US embassy cable - 04MONTREAL451

UNCLAS SECTION 01 OF 02 MONTREAL 000451 
 
SIPDIS 
 
SECSTATE FOR WHA/CAN, IIP, INR/IAA 
 
E.O. 12958: N/A 
TAGS: ASEC, OEXC, OIIP, KISL, KPAL, PTER, IS, Energy 
SUBJECT: GAS PLANT PROJECT CONTROVERSY HIGHLIGHTS 
QUEBEC'S NEW ENERGY CHALLENGES 
 
 
1.  SUMMARY:  Quebec's energy board is holding hearings 
on whether provincial energy needs require the 
construction of an 836 megawatt gas plant, the Suroit, 
in Beauharnois, located 25 miles from Montreal and the 
U.S. border.  The Board's recommendations, and the 
report of a provincial legislative commission in 
October, will have a major impact on Quebec's 
electricity generating capacity. END SUMMARY. 
 
2.  In fall 2001, the Parti Quebecois government of 
Bernard Landry first announced the $500 million 836 
megawatt combined-cycle natural gas plant, to be built 
in Beauharnois, a town located 25 miles between 
Montreal and the U.S. border.  The plant, named "le 
Suroit" (southerly wind in English) was billed as 
necessary to help Quebec bridge a projected energy gap 
until larger new hydro-electric projects come on-line 
between 2008 and 2010. 
 
3.  Quebec's new Liberal government had initially hoped 
that some of its budgetary woes, inherited from the 
former Parti Quebecois government, could be resolved 
through increased profit generation by Hydro Quebec 
(last year HQ contributed $1.1 billion to provincial 
coffers).  Liberal Finance Minister Yves Seguin had 
even suggested that HQ could generate an additional 
$600 million in annual income for the province.  But, 
in the face of increasing opposition to the Suroit from 
environmental and community activists, in February 
Premier Jean Charest delayed approval of the project 
and asked that Quebec's independent energy board, the 
Rgie de l'nergie, study Quebec's energy needs and 
make recommendations on how these needs can best be 
met.  The Regie is in the process now of hearing 
g 
presentations on the Suroit from environmentalists and 
Hydro-Quebec officials.  The Regie is scheduled to 
present its report on June 30. 
 
4.  Hydro Quebec itself is adamant that the Suroit 
project is necessary, making the case that provincial 
energy demand alone requires the plant's construction. 
According to HQ, provincial demand increased to 165 
terawatts (Twh) in 2003, three years sooner than the 
utility had projected.  But critics of the project 
charge that the plant is only needed in order to 
generate more profits from exports to the U.S. market. 
 
5. To convince the Regie and the Quebec public of the 
precariousness of energy supply in the province, Hydro 
has taken the unusual step of releasing data on the 
water levels behind its dams, information that the 
company has kept secret for the past six years because 
of market competition concerns.  A sharp drop in 
precipitation combined with greater provincial and 
export sales accounted for the lowest water levels 
since 1991, HQ president Andre Caille revealed on 
February 20 in a report presented to the Regie.  The 
report detailed that on January 1, 2004, Hydro Quebec 
held electricity reserves of 75.1 Twh down from 96.2 
Twh a year before, according to HQ figures.  Compared 
to 2000, the dams have 40 Twh less potential.  The lack 
of rain accounted for a loss of 23 Twh in 2003 alone. 
On any given day, Hydro-Quebec's goal has been to have 
60 percent of its yearly projected demand in reserve. 
However, in 2002, those reserves averaged 67 percent of 
projected demand; in 2004, reserve averages fell to 
43.7 percent, the lowest percentage since 1991, 
according to the HQ report presented to the Regie. 
 
6.   Environmental NGOs believe Hydro is over- 
dramatizing the supply situation, saying that the 
province can wait until new hydroelectric projects, 
considered "cleaner," than gas, come on line in 2008, 
even if it means importing more energy from the U.S. 
for a few years.  The Quebec media has repeatedly 
published figures, released by Greenpeace, stating that 
the Suroit increase Quebec's greenhouse gas emissions 
by 2.6 percent.  Opponents to the Suroit say the need 
for the plant would vanish if Quebecers simply used 
electricity more efficiently.  The very negative press 
has raised alarms in Beauharnois, where the mayor and 
the population fear the plant's emissions will be 
harmful to health and quality of life. 
 
7.   Some analysts have pointed out that while 
environmental groups are fighting the Suroit plant 
ferociously, they have essentially ignored a similar 
550 MW natural gas-fired cogeneration power plant in 
Becancour, 100 miles to the north of the Suroit. 
Becancour will be developed by the TransCanada Corp., 
which will supply its entire production to Hydro-Quebec 
under a 20-year power purchase contract.  The $500 
million Becancour plant is scheduled to be in service 
in late 2006. 
 
8.   Hydro Quebec officials claim that the Suroit will 
use the most efficient and cleanest technology 
available.  As currently conceived, the Suroit would be 
the first plant in North America to use the 60-hertz 
version of General Electric's H System, touted as 
providing an efficiency range of 60 percent. But GE 
Quebec spokesperson Sylvain Bulota said on March 17 that 
if delays persist, GE will withdraw the advantageous 
financial package it offered Hydro.  On March 16, GE 
officials met with Ontario Power Generation (OPG) and 
Hydro One representatives who are reportedly also very 
interested in GE's 7HMD technology.  Under the present 
plan for the Suroit, GE would assume all of the 
projected ($550 million) construction costs of the 
Suroit and operate the plant for several years before 
turning it over to Hydro.   If the GE technology is 
introduced first in Ontario, Hydro-Quebec would not get 
the advantageous financial package linked to introducing 
a new technology. 
 
9. According to Hydro Quebec Environment Director Pierre- 
Luc Desgagns, if the Regie unequivocally reports that 
the province needs the production from the Suroit, no 
other study would be needed to go ahead with the 
project.  However, if the Regie's recommendation is 
tepid or contains caveats, a provincial legislative 
commission -- with the specific mandate of deciding the 
Suroit's fate -- would start meeting in July or August. 
The opposition to the project has already delayed the 
start of construction by 18 months. The latest 
optimistic schedule has Suroit coming on line in Spring 
2008. 
 
10. National Energy Board figures for January 2004 show 
Hydro exported 562,205 megawatt hours (export figures 
include all sales outside the province, including the 
U.S., Ontario and New Brunswick) while it imported 
392,789 MWh for profits of $28.7 million, a drop from 
the previous year when the company exported 1,304,666 
MWh and imported 562,205 MWh.  In percentages, imports 
increased by 75 percent while exports dropped 57 
percent.  Hydro disputes the import figures saying they 
do not take into account sizeable HQ purchases made in 
Ontario and New Brunswick. 
 
11. The fact that the province of Quebec became a net 
importer of electricity in 2004 will not prevent Hydro 
from exporting to the U.S. Northeast markets this 
summer, says Gilles Favreau, HQ's Director of External 
Regulatory Affairs.  In summer, provincial consumption 
is at its lowest, making surplus production available 
for export sales as usual. "However, the next few 
winters could be hectic. Moreover, with the competition 
now informed about our low water levels, the 
electricity we will need to import could be more 
expensive," says Favreau. 
 
12.  COMMENT: It is clear that the Charest government 
would like to see the Suroit built.  But their party's 
current unpopular standing in public opinion has made 
the Liberals timid about confronting environmental and 
community groups, and addressing the expectations of 
Quebecers that their electricity will be forever 
provided cheaply, cleanly and abundantly.  Further, the 
notion that the province should limit itself to 
supplying Quebec demand, regardless of profitable 
opportunities to export energy, seems to be gaining 
traction in the public debate, if not in political 
circles. 
ALLEN