New Opportunity and Challenge
in the Deregulated Energy Market:
Power from the Lower Churchill River in Labrador
presented at the
New England Governors and Eastern Canadian Premiers Conference
by Premier Brian Tobin
Newport, Rhode Island
June 3, 1997
The National Energy Board of Canada has
ranked the 2200 megawatt Gull Island site on the Lower Churchill River in
Labrador as the lowest cost undeveloped hydro electric site on the North
American continent. Just a few miles down stream, the Muskrat Falls site has
been ranked as the fifth lowest cost hydro electrical site on the continent.
Together, these two sites are capable of producing 17 billion kilowatt hours
of environmentally clean, stable, and competitively priced electricity.
The objective of my remarks today is to talk
about an opportunity and a challenge for this development that has been
presented by the new deregulated market for electricity. The opportunity and
the challenge both have been created by FERC Order 888. The major
opportunity for us is that of supplying the Northeast U.S. market with the
environmentally friendly, or "green", electric power from the
Lower Churchill River in Labrador. That is also our major challenge to bring
this power to market in the new competitive environment.
Change, and our response to the opportunity
and challenge it presents, has become a central feature of our economic
Nowhere is this more true than in the
generation, distribution and marketing of electricity. For most of this
century for the past sixty or more years the generation, distribution and
marketing of electricity has been regarded as a natural monopoly. As such,
we all deemed it necessary to surround this industry with a complex
As a result, there was little competition and
limited consumer choice in the electricity industry. There was no incentive
for producers to lower costs and increase their market share. There was no
capability for the consumer, residential or industrial, to demand a lower
price; or, if they were so inclined, to choose to pay a premium price for
environmentally friendly energy or "green power" as it has become
For decades we all accepted the concept of
electricity as a natural monopoly, just as naturally as we accepted the
rhythm of day and night. But, the concept of a market force that rewards
risk and offers consumer choice, has asserted its influence in the
electricity industry. Openness and freedom of choice have finally come to
the electricity industry in North America.
This new market structure is due in no small
measure to the leadership of the U.S. Federal Energy Regulatory Commission (FERC).
One year ago, FERC Order 888 established a fair and sustainable means of
securing open and non-discriminatory trade in electricity at the wholesale
level. The FERC has provided the new deregulated market environment, thereby
allowing the benefits of technological change and economic advantage to get
to the end consumer.
Utilities across North America are responding
to this challenge. I was pleased to see, just a few weeks ago, that Hydro
Quebec was successful in obtaining conditional FERC approval for a power
marketing licence. I am confident Hydro-Quebec will meet these conditions.
Newfoundland and Labrador Hydro intervened in that FERC hearing. The purpose
of the intervention was not to protest or prevent Hydro-Quebec from
achieving a power marketing licence. Indeed, our success in this new market
is linked to Quebec meeting all the FERC conditions of open and transparent
transmission access; and, that was the purpose of the intervention.
I congratulate Hydro-Quebec on its success,
and FERC for the wisdom of its decision. Now we look forward to meeting the
needs of the new market in accordance with the new FERC rules.
As an energy producer, Newfoundland and
Labrador looks forward to the opportunity and challenges created by this new
Newfoundland and Labrador is a significant
and growing energy economy. First crude oil production in our province will
begin later this year. This production too represented technical and public
policy challenges that had to be overcome. The giant Hibernia production
platform is now completed and is being referred to as the eighth wonder of
the world. Oil production from Hibernia and other fields is forecast to
increase rapidly to one-third of Canada's total light crude oil production
in the early years of the new century. In addition, my Province also has
discovered resources of 8 trillion cubic feet of natural gas.
As we have met the challenges of offshore oil
production, and as we will meet the challenges of producing offshore gas and
bringing it to market, so too will we meet the challenges and opportunities
of the deregulated electricity market.
The traditional entry barriers to electricity
markets were not technical. They were institutional; and the new deregulated
market has removed these barriers. Deregulation has created the opportunity
for our province to become a full energy service provider in petroleum, gas,
In Labrador we already have the single
largest hydroelectric generating station in North America, which is the
equivalent of almost three quarters of Canada's net electricity exports to
the U.S.A. So, Newfoundland and Labrador is already a very significant
supplier to the North American electricity market. I have no doubt that you
are all aware of the dialogue between Quebec and ourselves concerning the
Upper Churchill contract. That is a matter which we will continue to
Power from the Lower Churchill has two very
important advantages; it is economically competitive, and it is
As I have noted, the National Energy Board of
Canada has ranked the Lower Churchill as the lowest cost source of
hydroelectric power on the North American continent. This, combined with the
long term price stability of hydro electric power, places a special premium
on this power.
The Lower Churchill has another premium, it
is truly "green" power. Being hydraulic, this project is naturally
environmentally clean in the sense that it does not produce any greenhouse
gases. This advantage can only be expected to increase as environmental
issues grow in importance. The equivalent amount of power produced by coal
would emit more than 14 million tonnes of greenhouse gases each year every
year. Even using the more efficient natural gas, to produce an equivalent
amount of electricity would send between 6 and 8 million tonnes of
greenhouse gases into the atmosphere each year every year.
The latest US Department of Energy forecast
for electrical generation calls for a 58 percent, or 6.8 billion kilowatt
hour increase in electricity generated from petroleum by 2010 right here in
New England. Just this increase alone will require the burning of over 10
million barrels of oil per year, and will produce over 4 million tonnes of
greenhouse gases. All of this, and more, can be avoided by the 17 billion
kilowatt hours available from the Lower Churchill River. Alternatively, the
17 billion kilowatt hours that will be available from the Lower Churchill
could replace all of the electricity that the US Department of Energy
predicts will be produced from coal in New England by 2010.
The same Department of Energy forecast
predicts that by 2010 only 2 percent of New England's electricity will come
from environmentally friendly and long term stably priced hydro imports from
Canada. Power from the Lower Churchill can increase that 2 percent up to 14
percent. At the same time, it could avoid altogether the need for any new
petroleum fuelled production; and, reduce New England's dependence on coal
fired generation from 12 percent to about 7.5 percent.
Another important advantage of this project,
both from a cost and an environmental perspective, is its location. Being
downstream from the existing Upper Churchill dam, it uses the same water
storage. Thus, there will be no vast flooding of Labrador territory
associated with this project. This project will be essentially a
run-of-the-river hydro project. It will flood only a small fraction about
five percent of the area typically flooded by a hydro project of this
magnitude, and even that level of flooding will be confined to the steep
walled river valley.
This project has already been subjected to,
and cleared by, the Environmental Assessment process in Canada. This,
however, was in 1980; and because of the elapsed time, the project will have
to be assessed again. Therefore, before this power reaches your markets, the
consumer will have the unique benefit that the project has been subjected to
two environmental assessments.
When we bring the power to your market it
will be competitively priced, as it must be in order to enter the market. It
will also be stably priced over the longer term because it is hydro power
and therefore not subject to the fluctuations of petroleum and gas prices.
But in addition, it will be "green power", which will have passed
two environmental assessments in Canada.
FERC Order 888, and the open transmission
access it provides, has presented the opportunity to provide 17 billion
kilowatt hours of competitive, stably priced and environmentally clean
electrical power to the electricity markets of New England. It has also
presented us with two challenges, both are financial. First, we must finance
the project; and second, we must deliver the power at a competitive price.
In the old regulated markets, long term sales
contracts were the staple of capital financing for large hydro projects. In
the new deregulated market such contracts are no longer the norm. But, given
all the positive features of this project, the new forces of creativity that
have been unleashed in these markets will be more than capable of meeting
These same new forces of creativity and
competition will also drive us in our efforts to bring this power to your
market at a price that is competitive with your other sources. If we fail to
meet these challenges, the alternative is clear, you will not buy the power
and we will not finance the project.
But, I am confident that the forces of
competition, and the skill and ingenuity of our financiers and engineers can
move the 17 billion kilowatt hours of power from the Lower Churchill River
with negligible environmental impact, and deliver this power to you at a
competitive price. An added premium for you is that it will help you reduce
greenhouse gas emissions by millions of tonnes each year.