Canada: Power Perspectives 2022 - Québec Regional Overview

Projects submitted under both RFPs should be capable of delivering energy by no later than November 30, 2026, and any power purchase agreement will need to be approved by the Régie de l'énergie. A proposed project's cost of electricity is the predominant selection criteria for both RFPs, being worth 60 points out of a any local support or participation and regional economic benefits, will also be important considerations in both RFPs, although more so for RFP A/0 2021-02 (wind). The RFPs aim to solicit contracts with 30-year terms but there is potential for longer or shorter contracts.

More specifically, RFP A/O 2021-01 (renewables) contemplates that Hydro-Québec will enter into one or more long-term renewable electricity supply contracts for 480 megawatts of energy supply in peak power. The selection and weighting grid is composed of broad criteria, as this RFP is designed to favour renewable energy project submissions with diverse energy delivery profiles, including variable, baseload or cycling, and which may or may not include a power guarantee. Sustainable development requirements are organized into five sub-criteria, which are:

1. the proposal's greenhouse gas emissions (if any);
2. the source of any supply of renewable natural gas (if any);
3. the proposal's capability to recover thermal waste;
4. the existence of an environmental certification system; and
5. a social indicator worth 11 points in and of itself.¹

In contrast, through RFP A/O 2021-02 (wind), Hydro- Québec will eventually enter into one or more long-term contracts for a combined 300 megawatt supply of wind energy generated by new projects. Projects submitted to RFP A/O 2021-02 (wind) will be assessed based on the Régie's approved weighing grid which includes the following three notable requirements:

1. bidders should ensure that the project involves local community participation (including Indigenous participation) at a minimum level of 40% to receive points, with a 50% level of participation receiving maximum points;
2. bidders must aim for a minimum 60% of the overall expenses to be linked to Québec content (otherwise the proposal may lose points); and
3. a potential project's regional content should also be maximized, with regional expenses being required to cover at least 35% of the overall expenses.

Developments in Québec's Electricity Export Strategy

Hydro-Québec remained throughout 2021 Canada's largest exporter of electricity. In line with its 2020- 2024 strategic plan, Hydro-Québec remains committed to its stated objective of increasing its exports and supporting the decarbonisation of northeastern North America. The Québec utility projects that its net income will reach C$5.2 billion by 2030 through increased exports and the development of other new projects.

The reduced demand for and consumption of energy brought on by the COVID-19 pandemic was less pronounced in 2021 than in 2020. These changes translated into more favourable market conditions for Hydro-Québec's energy exports. Net electricity exports for 2021 grew at an average of approximately 20% during the first three quarters of 2021 compared to 2020 results, with total export volumes reaching 27.8 TWh over these nine months (nearing the 2018 record level of 28.8 TWh). Third quarter export volume growth was 4.5 TWh, an increase from 2020 results.

While average export prices have not yet returned to 2019 levels, there was a significant increase in electricity export volumes. First quarter export prices also rose slightly to 4.5 ¢/kWh, but second quarter export prices decreased to 4.2 ¢/kWh (from 4.4 ¢/kWh for the same quarter in 2020). Prices then reached an average of 4.0 ¢/kWh by the third quarter (from 4.3 ¢/kWh for the same quarter in 2020). Nevertheless, Hydro-Québec's net income from electricity exports grew as of the third quarter, confirming that overall demand for electricity grew throughout the year. These positive results, combined with increasing probability that renewable electricity demand will continue to rise in the coming years, has meant that Hydro- Québec's export plans have not been negatively impacted by the pandemic.

Ongoing infrastructure projects are reflective of this continued export strategy, centred on the utility's ability to provide clean and renewable energy. In addition to the two planned RFPs and operating wind energy projects, the Province has continued its progress on ongoing transmission and production projects.

Work on the 1,500 megawatts Romaine-4 hydroelectric project continued throughout 2021. Due to certain delays in part resulting from the pandemic, the facility is now scheduled to start electricity production as of 2022.

Given the development of other energy projects, the Romaine-4 project may be Hydro-Québec's last major dam venture for some time. Hydro-Québec has also signaled that it considers its existing and developing energy infrastructure to be capable of providing sufficient power reserves to supply both the Province and export contracts for the foreseeable future.

Current projections suggest, however, that an increase in Hydro-Québec's electricity demand should be expected as of 2025 or 2026, leaving room for additional energy infrastructure projects, as exemplified by the recent renewable energy RFPs described above. Given that Hydro- Québec's current export strategy continues to promote the load balancing capacities of its hydroelectric assets to other provinces and to US states, it will be interesting to see how the utility plans to market other sources of renewable energy outside of Québec.

EXPORTS TO THE UNITED STATES

Efforts to export electricity to the United States remain a central feature of Hydro Québec's ongoing export strategy.

After renewed efforts in 2020 to export hydroelectricity to New York, it was announced in September 2021 that Hydro-Québec had been chosen by the State of New York to deliver 1,250 megawatt of electricity (approximately 10.4 TWh) as of 2025, under a 25- year contract with the New York State Public Service Commission. Early estimates suggest that the contract will generate revenues of approximately C$20 billion for Hydro-Québec, but discussions regarding financial terms were ongoing as of the end of 2021. The project will need to obtain regulatory approvals moving forward.

The New York announcement provided further support for the development of an interconnection link between Québec and New York, as existing transmission lines are not sufficient to meet such energy demands.

By November 2021, Hydro-Québec released plans for construction work to begin on the approximately 60-kilometre portion of the Hertel-New York interconnection line project as of spring 2023. This 1,000-megawatt high-voltage transmission line project will link upon completion La Prairie to the Champlain Hudson Power Express line which supplies New York City. In its current form, the line will be buried underground and underwater. In addition to the ongoing collaboration with Transmission Developers Inc. to develop this line construction project in the past ten years, Hydro- Québec indicated this year that the ownership of the line would also be shared with the Mohawk Council of Kahnawà:ke under a 40-year benefit agreement.

The utility also experienced certain unexpected setbacks this past year in its parallel plans to export electricity to Massachusetts pursuant to its 2018 power purchase agreement. Hydro-Québec has been moving forward with a joint venture with Avangrid Inc. to build a 1.2 gigawatt transmission line connecting Québec through Maine to the Massachusetts' power grid, the New England Clean Energy Connect project (NECEC). In February 2021, however, despite having received several of the required regulatory approvals and licences over the years, opponents to the project initiated a referendum procedure in Maine, which resulted in the project being submitted to the popular approval of Maine's residents. The referendum campaign ended on November 2, 2021, when a majority of Maine's voters chose to reject the transmission line project.

Construction of the 233-kilometre transmission line has nonetheless started. Nearly 40% of the NECEC line was complete when Charlie Barker, Maine's Governor, requested further construction work be stopped pending the resolution of various legal proceedings.

The results of the November referendum are currently being contested through a challenge to the procedure's constitutional validity. Requests for preliminary injunctions to resume building have also been tabled. The Québec government has stated that it remains confident that legal solutions will be found to allow the project to move forward.

There also remains strong support for the NECEC south of the border, despite the referendum results. The US Federal Government has remained supportive of the project, while Maine's Governor Charlie Barker and Québec Premier François Legault have indicated that alternatives to the current project's plans are being explored. Independently, Hydro-Québec has indicated that other options are available in order to transmit electricity to Massachusetts, including via alternative routes.

Aboriginal Renewable Energy Projects

In the next few years, the Province may see a growing number of new renewable energy projects that are either sponsored by aboriginal communities or developed in partnership with them. Many communities in Northern Québec are not connected to Hydro-Québec's main grid and are currently supplied with electricity produced from diesel generators. Many mining sites in Northern Québec are also relying on fossil fuel for their electricity needs. Given the current governmental objective of reducing greenhouse gas emissions and replacing fossil fuels, and Hydro-Québec's 2020-2024 Strategic Plan, there are many opportunities to replace diesel with renewable energy sources and we expect that aboriginal communities will continue to participate in such opportunities.

In its 2020-2024 Strategic Plan, Hydro-Québec has targeted using renewable energy sources to supply 70% of the energy for its off-grid systems by 2025. It will also be looking at creating the required infrastructure to convert its off-grid systems to renewable energy. This includes ensuring that diesel generators may be coupled with renewable energy sources to provide necessary backup and deploying energy storage infrastructure.

For mining sites operating in remote areas, the possibility of coupling diesel generators with clean energy could potentially create significant cost savings, in addition to contributing to greenhouse gas emissions reduction targets.

In March 2021, the Canada Infrastructure Bank launched its Indigenous Community Infrastructure Initiative with an investment target of C$1 billion in the financing of indigenous projects across the five priority areas established by the Government of Canada (public transit, green infrastructure, trade and transport, broadband and clean power). To this date, the Canada Infrastructure Bank publicly confirmed its participation in three projects as part of that initiative, including the modernization of the Tshiuetin Railway located in North-Eastern Québec and Labrador which is the first indigenous owned and operated railway in Canada. The Indigenous Community Infrastructure Initiative, as well as other financial assistance programs, could prove a powerful tool for aboriginal communities looking to develop renewable energy projects.

Hydrogen Projects

The 2030 Plan for a Green Economy aims to position the Province as a leader in the production of green hydrogen. New projects and partnerships are currently emerging while the Québec government prepares a more global strategy to develop the hydrogen industry in the Province.

In January 2021, Air Liquide inaugurated a 20 megawatt Proton Exchange Membrane (PEM) electrolyser which produces up to 8.2 tonnes per day of green hydrogen at a site in Bécancour, Québec, and became the world's largest unit of its kind. The operating unit is supplied with renewable energy provided by Hydro-Québec and its production process departs from the traditional hydrogen production process based on fossil fuels.

Hydro-Québec has announced that its Center of Excellence in Transportation Electrification and Energy Storage has signed commercial agreements with the University of South Wales (USW) to transfer USW's patented hydrogen storage technology to Hydro-Québec as part of an effort to commercialize this technology. The technology increases the capacity for hydrogen storage and has numerous applications, including transporting larger quantities of hydrogen safely and holding larger quantities of hydrogen in hydrogen-powered vehicles.

In February 2021, Evolugen and Gazifère Inc., an Enbridge company, announced the construction of a 20 megawatt water electrolysis hydrogen production plant in Gatineau, Québec. The electrolyser will be powered by Evolugen's adjacent hydroelectric facilities, and the green hydrogen will be produced for injection into Gazifère's natural gas distribution network.

Those types of projects will likely grow in numbers in the next few years. As part of its 2030 Plan for a Green Economy, the Québec Government communicated its intent to release and implement Québec's first green hydrogen and bioenergy strategy to enhance the production and use of hydrogen in Québec. A first round of consultations has been held during the Spring of 2021. Further to those consultations, a proposal for a strategic vision and guiding principles has been developed. The Québec government sought additional feedback in light of the proposal by launching a second round of consultations ending in January 2022 with the aim of refining its strategy. The green hydrogen and bioenergy strategy is now expected to be released in April 2022.

Footnote

1. The social indicator (translated from "indicateur à caractère social") is an umbrella grading criteria used in the RFP A/O 2021-01 documents to cover different sub-criteria. These sub-criteria - which collectively form the social indicator - are: 1) recognition of the project by local authorities; 2) the project's integration plan (within the local community); and 3) economic benefits for the region (where the project will be located).