continental power 
grid less flexible, efficient, and reliable. 
 
SUGGESTED REMEDIES, THEN AND NOW 
-------------------------------- 
 
¶9. (SBU) In 2002, suggested remedies for the problem of grid 
underinvestment fell into four general categories: 
 
- The U.S. and Canada should develop a high-level binational plan 
for the continental transmission grid.  (This has not occurred). 
 
- The USG should consider assuming "eminent domain" over the siting 
of transmission lines.  (Federal energy corridors are being 
designated in areas experiencing constraints and congestion, and 
FERC now has authority to issue construction permits for 
transmission facilities in these corridors). 
 
- Regional Transmission Organization (RTO) formation should be 
expedited.  (This has occurred, with RTOs now covering about 
two-thirds of the continental USA and much of Canada.) 
 
- Priority should be given to developing innovative transmission 
technologies in order to expand grid capacity.  (DOE's 2007 
Strategic Plan for electricity deliverability begins to answer this 
need). 
 
U.S. POLICY PROGRESS 
-------------------- 
 
¶10. (U) The bi-national Task Force which investigated the 
northeastern electric power outage of August 2003 made many 
recommendations on institutional issues related to system 
reliability, as well as on how to support and strengthen the North 
American Electric Reliability Corporation (NERC - now the Electric 
Reliability Organization for both countries).  Beyond the work of 
the Task Force, there remains potential for greater economic 
investment in the grid's capacity to make it more efficient and 
reliable and to open up new generating resources. 
 
¶11. (U) While the Energy Policy Act of 2005 focused more heavily on 
the oil and nuclear industries than on the electric grid, it led 
FERC to develop incentive-based rate treatments for interstate 
transmission of electric power.  The 2005 Act also led to USDOE's 
first National Electric Transmission Congestion Study (NETC study, 
August 2006).  This document makes good progress in examining 
transmission congestion and identifying constrained areas of the 
grid within the United States.  (Two such areas are adjacent to the 
Canadian border:  New England and the Seattle-Portland area.) 
 
¶12. (SBU) The NETC study also finds that large coal and wind 
resources in Minnesota, the Dakotas, Montana and Wyoming cannot be 
developed for electric generation without placing strains on the 
existing transmission grid in those States.  In our view, this 
analysis could easily have been extended to cover coal, oilsand, 
wind and hydroelectric resources across western Canada (and indeed 
in other provinces).  In order to be developed, these huge 
generating resources will require new transmission capacity within 
Canada and/or in adjacent States.  If those investments do not occur 
QCanada and/or in adjacent States.  If those investments do not occur 
in the United States, then Canadian proponents of new generation 
will reluctantly be left with a more limited and much sparser 
Canadian market. 
 
¶13. (SBU) The Energy Policy Act of 2005 also directed the 
Administration to designate energy corridors on federal land in the 
United States, strengthening FERC's authority to permit the 
expansion of transmission capacity for electricity, oil, gas and 
hydrogen in areas experiencing constraints or congestion.  While 
this is a great step forward, the proposed corridors barely reach 
the northern tier of states which are adjacent to Canada. 
 
CANADIAN GENERATION AND TRANSMISSION OUTLOOK 
 
OTTAWA 00000135  003 OF 005 
 
 
-------------------------------------------- 
 
¶14. (SBU) BRITISH COLUMBIA (which accounted for 11.5 percent of 
Canada's power generation in 2005) relies on a legacy of pre-1975 
hydro dams built on the Columbia River and Peace River systems.  The 
province exported large quantities of power to the western States in 
subsequent years while in-province demand "grew into" this 
generating overcapacity; demand is now catching up with supply and 
the governing philosophy is one of provincial self-sufficiency.  For 
future demand, the priority is to purchase more power from 
independent producers.  A potential large hydroelectric site known 
as "Site C" on the Peace River is the most likely large generating 
investment, but there is currently no time-line for its development. 
 
 
¶15. (SBU) Transmission investment in B.C. has lagged in recent 
decades.  A few modest transmission line reinforcements are in the 
works, none of which would cross the border.  The GOC expects 
British Columbia's net power exports to the USA to decline from 
about 3 terawatt hours (TWH) in 2004 to about 1.1 TWH in 2020.  Key 
obstacles to new infrastructure in B.C. are unresolved native land 
claims, which cover nearly all of the province's area. 
 
 
¶16. (SBU) ALBERTA (9.5 percent of national generation) relies mainly 
on inexpensive local coal and natural gas as generating fuels. 
Increasingly, electricity is co-generated while natural gas is 
burned to extract bitumen from the province's vast northern oilsand 
deposits.  This electricity is consumed locally by industry, which 
reduces the growth of industrial demand on the grid, helping to keep 
on-grid demand growth below 1 percent annually.  Cogeneration could 
also make a net contribution to electricity supply, perhaps even 
changing the province's traditional status from small net importer 
of power to net exporter if transmission capacity in Montana and 
Wyoming can be expanded.  (Moreover, some in Alberta are seriously 
considering use of nuclear reactors to fuel bitumen extraction, 
which could boost the amount of power co-generated in this process). 
 Alberta has gone much further than other provinces in introducing 
competition to its electric power market.  Several transmission 
investments are contemplated, including two which are cross-border: 
the likely-to-be-completed Montana Alberta Tie (240 kilovolts over 
346 kilometers) and the ambitious Northern Lights project from the 
oilsands to Oregon (500 kilovolts over 1743 km), with a projected 
in-service date of 2012. 
 
¶17. (SBU) MANITOBA (5.6 percent of national generation) has plans, 
but no timeline, for a low-unit-cost 1380 megawatt hydroelectric 
station at Conawapa on the lower Nelson River.  While the 
environmental and land-claims obstacles to development appear to be 
moderate, the Conawapa site is remote from power markets and would 
require a major long-distance transmission line southward to 
Minneapolis/Chicago or eastward to the Toronto area.  While Toronto 
is more distant from Manitoba than Chicago is, the eastward 
transmission route to Toronto is relatively uninhabited.  This means 
that an all-new line to Toronto, costing over C$1 billion, may be 
more feasible than expanding the grid's capacity in adjacent U.S. 
States, which according to Manitoba Hydro appears nearly impossible 
QStates, which according to Manitoba Hydro appears nearly impossible 
due to "not in my backyard" resistance.  Around 2005-06, Ontario and 
Manitoba held discussions aimed at reinforcing and expanding their 
power interconnections, in what they describe as "a first step in 
creating a national east-west power grid."  The GOC predicts that 
Manitoba's annual power exports to the USA will remain at about 11 
TWH through 2020, but that sales to Ontario will roughly double to 
over 3 TWH even if Conawapa remains undeveloped, with greater growth 
if that project goes forward. 
 
¶18. (SBU) ONTARIO (28.5 percent of national generation) has 
committed to close its four remaining large coal-fired generating 
facilities by 2014 due to air quality concerns, despite having 
limited options for new generating capacity.  Recently, most new 
generating investment has been in natural-gas-fired peaking plants 
built close to demand centers in southern Ontario, and dozens of 
small renewable (wind, biomass, solar and hydroelectric) projects. 
The province is edging toward permitting new nuclear reactors (there 
are 18 power reactors in service or being refurbished) to provide 
the baseload power that will be needed in the future.  Because those 
new reactors will not enter service before 2018, total nuclear 
capacity will actually decline over the coming decade.  The Ontario 
Power Authority (OPA) has clearly stated that natural gas plants are 
 
OTTAWA 00000135  004 OF 005 
 
 
effectively projects of last resort - "when additional conservation 
and renewable resources are not feasible or cost effective." 
 
¶19. (SBU) As it works to replace the baseload power currently 
generated by its coal plants, Ontario would like to have the 
flexibility to purchase energy generated from renewable sources from 
neighboring provinces and U.S. States.  The OPA estimates that 
demand could exceed in-province supply from 2015 until new nuclear 
capacity comes online.  The GOC's prediction for Ontario's net 
imports is strongly dependent on assumptions about the province's 
construction of new nuclear generating plants.  Ontario is currently 
focused on building the internal transmission infrastructure needed 
to carry power from its new renewable energy projects and upgrading 
transmission lines linking the Bruce nuclear facility to large 
electricity demand centers.  The province plans to expand its very 
limited east-west interprovincial transmission links in order to 
accommodate more imports.  Use of provincial funds in this way is at 
least partly rationalized as an environmental investment which 
facilitates the shutdown of the coal-fired plants.  The vast 
distance (over 1,200 road miles, some of which cross native lands) 
from the Manitoba border to the Toronto-area demand center, 
significantly complicates construction of this portion of the 
east-west transmission grid across Ontario. 
 
¶20. (SBU) Currently only one of the transmission line projects under 
construction - a 20 kilometer, 230 kilovolt link to neighboring 
Quebec - would cross the province's boundary.  With the exception of 
the 2006 replacement of a 230 kv transmission line between Sarnia 
and Marysville, Michigan, Ontario's north-south transmission grid 
links to the U.S. have not been upgraded or expanded in recent 
years.  In the near term, increased Ontario-U.S. transmission 
capacity is not a priority for Ontario policymakers and the 
Independent Electricity System Operator (IESO). 
 
¶21. (SBU) QUEBEC (28.7 percent of national generation in 2005) has 
enormous hydroelectric capacity, both developed and undeveloped. 
Historically Quebec built transmission lines to support long-term 
net exports to the northeastern United States.  The province has 
successfully added new medium-sized hydro generating plants in 
recent years, and has plans for at least one large development (La 
Romaine - 1500 megawatts) in the coming decade.  Quebec is also 
investing in wind generating capacity, which is expected to reach 
5.5 gigawatts by 2020.  All these developments are located far from 
markets, so the ability to link them to the grid and strengthen 
overall transmission capacity is a crucial factor, as is the 
negotiation of long-term supply contracts with U.S. customers. 
Outside of developed areas in the province's south, Quebec seems to 
be making more progress than other provinces in expanding its 
transmission grid.  However, all currently planned expansions appear 
to be either bringing new capacity into the grid, or strengthening 
export capacity to Ontario.  Grid reinforcements in densely settled 
areas, notably those into the Montreal urban area and near the 
boundary with New York State, remain politically very difficult to 
achieve, and we understand that there are similar challenges on the 
U.S. side of the border. 
QU.S. side of the border. 
 
¶22. (SBU) NEW BRUNSWICK (3.1 percent of generation) is expected to 
increase its power exports into Maine from 0.9 TWH in 2005 to 2.3 
TWH by 2020, due to slow in-province demand growth and a diverse 
range of supply options (hydro, coal, nuclear, gas, wind).  A 230 
kilometer, 345 kilovolt line to the Bangor, Maine area is currently 
being completed. 
 
¶23. (SBU) NEWFOUNDLAND AND LABRADOR (7.3 percent of generation) has 
most of its generating capacity at a remote location in Churchill 
Falls, Labrador, from which power is exported to the Quebec grid and 
into the northeastern United States.  While large developments are 
contemplated for new sites on the Lower Churchill River, 
transmission depends on interprovincial arrangements with Quebec. 
If Quebec continues to invest in interprovincial ties with Ontario, 
the majority of new generation from Labrador could  end up in the 
Ontario market.  A more expensive export alternative for 
Newfoundland/Labrador would involve building transmission lines and 
undersea cables across the Island of Newfoundland and Cabot Strait 
to Nova Scotia and thence to New England, an ambitious (and 
early-stage) idea which Nova Scotia and Newfoundland have agreed to 
consider. 
 
CONCLUSION/COMMENT 
 
OTTAWA 00000135  005 OF 005 
 
 
------------------ 
 
¶24. (SBU) Canada's annual net electric power exports to the United 
States halved in the first six years of the current decade, sliding 
from 36 TWH in 2000 to 18 TWH in 2006.  The GOC expects Canada's net 
power exports to decline somewhat further over the next dozen years, 
to 15 TWH in 2015 and 14 TWH in 2020.  U.S. markets will probably 
have access to increased net exports from two provinces (a modest 
increase from Alberta, more from New Brunswick), but as the 2006 
U.S. NETC study implies, grid congestion in adjacent States may yet 
limit these opportunities. 
 
¶25. (SBU) While the drive to open up electricity markets in both the 
U.S. and Canada appears to have slowed since around 2003, at least 
this slowdown has mitigated the uncertainty which may have been 
impeding investment previously.  Compared with 2000-2002, we are 
reassured to find signs of an upswing in capital investment in the 
electric power industry.  Still, too little of this investment is on 
the transmission side.  Also, while the 2005 Energy Policy Act made 
great strides toward facilitating such investment, it treats the 
grid essentially as a domestic system and does not promote 
investment in cross-border transmission.  Where Canadian players are 
planning inter-jurisdictional connections, the biggest players - 
Ontario and Quebec - are thinking along east-west rather than 
north-south lines.  Assuming provinces individually do not give in 
to parochial "self-sufficiency" thinking, power trade on such 
inter-provincial connections will bring benefits, but still, the 
benefits will be largely confined to Canada.  As Prime Minister 
Chretien told President Bush seven years ago, removing obstacles to 
transmission investment, and growing the capacity for north-south 
power trade, would unlock major new electric power supplies and 
bigger economic gains for both countries. 
 
WILKINS