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March 24, 2010

CEO Dialogue on the Future of Energy:

Steve Snyder, President & CEO

As you can tell from our panel, the general norm when one talks about energy – be it the future of energy or the climate change impacts of energy – is to think of it in terms of the oil & gas sector. Traditionally electricity has been seen as the periphery; almost an after-thought. But today, if we look around where technology breakthroughs are taking place and where there are exciting futuristic scenarios being bandied about by people on the street. It’s in the electricity sector:

Wind Wave Geo-thermal Solar Bio-mass

There’s a new source for electricity generation coming out at unprecedented speed. None of these ones I just mentioned were more than mere thoughts or of any significance the last 5-10 years. How about scenarios like consumer home generation, smart grids, every car an electric car? How about emerging technologies like wireless transmission of electricity, mine-nuclear plants, and low cost storage of electricity? I’m not sure if drilling horizontally instead of vertically is in the same league or not. Perhaps it is. It wasn’t always like this of course. For over one hundred years the electricity sector deserved to

be on the back burner. A new technology emerged in our industry maybe every 40-50 years; hydro in the first half of the 20th century, coal in the second half, and nuclear and natural gas in the last 25 years. The basic rule of thumb for technology in our sector was simply – make it bigger! Almost all of the electricity produced in the world today comes from plants built in the 60’s and 70’s or even earlier. What’s changed? One thing and one thing only – climate change. That genie, whether intended or not and with all the uncertainties surrounding it – has set into motion a chain of events that will infuse and dramatically change what has long been described as the world’s largest machine. It’s a machine we all take for granted because it’s worked so well for so long. Today low cost, highly reliable electricity is a given in any developed or even developing country. Your total interest is the two minutes it takes to pay your bill at the end of the month. Pay it and forget it. Now that is all changing. And, it’s happening to an industry that is not used to change, that has operated regionally (and generally not in competitive markets), that generally operates technologies that are 25-50 years old, and that transport it on a pipeline that almost all agree is an aging and inadequate platform for change. Yet what we see today are world forces at play – country vs. country, province vs. province, fuel vs. fuel, industry vs. industry, technology vs. technology, regulation vs. regulator, all of which are collectively totally upsetting the power sectors apple cart. So, welcome to my world. As I sit here today I can see an electricity world in 2050 where the future ahead of it is:

Emission free Power is generated locally and stored Power is low cost and reliable

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I’m a big fan of technology and the creativity in the electricity sector in that regard is today unprecedented for our industry. Two big questions though quickly come to mind. First, can the industry handle all this technological change without disrupting supply? Remember, we have to supply over 99.999% of the time; not 99.99%. Second, we’ve got to somehow get from 2010 to 2050. I also know that whatever steel I put into the ground today will probably be producing power in 2050. So, the more steel today, the further out is my vision for 2050. At the core of my dilemma is what I call the triple “E” equation. It’s been the reality of the total energy sector for the past 100 years.

Economic Development

Energy Environmental Consumption Impact So today I am struggling with how to break this equation without ruining either our economy or our environment. Because clearly, we all want economic growth and improvedi quality of life – not just in Canada, but around the world. And we want to increase the security of and supply of energy with less dependence on foreign fuels. And, we want to reduce CO2 emissions. And, we’ve got to do that against a framework of huge uncertainty:

Uncertainty around rules, regulations, and compliance mechanisms

Uncertainty around technology

Uncertainty around fuels, especially natural gas

Uncertainty around the economy

In our particular industry’s case, do all that with very little historical experience or precedence

I also know that today every renewable source of energy is subsidized. That causes me two major problems. First, it creates expectations for consumers that these low emission fuels are

just as reliable and low cost as existing generation. They are not. Second, I know the subsidies can’t last. They’ll become prohibitedly expensive for governments. Let me frame that for you: Power from existing coal, nuclear and hydro costs from $20-$50 per MWh:

New coal: $70 - $80 (without CCS) Wind: $80 plus New Hydro: $100 plus Geo-Thermal: $100 plus New Nuclear: $150 - $200 plus Solar: $400 Wave power: ?? (no one wants to talk about it)

Against this backdrop, I think the following public policies make sense to me:

Accept the science that says we have time to act. Be realistic that we can accomplish a lot – both right now and by 2040

Start easing off the subsidies for renewables and ensure those costs are averaged – directly into consumer’s energy bill and not subsidized by general government revenues

Support accelerated infrastructure coal replacement, initially with transitions to natural gas

Support smart metering for consumers

Support transmission systems upgrades, and expand the regional inter-connects, especially N/S

Support select technology development where Canada has natural competitive advantages – like CCS and transmission

Both the economics and physics of electricity don’t lend themselves to rapid, ill-planned changes. But we can do a lot more, a lot faster than we’ve done in the past. Public policy that is quick but without direction and with constant bouncing back and forth along the road isn’t helpful. We need to move down the road – steadily, smartly and towards tough long-term goals and realistic short-term ones. For electricity, the tortoise will beat the hare – and in every race.