2023-10-10 09:00:00
Hydro-Québec’s contract with the State of New York will not only be profitable. It will be extremely profitable.
Posted at 5:00 a.m.
Vincent Brousseau-Pouliot La Presse
According to our information, Hydro-Québec plans to make profits of around 950 million per year by selling 10.4 TWh of electricity to the State of New York with this 25-year contract which begins in 2026.
Over 25 years, the total profits expected for Hydro-Québec would therefore be approximately 23.8 billion, on total revenues of approximately 32 billion1. (All figures in this article are in Canadian dollars.) This is a rate of return of approximately 73%.
For reasons of confidentiality, the state-owned company has never publicly revealed the profitability estimates of the contract and did not want to comment on this aspect of the matter, but it nevertheless confirms that it will be profitable.
Since the contract was announced in 2021, the Quebec government has publicly indicated that it would generate revenues of 30 billion over 25 years for Hydro-Québec. Prime Minister François Legault repeated this figure last month. Neither the Legault government nor Hydro-Québec has quantified the profits, once paid for the production and transport of electricity in Quebec.
Hydro-Québec is able to make profitability forecasts, among other things, because its revenues per terawatt hour are forecast for each of the 25 years of the contract (revenues are indexed by approximately 2.5% per year).
For comparison, Hydro-Québec generated a net profit (net profits) of 4.56 billion across all of its activities in 2022. The average annual profits from the contract with New York (950 million per year) would have represented an increase in profits of 21% that year.
However, one important caveat must be made. According to this profit forecast, the hydroelectricity sold in New York will be produced on average at a cost of 2 cents/kWh during the 25 years of the contract, and transmission on the territory of Quebec will cost approximately 0.8 cents/kWh (this cost includes, among other things, the amortized cost of a new transmission line of $1.14 billion2).
From an accounting standpoint, this calculation of the production cost of 2 cents/kWh is justified. The contract with New York provides that Hydro-Québec must supply electricity from our current hydroelectric dams. The production cost of our current dams is currently slightly less than 2 cents/kWh and will not vary much within 25 years (except Churchill Falls whose contract must be renegotiated upwards). This is why, according to our information, Hydro-Québec plans expenses of around 2 cents/kWh on average for the production of hydroelectricity from the New York contract between spring 2026 and spring 2051.
But in practice, to decarbonize Quebec and make it carbon neutral by 2050, it will take much more electricity than the 216 TWh produced by Hydro-Québec in 2022. The state company estimates that it will take at least 100 TWh additional. Publicly, the Minister of Energy of Quebec, Pierre Fitzgibbon, mentioned 150 TWh more.
This new electricity will be much more expensive than current electricity, produced at low cost by hydroelectric plants built in the 1960s and 1970s.
Hydro-Québec is redoing its calculations to see how much energy it should produce, and at what cost. Its latest estimate made public: any new source of electricity supply would cost 9.5 cents/kWh to produce, compared to 2.0 cents/kWh for all production in 2022.
Our adjusted estimate: profits of 750 million per year
To estimate the real profits of the Hydro-Québec contract in New York, it is wise to take into account the future increase in the cost of electricity production.
By gradually adding 150 TWh at a production cost of 9.5 cents/kWh until 2050, the average production cost over 25 years is 3.55 cents/kWh (it goes from 2 cents in 2026 to 5.1 cents in 2050). This is our working hypothesis, not that of Hydro-Québec.
Despite this upward adjustment of expenses, Hydro-Québec’s contract with New York remains very profitable.
On average, Hydro-Québec would generate profits of around 750 million per year, according to our calculations. Over 25 years, we are talking regarding profits of around 18.7 billion.
“It’s a good contract. In my opinion, it is very profitable, it allows you to build a transport line [vers New York] and it recognizes the green nature of hydroelectricity,” says Professor Pierre-Olivier Pineau, holder of the Chair of Energy Sector Management at HEC Montréal.
PHOTO ALAIN ROBERGE, LA PRESSE ARCHIVES
Pierre-Olivier Pineau, holder of the Chair of Energy Sector Management at HEC Montréal
Critics of the export contract in New York might argue that without this contract, Hydro-Québec might use the 10 TWh for the energy transition in Quebec. In other words, the New York contract forces us to add 10 TWh at a higher cost (e.g.: 9.5 cents/kWh) to decarbonize Quebec.
We did the calculation using this more pessimistic method where the total cost of all electricity sent to New York is regarding 10.3 cents/kWh (9.5 cents for generation, regarding 0.8 cents for transmission in Quebec). Even with this method of calculation, the New York contract is profitable, with average profits of around 130 million per year, according to our calculations. Total profits over 25 years would be around 3.2 billion. This calculation method is harsh and assumes that Hydro would build 10.4 TWh of new electricity by the start of the contract in 2026.
In theory, this would be the right way to do it [prendre le coût marginal de 9,5 cents/kWh]but it is harsh to use it for exports, because we do not do it with anyone in Quebec.
Pierre-Olivier Pineau, holder of the Chair of Energy Sector Management at HEC Montréal
Our scenarios with profits of 750 million or 130 million per year show that the Hydro-Québec contract will be financially profitable, regardless of how electricity production expenses are calculated.
These two scenarios (profits of 750 million or 130 million per year) are not certainties cast in concrete. The Legault government and the state corporation are establishing a game plan to significantly increase Quebec’s energy capacity. The 9.5 cent production cost for a new energy supply might be revised under the new game plan.
“The evolution of the average cost of electricity production for the next 10-20 years is currently being analyzed,” indicates Hydro-Québec by email. Several elements must be considered in this evaluation depending on the scenario of mix energy, considering various energy efficiency and renewable energy variables in the years to come, as well as the construction period, renovation and capacity enhancement of existing power plants. »
1. The revenues (32 billion over 25 years) of Hydro-Québec cited in this article are the sums paid to Hydro-Québec following payments to its American partner, Transmission Developers Inc. (TDI), which takes care of transmission electricity in the United States. For their electricity, Hydro-Québec and TDI will jointly charge a wholesale price which will increase from 9.7 US cents/kWh in the first year (2026-2027) to 17.6 US cents/kWh in the last year of the contract. , in 2050-2051.
2. The transmission cost of 0.8 cents/kWh includes the annual costs to finance the construction of a 1.14 billion transmission line connecting Quebec to the American border. This transmission line is held by a joint venture in which Hydro-Québec is the majority shareholder and the Mohawk Council of Kahnawake the minority shareholder. In this joint venture, Hydro-Québec and the Mohawk Council of Kahnawake will share the electricity transmission revenues on this transmission line in Quebec (in which they have both invested).
Financially… and environmentally profitable
Why sell our electricity to the Americans when we will have to significantly increase our electricity production to meet Quebec’s needs?
In theory, we might have kept this electricity sent to the United States for Quebec.
But Hydro-Québec’s two contracts with New York State and Massachusetts have three major advantages.
First, these contracts are very profitable for Hydro-Québec, and therefore for its shareholder, the government of Quebec.
For New York, Hydro-Québec would estimate the annual profits from the contract at 950 million Canadian dollars, according to our information (see other text).
For Massachusetts, Hydro-Québec indicates that the profitability of this contract will be “comparable to the New York contract”, but that the total amount of profits will be lower.
Second, these contracts will reduce CO2 emissions in the northeastern United States.
Quebec hydroelectricity will replace very polluting fossil fuels in the United States. Experts have calculated that Quebec hydroelectricity would reduce CO2 emissions by 3.9 million tonnes per year in New York and 3 million tonnes per year in New England. These are significant reductions which together correspond to 8% of Quebec’s CO2 emissions in 2019. These reductions will go to the balance sheet of the United States, not to that of Quebec, but that gives an order of magnitude.
Currently, New York uses 90% fossil fuels and wants to consume 70% renewable energies by 2030. The contract with Hydro-Québec must provide 20% of the total electricity consumed in the Big Apple.
Third major advantage: the two contracts will make it possible to build two modern electricity transmission lines in the Northeast, which will give Hydro-Québec more flexibility in the future.
Thanks to these long-term contracts, Hydro-Québec will now be connected by a modern transmission line (with electricity transmission capacity in both directions) to the two most important cities in the American Northeast, New York and Boston. .
“These contracts are very good [pour le Québec] among other things for a simple reason: we need these transmission lines in the long term, because there will be more and more renewable energy that will have to be exchanged, and it is very difficult to build transmission lines [sans ces contrats avec des prix garantis à long terme] “, says Professor Pierre-Olivier Pineau, holder of the Chair of Energy Sector Management at HEC Montréal.
In the long term, our hydroelectric reservoirs will become even more important, as they will allow US-generated wind energy to be stored in our reservoirs, and then sold (at a higher price) during peak periods.
It may seem paradoxical to sell electricity to Americans when our own needs will increase rapidly. However, things must be put into context. When the New York (2021) and Massachusetts (2018) contracts were signed, the Quebec government did not anticipate such a large increase in energy demand (an additional 150 TWh) to decarbonize Quebec.
“There was just New York which was ready to sign such a contract, Hydro-Québec Production was not ready to do it,” says Professor Pierre-Olivier Pineau. We sold electricity in the United States on the markets [contrats “spot” sans engagement à long terme], but the price of natural gas fell and we were afraid that it would be the same for electricity, that these contracts on the markets would no longer be as profitable. In addition, these market contracts do not recognize the green nature of hydroelectricity. »
And the price of electricity for Quebecers?
The contract with New York may be very profitable for Hydro-Québec, but it will inevitably lead to a modest increase in the price of electricity for Quebec consumers. These benefit from the lowest prices in North America.
It’s mathematical: if we take 10 TWh of electricity produced at low prices (2 cents/kWh) to export to New York, we will soon have to take new and more expensive electricity to decarbonize Quebec. Which means a slight increase in price for Quebec customers. Why a slight increase? All electricity beyond the heritage block (this is the case for this 10 TWh) must be sold at market price. “We would not have sold this electricity for 2 or 3 cents to Quebecers,” says Professor Pierre-Olivier Pineau.
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