ENERGY IN QUÉBEC: SECURITY AND FUTURE PROSPECTS ENERGY SECURITY AND THERMAL POWER

Transcription

1 ENERGY IN QUÉBEC: SECURITY AND FUTURE PROSPECTS EXPERT OPINION presented to the Minister of Natural Resources, Wildlife and Parks ENERGY SECURITY AND THERMAL POWER by JOSEPH DOUCET Joseph Doucet Economic Consulting Inc. Québec November 2004

2 The place of thermal generation in an electricity generating system such as the one in Québec. Executive Summary This opinion deals with the place of thermal generation in an electricity generating system such as the one in Québec. Considering the current makeup of Québec's generating system and anticipated investments and projects, particularly wind energy developments requested by the Québec Government, the question to be considered is how thermal power could contribute to the reliability of Québec's system, with the objective of minimizing costs. Of course, the exact place of thermal power in Québec will result from a societal choice and not an explicit economic or technical optimization of resources. There is every indication that the thermal sector will remain marginal in Québec's generating portfolio. That being said, at the margin, thermal power could contribute positively to increasing the value of the hydroelectric generating system and improving the reliability of Québec's electrical system at a lower cost than hydroelectric investments. In addition, the thermal sector could meet medium-term demand in Québec, pending development of major hydroelectric projects. This report identifies certain features, specific to Québec's power system, suggesting that thermal developments could be valuable, but always in the context of supplementing existing hydroelectric resources. i

3 Table of Contents Summary... i Table of Contents... ii Introduction Power system reliability Uncertainty and reliability Lessons to be learned from a few hydroelectric systems Factors that can have an impact on analyzing Québec s situation Conclusions...12 References...14 ii

4 1. Introduction The place of thermal generation in an electricity generating system such as the one in Québec The Minister of Natural Resources, Wildlife and Parks of Québec has retained the services of Joseph Doucet Economic Consulting Inc. in the context of preparing Québec's energy policy and in preparation for the parliamentary committee hearings on energy security and the future of energy in Québec. This expert opinion has been prepared under that mandate. The question to be analyzed is the following: Using recognized technical and economic principles, what place could thermal generation occupy in an electricity generating system such as the one in Québec? For the purposes of this opinion, thermal generation refers to an electricity generating facility fired by fossil fuel (coal, fuel oil, or natural gas). The fuel is burned to produce steam, causing a turbine to turn, thereby producing electricity. This opinion does not seek to determine what the exact nature or contribution (technology, quantity, location, etc.) of thermal power will be or should be in Québec. Not only would it be impossible to do so under the present mandate, it would also mean ignoring the fact that thermal power's place in Québec will necessarily be the result of a societal choice and not a specific economic or technical optimization. The choice will depend, in part, on the relative weight attached to various assessment criteria. This opinion in no way seeks to substitute itself for Québec society's decision-making process. Instead, the objective of this opinion is to raise questions relevant to assessing the place of thermal power in Québec and to thereby contribute to its analysis. The point of view adopted in this opinion is basically one of micro-economic analysis, invoking notions of cost, risk, and uncertainty. Of course, there are limits to micro-economic analysis, insofar as certain aspect of decisions can be more difficult to quantify than others. In that way, decisions dealing with energy security are no different from other societal choices. The fact remains that strategies must be prepared and decisions made even when assessments or comparisons are difficult. Note that prices can also be put on many parameters related to social and environmental aspects; though it can be difficult and somewhat controversial. But the assessment and comparison of the various options available for meeting Québec's energy needs must be made with the most comprehensive information available about the economic, environmental, and social impacts of each option. The starting point for this opinion is the report (A ) issued by the Régie de l énergie on energy supply security for Québec with respect to electricity supply and the 1

5 contribution of the Suroît project. The points of reference selected from the report by the Régie de l énergie for the purposes of this document are the following: - Demand growth is significant. The needs of Quebecers exceeded the Distributor's forecasts in 2003 and The Régie has analyzed forecasted demand to 2011 and settled on a medium-high scenario, in which power demand rises from TWh, in 2004, to TWh, in (Page 3) - Almost all of Québec's current and forecasted supply will be needed to meet growing demand. The Régie has concluded that, even if the Generator's uncommitted resources are taken into consideration, Québec does not have enough leeway and the needs of the Distributor are such that resorting to imports is inevitable. (Page 4) - The uncertainty of water availability is an important factor in planning Québec's electrical system. Under low inflow conditions, the situation would be worse and the Generator would have no safety margin to respond to additional demand from the Distributor. (Page 4) - Limits on imports will most likely be constraining. Therefore, there is a possibility of congestion at interconnections. (Page 7) The context in which thermal power should be assessed is one where, for the planning horizon, hydroelectricity will be the main source of generation in Québec. In addition, the Québec Government has decided to encourage development of the wind energy sector. Therefore, possible contributions by the thermal sector must be examined in the context of a hydroelectric system in which wind energy is expected to take a larger place. Thermal power must not be studied in isolation, but as a complement to existing and forecasted resources. The document is organized as follows: the next section presents the notion of system reliability and the link between reliability and generating resources; Section 3 discusses uncertainty in the electric industry and the impact of uncertainty on reliability, with ongoing emphasis on the assessment of thermal resources; Section 4 suggests that there might be lessons to be learned for Québec in other hydroelectric systems; Section 5 presents a few factors specific to Québec's power system which must be understood in order to situate the challenge properly; Section 6 provides a summary of advantages and disadvantages of thermal power in the development of Québec's industry and the conclusions of the analysis. 2

6 2. Power system reliability Electricity is very important to modern life and society. This is particularly true in the context of Québec, where electricity represents a major proportion of the energy balance. 1 Moreover, electricity is relatively unique because of some of its features. For the purposes of this study, two features have been identified. First, because of its physical nature, an electrical power system must generate exactly the quantity of electrical energy consumed, at any given time, since electricity cannot be efficiently stored and must be consumed when it is generated. Second, there is often no obvious substitute in usage for electricity. Because of this, costs incurred by society for breakdowns or failures in the electric power system can be huge. These two features suggest that investments in an electrical power system are necessary in order to minimize breakdowns or outages, that is, to ensure system reliability. With regard to a longer-term perspective, it is important that investments be chosen to minimize the cost of achieving reliability. It should be acknowledged from the outset that there are invariably trade-offs between the two objectives of power system reliability and cost minimization. The reliability of the electrical power system is obviously not independent of cost. Increasing system reliability usually involves additional costs. Moreover, when all the costs, including those associated with outages and service quality, are included, it appears that the optimal reliability level can be determined by a cost/benefit approach. When analyzing investments in the generating segment of a power system, the various technological options (hydroelectricity, wind energy, thermal power, demand-side management, etc.) need to be assessed in relation to the various types of needs of the system in question. In spite of the fact that a technology must be selected on the basis of economic, technical, and social criteria, it is important to understand that the primary criterion in terms of importance for system operation is reliability. Any added equipment or any operation must, first and foremost, maintain and ensure the electrical stability and reliability of the system. The two types of basic needs met by generation facilities are electric power and energy. Power, or capacity, refers to the generating capacity of a resource at a point in time, while energy refers to volume of generation over a given time. 2 All resources hydroelectric, wind, thermal, etc. can supply power and energy. Because the different technical, economic, and social parameters associated with each of the resources vary, and are uncertain, in many cases, evaluating and selecting resources for an energy strategy is a complex task. The reliability of a network can be analyzed in the short or the long term. 1 Note that electricity's place in Québec's energy balance is a result of explicit policies and strategies encouraging hydroelectric development. 2 Note that power and energy are also associated with demand, that is, the quantity required at a point in time (power) and the quantity required over a given time (energy). 3

7 In the short term, reliability is mostly associated with power 3. Power, expressed in megawatts (MW), measures the quantity of energy generated or required at a point in time. Therefore, available power is the maximum quantity that the generating system can provide. Demand, on the other hand, is measured at a given time in MW. System balance can be maintained if available power generation is sufficient to meet demand at all times. Technical criteria have been developed to determine the necessary safety margins between power supplied and power demanded. These margins are calculated with respect to the type of equipment, the nature of the transmission system, variability of demand, etc. The first need related to reliability in the short term is therefore adequacy in terms of power. The options available for meeting power needs are commissioning new generating facilities within the system in question, setting up new transmission lines to link to generating facilities in neighbouring systems, and demand-side actions. Of course, energy problems can occur in the short term if some generating resources are not available because of a lack of fuel (water for hydroelectric power, wind for wind power, fuel for thermal power, etc.). In the longer term, there is no problem, in theory, with the adequacy of power and energy since the very definition of long term implies that generating resources (or demand-side tools) can be set up. Long-term planning is more about cost minimization. Many factors must be taken into consideration in long-term planning, including those related to uncertainty on the supply side and to evaluating and choosing resources to develop on the demand side. The need for long-term reliability is therefore also a question of power and energy. For Québec, where most of the electrical energy used is derived from water stored in reservoirs, the uncertainty surrounding water availability is a major factor in developing a long-term strategy. The options available to meet long-term power needs are essentially the same as those for the short term. Then again, for energy needs, the options available are actually very similar to the options for power. Commissioning new generating facilities in Québec with new energy sources, setting up new transmission lines to reach generating facilities in neighbouring systems, and demand-side actions are all likely to increase available energy. In addition, for energy, adding new reservoirs and increasing the capacity of existing reservoirs, without necessarily modifying power, are potential options. Between operational concerns in the short term and strategies to minimize costs in the long term lies the medium term. This period is often characterized by the need to make strategic adjustments and provide technical answers, bridging the short and long term and compensating for unforeseen events. Thermal power's place in Québec is sometimes discussed as lying in the medium term, since the speed at which thermal projects can be implemented makes it possible to increase supply more rapidly than is the case with major hydroelectric projects. In summary, the options for ensuring reliability of an 3 There are obviously other concerns related to reliability, for example, transmission system management operations, which are directly related to the adequacy of supply and demand in terms of power. 4

8 electrical power system at minimum cost must be analyzed on the basis of their contributions to power and energy needs. It is therefore important to understand what these power and energy needs are and how they are related to the configuration of the current system. What are Québec's needs? Anticipated growth in demand over the coming years implies power and energy needs. Anticipated additions to capacity, mainly in the hydroelectric and wind energy sectors, will provide additional power and energy to Québec's system; this is the context in which thermal power must be evaluated. The report by the Régie de l énergie identifies certain concerns with respect to meeting demand in the medium term. Some of these concerns are relevant to the analysis of the place of thermal power in Québec's system. The most significant concerns are the following: - Growth in demand implies a need for power. In addition, the magnitude of peak demand in Québec and the relative weight of electric heating in peak demand could make this need for power even greater. - The development of wind energy will add to the supply of power and energy. But wind energy supply is uncertain because of the nature of wind. - The uncertainty of water availability implies that the energy supply from the hydroelectric system is uncertain. That suggests that there might be an energy need to be met, and that the relative magnitude of the need is uncertain because of the uncertainty of precipitations. - Constraints on interconnections with neighbouring systems will limit access to power and energy from those systems. - Québec's system needs an approach that accounts for risks and ensures system reliability. Once system needs and options to meet these needs have been identified, the next step is an assessment to find the best option. This raises two challenges: defining decisionmaking criteria and comparing options. Defining decision-making criteria is much more complex than it might look at the outset. The performance of electrical systems is evaluated with respect to operational results in the short, medium, and long term; to economic costs in the short, medium, and long term; and to flexibility in the face of unusual events, etc. In short, electrical power systems are complex and the assessment of overall system performance must incorporate several variables describing the system. In terms of comparing options, it must be acknowledged from the outset that each option is in fact a set of characteristics, some economic, some technical, and others social. It is impossible for an option to stand out over all the others in all characteristics. Accordingly, any choice is a compromise. Comparing the options is especially difficult since economic, technical, and social characteristics are measured differently and can be difficult to compare. 5

9 To deal with all the options coherently, it can be interesting to put a price tag on the various characteristics, to the extent that this is possible. A discussion of this approach, and its inherent difficulties, exceeds the scope of this opinion. In short, the reliability of Québec's electrical power system depends on a certain number of factors related to the current composition of the electricity generating system. The value of thermal development is therefore a relative value stemming from the characteristics of thermal power in relation to the characteristics of other available options, considering the overall context in Québec. It must be acknowledged that the choice of investing in generation in Québec's system will not be solely economic or technical. The exact place of the thermal sector in Québec will necessarily be the result of a societal choice and not exclusively a economic or technical optimization. 3. Uncertainty and reliability Electrical power systems operate in uncertain environments, both on the supply side and the demand side. As described in the previous section, the primary objective of the electrical power system is to maintain a chosen level of reliability, with an acceptable cost. The fact remains that any chosen level of reliability necessarily represents a compromise between costs incurred to ensure reliability, on the one hand, and costs related to system failures or interruptions, on the other. Therefore, the usual reliability criteria for an electrical power system, such as an average of x hours of outage per year, are determined, in principle, by considering costs and benefits. 4 Because of costs associated with system outages, the traditional approach in electrical power systems has always been to minimize the risk of failure or interruption, often without regard to costs. This often meant building systems in which interruption risks were extremely low. The costs incurred to ensure this level of reliability were distributed across the system, to all consumers, without the consumer seeing or knowing what link there was between the price of electricity and reliability. With new market structures, this is no longer necessarily the case. This discussion suggests two questions. In what way do thermal resources contribute to the reliability of Québec's electrical system? Do new market structures in Québec and the Northeast introduce new elements into the reliability analysis? To answer the first question, the place of thermal generation in Québec's system can be analyzed by considering what thermal power provides to the system, in terms of costs and benefits, as far as reliability in the short and long term are concerned. A simplistic way to consider this question is to ask how the reliability of a hydroelectric system can be 4 The definition of performance objectives for an electrical power system must take uncertainty into account. The performance or reliability objectives of the system can be expressed in probabilistic terms (expected values, extreme values, etc.). A more in-depth discussion of the probabilistic approach exceeds the scope of this study. 6

10 improved. For purposes of illustration, the discussion will be limited to two approaches, increasing the size of the hydroelectric system or adding thermal capacity. In the first case, by increasing the number or size of the system's reservoirs beyond the needs associated with demand, the system operator can increase reliability, since the vagaries of water availability will have less impact with an oversized system. The costs of this approach include costs incurred to overinvest in the system, but also costs for "wasted" energy, when normal or high water inflow fills the reservoirs. Since there will not necessarily be a market for the excess energy in the reservoirs and there are risks in overfilling them, the generator could be forced to release water without any associated benefit. Instead of investing in reservoirs and hydroelectric capacity, the generator can choose to invest in other forms of generation, such as thermal power. There is an investment cost associated with thermal generation and, when it operates, there is a variable cost that can be high (and is uncertain at the time of investment). But when water inflows are normal, variable costs associated with the thermal resource are minimal if it is not called upon. The potential contribution of the thermal sector to the reliability of Québec's electrical power system therefore depends on the complementarity that might exist between specific thermal resources and technologies and the hydroelectric generating system. This complementarity could be calculated on the basis of forecasted demand, the assessment of future reservoir levels, forecasted wind energy production, etc. The uncertainty analysis must distinguish between power and energy needs. It is also true that all supply sectors can be compared using approaches related to demand (demand-side management, energy efficiency programs, etc.). Moreover, it is important to understand that Québec's very low electricity rates reduce the potential penetration of demand-side approaches. Experience suggests that the results of demand-side approaches, in terms of contributing to power and energy, are less certain than the results of adding to generating capacity. The impact of new market structures in North America on the potential place of thermal power must also be analyzed. There is obviously a great deal of uncertainty about the direction in which certain markets and market segments will evolve, particularly with respect to development of major American transmission systems. In terms of Québec's power system, it would be necessary to identify how integrating thermal resources affects the reliability of the entire system. Québec's new regulatory framework should not, at first glance, have an impact on managing and maintaining reliability, but this question could be examined. New regulatory frameworks in neighbouring systems might have impacts on the evolution of reliability in Québec's power system. Such impacts could be indirect, for example, influencing the availability and price of supply in neighbouring systems and therefore the availability of imports for Québec. 7

11 Since imports have been identified by the Régie de l énergie as being necessary to ensure Québec's energy balance, the availability of imports must be part of the analysis. The evolution of American regulations and fluctuations in northeastern American markets could influence Québec's market through imports. Note that the American regulatory framework is still evolving; there is therefore uncertainty when it comes to regulations. 4. Lessons to be learned from a few hydroelectric systems Québec is not the only region in the world to have a mainly hydroelectric generating system. It would therefore be interesting to see if there are lessons to be learned elsewhere, either in terms of operations or development of new generation resources. Three cases are presented here: British Columbia, Brazil, and Norway. These cases are presented to show that Québec's situation is not unique and that outside analyses could be useful for assessing future strategy. British Columbia possesses a predominantly hydroelectric system very similar to the one in Québec, though on a smaller scale. About 90% of the energy generated by BC Hydro, the provincial entity responsible for electric generation over 94% of the territory, is hydroelectric. It is interesting to note that BC Hydro uses thermal resources both to meet demand and to optimize management of hydroelectric resources. In addition, through management of interconnections with Alberta s system, which is mostly thermal, British Columbia can profitably manage its hydroelectric resources while actively participating in the competitive Northwestern American market. The use of internal thermal resources and timely purchases from Alberta make it possible for BC Hydro and its subsidiaries to better manage water in the reservoirs. The improved management not only results in more economic profit, but in a level of reliability associated with energy reserves that are higher than they would be otherwise. The use of thermal power in British Columbia is part of a vision of generation as a resource portfolio 5. Faced with growing demand, BC Hydro anticipates using, not only thermal resources, but also renewable resources such as biomass and wind energy. Brazil is a huge country with considerable hydroelectric resources. About 90% of Brazil's generating capacity is hydroelectric, and several generating regions are relatively distant from major demand centres. In , very low water inflow severely limited Brazil's generating capacity. Very low levels in reservoirs dramatically reduced electrical generating capacity and forced the government to adopt draconian rationing measures to avoid an industrial catastrophe. The government also implemented measures to rapidly increase generating capacity from other sources, including thermal resources. 5 In fact, BC Hydro's Website explicitly identifies thermal power as one of the generation strategies in a portfolio. See 8

12 Due to its great dependence on hydroelectricity, the Brazilian system had few options to compensate for low inflow in Investments have since somewhat diversified the Brazilian generating portfolio. It is also interesting to note that the rationing experience appears to have encouraged the population to develop more efficient energy efficiency behaviour. Norway is another country highly dependent on hydroelectricity. Almost all of Norwegian generation is hydroelectric. In addition, Norway operates in the Nordic electricity market. It imports energy every year to cover about 10% of total consumption. Norway also exports energy, but remains a net importer. Trading is with Sweden, which has a more diversified portfolio of resources, with hydroelectric, nuclear, and thermal generating stations. Imports make it possible for the Norwegian system to effectively use its reservoirs. In the past few years, growth in demand has become a concern for certain Norwegian analysts, since there have not been many investments in Norway's generating sector in recent years. A way to interpret the upcoming challenge for the Norwegian system is to ask whether Norway wants to be dependent on Swedish imports, generated from more diversified resources, or whether it wants to diversify its own production. The three cases described above are not comparisons with Québec as such. Instead, they are intended to illustrate problems similar to the one of assessing thermal power's place in Québec. Additional in-depth analyses of these cases would obviously be necessary to learn profitable lessons for Québec. 5. Factors that can have an impact on analyzing Québec's situation Though the previous section sought to illustrate that there were systems similar to the one in Québec, it must be acknowledged that certain specific features of Québec s electric system need to be emphasized because of their potential impact on the issue of thermal power's place in Québec. Québec's electrical power system, in spite of its new regulatory structure, is very similar to a relatively traditional system. In terms of generation, there is competition on the margin for new generating sources through calls for tenders by Hydro-Québec Distribution. The fact remains that Hydro-Québec Production is still the dominant company in the market and generation cannot be characterized as a competitive market segment. Since there are not many companies in the generation market, the level or intensity of competition is diminished. The relative weight of electricity in Québec's energy balance is relevant to the analysis of the place of thermal power. Electricity is used in many markets in Québec, where the North American standard is fossil fuel combustion. Space heating is an example. Québec's winter demand peak is closely tied to the demand for electric heating. 9

13 If thermal generation is expected to play a larger role in Québec, it is important to recognize that burning fossil fuel to produce electricity in order to heat buildings is not very energy efficient. It is much more efficient, from an energy efficiency and economic standpoint, to use a thermal heating system for space heating without going through the intermediate stage of generating electricity. The fact remains that Québec has chosen an electrification strategy to develop hydroelectricity. There have therefore been huge investments in the province to focus the economy on electricity use and to base generation development on hydroelectricity. Development of thermal power must be evaluated with an understanding of this underlying market. It should also be noted that electricity rates have an impact on this type of development. Quebecers benefit from very low electricity rates because of a governmental choice regarding a heritage pool of electricity from Hydro-Québec Production. Electricity rates are fixed based on average generating costs, where the costs reflect historical costs and not opportunity costs (i.e. the market value of electricity). Fossil fuels, on the other hand, are traded on competitive markets where prices are determined on the market and reflect marginal costs. This is therefore a true opportunity cost. Accordingly, it is practically impossible for thermal-based space heating to compete with electric-based space heating in Québec, even if the latter can be less energy efficient. Moreover, the low price of electricity encourages over-consumption compared to levels that would result from higher electricity prices. Higher electricity prices would reduce the need to increase supply. Since Québec is active in neighbouring markets with imports and exports, it is important to accurately understand the evolution of neighbouring markets and the nature of activities on these markets, insofar as they could have an impact on Québec In , reserve margins (the difference between available capacity and peak demand) are relatively high in the American Northeast. In principle, that means that import possibilities to meet demand in Québec likely exist. Of course, an in-depth analysis of current and future market situations is necessary. Ontario, for example, is going through a difficult period with its electric industry, and, unfortunately, nothing indicates that the situation will improve in the coming years. This could affect Québec indirectly, should Ontario begin to import more electricity. A Québec strategy for development or reliability based in whole or in part on imports would have to take into consideration the impact of the Ontarian situation on the availability and cost of imports. In assessing thermal generation in Québec, the substitution of Québec's production for imports should also be taken into account. In other words, would thermal generation in Québec reduce imports? If it did, what would be the nature and costs of the energy imports avoided? Considering Québec's hydroelectric generating system, electricity can often be imported when costs on external markets are low. During these periods, a significant portion of generation in the Northeast is thermal. This basic thermal capacity is economic on the market, but causes more pollution. 10

14 All things being equal, Québec's thermal generation could therefore be used to reduce imports from more polluting sources. If ever imports were needed at peak times, when rates in neighbouring systems are high, Québec's thermal generation would probably be competitive in terms of cost and technology and would result in benefits in terms of transmission lines losses. 11

15 6. Conclusions The thermal sector, just like any other sector or option, has both positive (benefits) and negative (costs) aspects. In the context of Québec, it is important to accurately understand the possible role of thermal generation in the context of a hydroelectric system in which wind energy is expected to be developed. This means that possible contributions from thermal generation must not be examined in isolation, but as a complement to existing and forecasted resources. Accordingly, the advantages and disadvantages of thermal generation must be understood in relation to existing resources and available options. However, it is important to specify that assessing thermal generation s contribution is not as easy as reading a list of the advantages and disadvantages of the various technologies or options. An electrical power system is a whole and the planning approach must be based on system performance. There may be synergies between technologies that are not clearly apparent on a list of individual advantages. That being said, some advantages and disadvantages of thermal power, in the context of Québec, are presented here. Advantages: - Thermal generating plants fuelled by natural gas can be planned and built relatively rapidly (construction time, turbine availability, etc.), compared to hydroelectric projects. This is an advantage for medium-term needs. - The performance of thermal plants is well known and their availability and reliability are high. In Québec, there would be no fuel supply problems. Thermal plants would therefore be useful in assisting with the management of hydroelectric and wind energy variability. - Thermal plants can be used with a high level of probability during winter and therefore provide a good power option for meeting peak demand. - The ratio of fixed costs to variable costs for thermal plants is lower than for hydroelectricity, suggesting that thermal power is an economic solution for meeting peak demand. - Thermal plants can be operated jointly with hydroelectric resources to increase the value of the water in reservoirs. Combining thermal plants with water resources might allow better use of water in the reservoirs, therefore increasing Québec's energy wealth in the long term. This might be a less costly means of dealing with variations in water inflow (less costly than oversizing reservoirs, for instance). - The same point can be made for complementarity between thermal plants and wind energy. 12

16 - Thermal plants can be located nearer to demand centres than hydroelectric and wind energy resources. This proximity reduces transmission costs and transmission lines losses and can even improve transmission system stability. - New thermal plants are more efficient and less polluting than existing thermal generating stations (Tracy and some thermal generating stations in the Northeast). If operating thermal generating plants in Québec resulted in less use of the more polluting generating plants, the environmental impact would be positive. Disadvantages: - The variable costs of thermal plants are mainly fuel costs. These costs are uncertain and volatile. They are certainly higher than costs associated with water in reservoirs and with wind. 6,7 - Using thermal resources produces emissions that have local and global impacts. - All in all, there is more public opposition to the development of thermal resources in Québec. The list of advantages and disadvantages suggests that there might very well be a place for more thermal power in Québec, especially considering the evolution of demand and the current supply situation. Moreover, it must be acknowledged that the question is not thermal power or nothing, but the relative place of thermal power in the future development of Québec's electric industry. It is not very likely that thermal power will make a very large contribution percentage-wise, considering the significant hydroelectric potential that remains to be developed. But the list of advantages indicates that it is certainly possible for thermal power to contribute as a complementary resource, thereby increasing the value of the hydroelectric generating system. 6 Note, however, that the comparison would be more accurate if water in the reservoirs was valued using the price of electricity based on opportunity costs, and not on historic costs as is the case for the heritage pool. 7 This first disadvantage must however be qualified. On the one hand, most analysts agree that the price of natural gas will probably not continue to rise past its current level. On the other, depending on import profiles, differences between costs of thermal generation in Québec and of other options could be minimal if the latter are related to the same fuels. 13

17 References Québec (2004) L avis de la Régie de l énergie sur la sécurité énergétique des Québécois à l égard des approvisionnements électriques et la contribution du projet du Suroît, available at 14