Tuesday, March 16, 2010

Hydro Quebec De-Mystified

A Win-Win Deal?

The recent Hydro Quebec deal was announced in a air of hoopla and celebration. On Friday, March 12, the Burlington Free Press quoted James Moore of VPIRG and various members of the legislature, congratulating Vermont for the deal. In this article, President Pro Tem Shumlin, House Speaker Shap Smith, and House Natural Resources Committee chair Tony Klein all described the purchase as a positive development. For once, Governor Douglas was in agreement with his legislature. “Reaching a new long-term agreement with Hydro-Quebec is a good deal for ratepayers and strengthens the state’s economic future,” Douglas said.

There was happiness on the Canadian side, also. The Montreal Gazette was pleased that HydroQuebec had landed a $1.5 billion dollar deal with the Vermont utilties. While the U.S. stories avoided talking about money, the Canadian article was more direct. The Montreal Gazette article was published on Thursday, March 11, and it was delighted with the revenue that would be coming to Canada.

Worth $1.5 billion over 26 years, and starting in 2012, the contracts call for the purchase of 225 megawatts of power from Hydro-Québec at “market prices,” Premier Jean Charest said. The contract renewals, with Central Vermont Public Service and Green Mountain Power, account for a third of the electricity consumed in the state. And Charest said Hydro-Québec could win an equally large new contract with Vermont if plans to close Vermont Yankee, the state’s only nuclear reactor, go ahead.

(emphasis added by blogger)

Vermont utilies also gave HQ something they dearly wanted: declaring Quebec Hydro power as Green Energy. As the Montreal Gazette noted:
But in addition, Charest said, the Vermont legislature is considering a bill to recognize electricity produced by large hydro dams as green. At present, several U.S. states consider electricity produced by large dams as non-renewable energy.......If Vermont becomes the first state to recognize Hydro-Québec as a green energy producer, others could follow, increasing the provincial utility’s potential export sales to the U.S., Charest said. “It opens the door to agreements that could multiply across the United States,” the premier said.

Meanwhile, also on Thursday, March 11, Governor Jim Douglas of Vermont was given the highest honor that the Quebec government can award, the National Order of Quebec. He was the first American politician to receive this award. It was a great, busy day for Quebec-Vermont relationships.

A Puzzle?

Premier Charest and Governor Douglas described the situation as win-win. I described it to myself as puzzling. How much power were we buying? What were we paying for it? It seemed to have something to do with Vermont Yankee, but what? I began my investigations.

My hard work was interrupted when I discovered that Peter Shumlin thinks 30% of German electricity comes from solar. (Solar provides 1% of German electricity.) So I had a little comic relief. But a blogger's life cannot be all fun and games. I had to figure out this HQ deal. I called David Lamont of the Department of Public Service, and ask him a few questions. He was very helpful.

For a while, Mr. Lamont was TOO helpful. Vermont utilities have five separate contracts with HydroQuebec, with different rates and end dates. The new contracts extend this power purchase past 2016. The existing contracts buy capacity and electricity separately somehow. Dollars do not follow the electrons. For example, Vermont could buy electricity that gets delivered to Boston, and some other electricity would get delivered to Vermont from near Boston. And to top it off, the dollar amounts in new HQ contracts are not finalized.

Well, at least I know why I was confused.

Hydro Quebec Deal Demystified

I think I finally got it, though. The basics of the Hydro Quebec deal.

Our current situation:

Vermont buys 300 MW (installed) at 75% of hours (capacity) from HQ each year. Vermont pays approximately 6.6 cents per kWh for this power. The five contracts begin to run out in 2012, and all finish by 2016. The AC line into Vermont near Highgate is adequate to carry most of this amount of power. Some is currently carried by a DC line into Boston.

The new situation:

Vermont will have new contracts to buy power from HQ for 26 years, starting in 2012. The contracts cover 225 MW (installed) and 66.7% hours (16 out of 24 hours).

Looking at the odd unit of MWyears (one megawatt times one year's worth of time)
  • We used to buy 300 MW times 0.75 or 225 MW years
  • Now we will buy 225 MW times 0.67 or 150 MWyears.
Therefore, this deal is for 2/3 of the power we used to buy from HQ.

The price is not known, but it will be some variation of market price. Negotiations are not yet finished. I think the price is unlikely to be less than the 6.6 cents per kWh we are currently paying HQ. If it were less, Douglas and the Legislature would be trumpeting this from the housetops. Right now, the Canadians are the only ones shouting with glee about money.

Future Purchases

Both the newspaper articles and Mr. Lamont stressed that more power can be bought from HQ at a moment's notice. Mr. Lamont wanted me to realize that Vermont could buy more power (if it wanted to) than the Highgate AC line can carry. The DC line to the Boston area could carry power that Vermont buys: it already carries some Vermont power. This power is delivered to Boston, but some Boston-area power is delivered to us at the price we had arranged with HQ. Electrons and dollars do not have to move in tandem. Since the line can carry more power, we could buy more power from HQ if Vermont Yankee closes.

Some Thoughts

I don't mean to be a spoilsport. But why is everybody in Montpelier so happy about this? Locking in out-of state power at "market price" when VY was willing to sell at 6.1 cents? And VY pays taxes here. Apparently some price fluctuations will be smoothed in the new contracts, just like a mortgage that will only raise your rate half a percent per six months. (Not the best kind of mortgage.) But the deal is still about market rates.

I am not the only one to notice that this is not the deal-of-the-century. Vermont Digger shows Douglas being asked some difficult questions at his March 15 press conference. Three particularly good questions:
  1. How can you evaluate a deal without a price?
  2. Is it right for public utilities to agree to a contract without a specified price structure?
  3. There is language in the agreement that ties a contract to legislative action. Isn't that unusual?
Unfortunately, the Governor's answers weren't quite as good as the questions. His answers were along the line of "It's all going to be all right. We have a feeling about it." I urge you to read the transcript of the conference referenced above, or perhaps watch the video.

Another point is a little more subtle. There's language in the contract that ties this contract to legislative action...that is, I believe the Vermont legislature has to declare HQ power "renewable" for the contract to take effect. Haven't we been here before? Haven't we had the legislature in the middle of a power purchase agreement before? Can't the legislature decide later that HQ power isn't renewable after all?

Indeed. Why does anybody in Quebec think it's going to work out well to have our legislature in the middle of their power agreement?


Robert Hargraves said...

$1.5 billion
divided by 225 MW
divided by 26 years
divided by 365 days
divided by 16 hours/day
= $0.0439 per kWh

which would be a good deal for Vermont ratepayers.

Why are they changing the contract to buy only 225 MW instead of 300 MW? I bet the "deal" is to buy the rest at short-term market rates via the ISO-NE pool. That explains the "Boston or Vermont" comments.

Meredith Angwin said...

Bob. Thanks for the comment and the analysis.

I don't think that the $1.5 billion is a very fixed number. I think they calculated that number at market prices, which are particularly low now, but they actually expect their "market prices" will turn out higher and that number will go up significantly.

My feeling is that Vermont didn't buy more power because they didn't get a particularly good deal. If you get a great deal, you try to buy as much as possible. If you don't get a great deal, if you are buying at the market (hoopla or not), it doesn't matter when you buy more. So you might as well wait.

Jack Gamble said...

The hilarious thing is that this green hydro they are touting does far more damage to the environment by interupting river flow than VY does. But then again, this was never about the environment, was it?

Oh yeah, they will also be paying more, shipping dollars out of the country, losing massive amounts of tax revenues, shipping jobs out of the counrty, and destroying an entire town in the process.

Way to go Vermont!

Peter Roth said...

I remember telling you about a long conversation I had with Sen. Mark Mitchell before the historic senate vote to close Vt. Yankee.

The point Gamble makes in his comment is only part of the story. Sen. Mitchell recognized my point that Brattleboro and Vernon economies would be ruined by massive job losses, loss of tax revenues to the state and probably state assistance to families who lose jobs and require state aid. Loss of tax revenue to Vt. from the Yankee facility and many further economic DOMINO effects; such as consumer spending in the south Vt. area.

Overall the consequences of closing Vernon and buying power from outside will be another blow to manufacturing industries leaving Vt. because of economic pressures. The entire consequence won't be known for a while but the repercussions will be very great.

The Vt. legislature appears to be in a self inflicted "Death Spiral" without recognizing what they are doing to the State. It is probably the reason Gov. Douglas decided not to run again because he does not want to be associated with the states fiscal demise. At the rate we are going, loss of $ 150 million in revenue will seem small in a few years.

Meredith writes:
My friend Peter Roth emailed me and asked me to post this comment for him. Roth is a chemical engineer and a member of Coalition For Energy Solutions. You can see a short biography here. http://www.coalitionforenergysolutions.org/about_us.html

Unknown said...

Your discussion of prices for power from H-Q and VY compares apples to oranges. The H-Q deal is for "system" power, meaning delivery is guaranteed because it can come from anywhere in the vast Hydro-Quebec system. VY power comes from that one plant, and therefore is not guaranteed. When the plant goes offline, its customers must replace the power at high prices on the spot market (for which they buy insurance, adding to the actual cost and of VY power). The risk of unreliability for VY operating at 120% capacity for two decades past its 2012 scheduled retirement adds to "sticker" price of 6.1 cents, making the guaranteed reliability of H-Q power more economically attractive for what may seem like the same price. The utilities are prudent to factor this in, which is why the governor is happy with the deal.

Meredith Angwin said...

Duane. Thank you for commenting. You make an interesting point that needs to be considered. HQ is many plants (including quite a few nukes) and Yankee is just one plant.

On the other hand, HQ only promised 16 out of 24 hours for their power, and that gives them quite the edge in reliability, since they can probably choose their own downtime (at least partially). VY promising 24/7 power puts them in a position of truly having to be more reliable. Not sure what the legislature thinks of that. Would they have wanted more hours for HQ power? Are they happy with what they got? Maybe HQ power is basically cheap-- for peaking power, which is closer to what they are promising. I DO know that 16 out of 24 is not truly "peaking." But it ain't baseload, either.

It is also nice to see you acknowledging that the distribution utilities buy insurance against unscheduled outages by Yankee. The utilities know that they will have to buy more expensive power to replace Yankee, and they can't get instant rate relief, so they buy insurance against Yankee outages. Thank you for mentioning that! I should have mentioned it. Well, there's always another post on another day, now that you have reminded me. I appreciate it.

bouchecl said...


HQ only has ONE nuclear plant, the 635-MW (net) Gentilly-2, a CANDU-6 reactor located near Trois-Rivières.

The Gentilly-1 plant has operated for 180 days in 1972 and has been decommissioned in the late 70s. As of the end of 2008, only 2% (4 TWh) of HQs supply comes from the nuclear plant, whereas their 59 hydro facilities have an installed capacity of 34,100 MW, with more on the way.

HQ might get a second one, Gentilly's sister plant at Point Lepreau in New Brunswick, if the deal for the sale of generation assets of NB Power goes through and if and when the plant is recommissioned.

As a citizen of Quebec (and an indirect shareholder of HQ), I take no position in the Vermont Yankee debate. It's basically up to you guys to decide whether you want Entergy to carry on operations in Vernon after 2012. As for the VT legislature, I am not overly worried. While 1.4 TWh is a drop of water for HQ (0.7% of its total output), it still represents almost 30% of the state's demand.

Meredith Angwin said...

Claude. Thank you for the comment. You are completely correct, of course, that HQ has only one operating nuclear plant. My apologies for misstating the situation. Gentilly is on the banks of the St Lawrence, significantly south of most of the hydro projects. So some of Vermont's green electrons from HQ may well be purchased from a nuclear plant. This amuses me.

Indeed, HQ doesn't need to worry about the Vermont Legislature. Since our legislature has attempted to destroy any alternative except market purchases and expensive renewables, it ought to be very responsive to anything HQ asks.

Still, I wouldn't like a contract that requires the legislature of this state to do anything. You can't assume they will act in a rational way for the good of the state. Which means dealing with them is a little like dividing by zero...any answer is possible.