energy strategy 2006 2015 hilight

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USING ENERGY

Qubec Energy Strategy 2006-2015

To Build the Qubec of Tomorrow


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The text of this publication is available on the website

of the ministre des Ressources naturelles et de la Faune.

www.mrnf.gouv.qc.ca/energy

Gouvernement du QubecMinistre des Ressources naturelles et de la Faune

Legal Deposit - Bibliothque et Archives nationales du Qubec, 2006

ISBN: 2-550-46952-6 (Printed version)

ISBN: 2-550-46953-4 (PDF)

Distribution code: 2006-4002

Cette publication est galement disponible en franais.Code de diffusion: 2006-4001


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USING ENERGY

Qubec Energy Strategy 2006-2015

To Build the Qubec of Tomorrow


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To Build the Qubec of TomENERGY

MESSAGE FROM THE PREMIER

A new step forward

The energy strategy released by our Government opens up a new era in a long historachievements and success. The creation of Hydro-Qubec, the nationalization of elec tric itythe James Bay project prepared the w ay for achievements that are now the envy of the wo

We are taking a new step forward in this impressive journey which is making us so proudthat w ill prove as stimulating and inspirational as the ones before.

The strategys purpose is to empower the Qubec soc iety to maximize the economic, sociaenvironmental benefits associated w ith the development of its energy resources.

We will resume and speed up the development of our hydroelectric potential. This will strengour energy supply security, and our hydroelectric potential will, more than ever before, beca lever for regional and economic development, including the expansion and introductioindustries that create wealth and jobs. Qubecs hydroelectr ic resourc es will be developedpace unequalled since J ames Bays second phase.

Qubec is a world leader in the energy field. Hydro-Qubec is one of the planets largest electric ity utility. Thanks to JaBays development, Qubec is home to the w orlds largest hydroelectric complex.

The development of our hydroelectric resources is a source of collective pride, and has also proved to be a profitinvestment. The revenues generated help fund our public services, and contribute to the well-being of the entire popula

We have made the right energy choices. This source of wealth must be used, as never before, to improve the presen

also to prepare for the future. This is the aim of the new Qubec energy strategy, Using energy to build the Qubetomorrow.

The strategy is ambitious. It expresses our firm belief that by developing our full potential and using energy more efficly, we can increase our prosperity, better protect the environment and better prepare to face the challenges of the fu

The new energy strategy sets out the path that Qubec will follow over the next ten years. It expressesGovernments vision concerning our resources development and use. It calls for immediate actions that w ill prepare our c hildrens future.

Improving the present and preparing for the futu

M essage from the Prem


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We are committed to sustainable development, and we will become a leader in this field bydeveloping our own potential for renewable energy, by investing in energy efficiency and byincreasing the pace of development and implementation of new energy technologies. Thanks toour resources and the way we use them, we will ensure an environmentally friendly form ofeconomic development.

We are mobilizing all the resources needed to make a significant contr ibution to the preventionof climate change. At the same time, our Government will go further than any of its predecessors inthe area of energy efficiency. And by exporting more energy, we will help improve the greenhousegas performance of the entire continent.

A further goal of our strategy is to prepare the Qubec of tomorrow a more prosperous Qubec

that is more concerned about the environment, and less burdened by debt. Hydroelectricdevelopment , through the Generations Fund, will fully contribute to reducing the weight of debton the shoulders of present and future generations.

This is the path that our Government is proposing to the c itizens of Qubec. I firmly believe thatit w ill rally support throughout Qubec.

This new energy strategy is entirely consistent w ith the objectives we set since April 2003 for allGovernment actions. It illustrates Qubecs ability to build on the heritage w e have received aswe prepare resolutely for the future.

Our goal is to foster a more responsible use of energy.

Jean CharestPremier of Qubec

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M ESSAGE FROM THE MINISTER OF NATURAL RESOURCES AND WILDLIFE

Strong messages

Citizens, businesses and stakeholders in the energy field all stated their point of view forceThe Government listened.

Many of the comments concerned hydroelectricity.

Our hydroelectr ic resources give us a lever for development whose value continues to incrin a world in which other resources are becoming ever scarcer. Hydroelectricity is ourresponse to the difficult question of energy security. Few industrialized countr ies can counsuch abundant potential for renewable energy, and we must take full advantage of this situa

The development of wind energy is set on a firm footing. It w ill become the perfec t completo our unique hydroelectr ic potential, as many participants in the consultation process poout.

Other comments concerned energy savings.

There is an urgent need to use energy more effic iently, to match spec ific types of energy to cific uses, to change some of our behaviour patterns and to improve our equipment. The goto save energy, and also to act responsibly with respect to the challenges that must bewor ldwide, since greenhouse gas emissions can only be reduced by controlling our energy sumption. Our privileged position as a producer of clean energy does not exempt us fromresponsibility we all share to protect the future.

To draw up the new energy strategy, the Government was able to count on a wealth of sugtions and proposals, which it used to define objectives and the measures needed to achthem.

A STRATEGY FOR ALL QUEBECER

M essage from the M inister of Natural Resources and Wild

The energy strategy released by the Government is the strategy of all Quebecers. To draft it, the Governmentindeed applied an open and transparent approach based on receptivity and acc essibility, generating public inte

Discussions with experts, a parliamentary committee hearing and the on-line consultation reached out to a renumber of citizens. The Web-based consultation alone attracted over 10,000 participants, and 2,000 briefs and cments were forwarded by individuals and organizations


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An innovative strategy

The objectives and measures presented here by the Government are daring and visionary, andopen up new avenues. The strategy proposed will make Qubec a leader in the development ofrenewable energy in North America. For many of our neighbours and partners, energy is aproblematic issue. In Qubec, it is a source of opportunities and c hallenges.

The energy strategy innovates in many different ways. It proposes a new approach to hydroelectricdevelopment, based on a portfolio of projects, in response to the increasing constraints affectinghydroelectric development projects.

It also involves local and regional communities, as well as the First Nations, in future develop-ments. In this way, the Government intends to maximize the loc al and regional benefits of future

investments, while ensuring that the new developments are environmentally friendly and aresupported by the communities directly affec ted.

The Government innovates by providing sustained funding for energy efficienc y in the energyfield, defined under a comprehensive plan for all forms of energy. The mission of the Agencede lefficac it nergtique w ill be broadened, and the Rgie de lnergie w ill be given increasedpowers.

Thanks to the new rules defined by the Government, the energy efficiency plan w ill be subjectto strict accountability requirements, to ensure that the resources invested produce the desiredresults and that the money directed to energy effic iency is properly managed.

Focusing on new energy technologies

The Government also innovates in the area of new energy technologies.

A new institutional and financial framework is set up to accelerate the use of promising technologiesin Qubec. Priority will be given to the development of bio-fuels, and to the promotion ofgeothermal and solar energy.

Geothermal energy offers a particularly attractive way to save energy, while solar energytechnologies offer new potential. Both of these energies will be developed.

The Government also innovates by updating the regulatory framework to encourage the initiativestaken by individuals and businesses.

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M ESSAGE FROM THE MINISTER OF NATURAL RESOURCES AND WILDLIFE

An achievable vision for the future

The objectives of the new energy strategy are ambitious and achievable.

The initiatives it announces are stimulating. They are consistent w ith an overall view of Qubenergy sector, its future development and the benefits it generates.

W ith Using energy to build the Qubec of tomorrow , the Government shows that it is posto reconc ile wealth creation with environmental protection and social development. In shorGovernment has established one of the fundamental foundations for its vision of sustaindevelopment, which it hopes will rally public opinion generally.

Pierre CorbeilMinister of Natural Resources and Wildlife


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SUMMARY

Following a broadly-based consultation process thatbegan in November 2004, this document sets out theGovernments energy strategy, Using Energy to Buildthe Qubec of Tomorrow.

OBJECTIVES

The energy strategy has six objectives:

1) Qubec must strengthen its energy supply security.

2) We must make better use of energy as a lever foreconomic development. Priority is given to hydro-electricity, wind energy potential, hydrocarbonreserves and the diversification of our natural gassupplies.

3) Local and regional communities and First Nationsmust be given more say.

4) We must use energy more efficie ntly.

5) Qubec must become a leader in the sustainabledevelopment field.

6) Electricity rates must be set at a level that promotesour interests and ensures proper management ofresources, thus improving price signals while pro-tecting consumers and Qubecs industrial struc-ture.

To meet these six objectives, the energy strategy isexpressed in terms of orientations and priority actionsdetermined for hydroelectricity, wind energy, energyefficiency, new energy technologies and hydrocarbons.

ORIENTATIONS AND PRIORITY ACTIONS

1) RESUM E AND ACCELERATE THE PACE OF DEVELM ENT OF OUR HYDROELECTRIC POTENTIAL

In recent years, hydroelectric development hasexperienced a slowdow n and, to correct the situathe Government has decided to resume and accelethe development of our hydroelectric potential w

the implementation of new projects totalling 4,500within the next five years.

- The new projects will represent a pace of devopment equal to James Bays second phase, aadd more capac ity than the total of the past15 years. This translates into investments of $billion and 70,000 jobs over ten years in addito the $4 billion in investments and 888 MWproduced by the Eastmain 1A/Rupert DiversionSarcelle project that is currently going throughenvironmental assessment.

- The 4,500 MW added capacity will be sufficiento meet Qubecs long-term demand, promotewealth-creating industrial development, and supexports.

The projects will be developed using an innovatapproach involving the constitution of a portfolof projects.

- Work to complete a major hydroelectric projecnormally takes ten years and comprises two mphases:

negotiations, studies and environmental assments (five years);

engineering and construction (five years).

SUMMARY


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- The portfolio approach consists in launching thefirst phase of several projects at the same time,ensuring that all necessary agreements and envi-ronmental permits are obtained by 2010. The mainadvantages are:

the possibility of adjusting each projects con-struction schedule to address unexpectedsituations that arise during implementation;

flexibility for better risk management, and com-petition between projects;

greater efficiency, allowing for an overall gainof at least five years.

The Government does not intend to promote the devel-opment of small, privately-owned generating stations.These projects of 50 MW and less are not essential toour energy security and no block of electricity fromthis type of generating station has been included inthe Strategy.

Some local and Aboriginal communities see this as aninteresting opportunity for social and economic devel-

opment in their regions. The Government feels that thebest approach is to leave interested communities freeto develop such projects provided they have the sup-port of the local population, generate benefits for theregion, and are under the control of the community.

In other words, the development of small generatingprojects (50 MW and less) will be pursued by and forlocal communities.

Each project will be subject to an environmentalassessment by the BAPE, and an agreement c oncern-ing the purchase price of the electricity produced

must be signed with Hydro-Qubec before the projectis presented to the Government.

The Government also intends to ensure that Qubecis able to increase its electricity exports, once itsown needs have been met. It has therefore man-

dated Hydro-Qubec to begin discussions withpotential partners in view of signing electricityexport agreements. The crown corporation will alsoreport on interconnections with neighbouring grids.One of its short-term priorities will be to strengtheninterconnections with Ontario.

The strategy confirms the Governments desire topreserve Qubecs advantage in the way of elec-tricity rates by maintaining:

- the heritage block: most supplies (95% of the

current supply) will continue to be priced at thefixed rate of 2.79 /kWh;

- competitive rates to promote economic develop-ment: a comparative advantage for industries thatcreate wealth and jobs.

2) DEVELOP W IN D POWER, AN ENERGY SOURCE FORTHE FUTURE

It is estimated that Qubec has a potential of 4,000 MWof w ind pow er that can be economically connected

to the Hydro-Qubec grid by 2015, based on currenttechnology. This represents approximately 10% ofthe peak electricity demand.

- The Government intends to develop this potential.

The Governments priority for wind power is tocomplete the process launched by the two requestsfor proposals issued in 2003 and 2005 by HydroQubec totalling 3,000 MW of supply.

The requests for proposals generate investments of$4.9 billion. They include requirements concerning

Qubec content (60%), with a special focus on theGaspsie-les-de-la-Madeleine region and theMatane MRC.

- Three plants are already established in Mataneand Gasp.

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SUMMARY

The Government further intends to issue otherrequests for proposals for wind power, when condi-tions are more favourable. This will depend on:

- the pace at which the additional 4,500 M W ofhydroelectric projects can be implemented:100 MW of wind power will be added for every1 000 MW of new hydroelectricity;

- new technological developments and the costof connecting to the Hydro-Qubec gr id. To thiseffect, Hydro-Qubec has been mandated to

improve conditions for connecting wind powerto the grid.

An additional request for proposals of 500 MW willbe issued for the supply of two separate blocks of250 MW each, one earmarked for the regions(M RC), and the other for the First Nations.

- Individual projects will be limited to 25 MW inorder to encourage direct involvement by smallcommunities.

- The requests for proposals will generate invest-ments of $700 to $750 million.

Combined wind/diesel power generation pilot projectswill be carried out for off-grid supply networks,aimed at reducing the use of costly and pollutingdiesel power generation. The first of these projects,in the les-de-la-Madeleine, should be in operationby the summer of 2007. The second, in Nunavik, willbe implemented in consultation with the Inuit. Basedon these pilot projec ts, Hydro-Qubec c ould gener-alize this approach in the off-grid supply networks.

3) USE ENERGY MORE EFFICIENTLY Energy efficiency will be a core element of the

energy strategy. The actions proposed by theGovernment w ill, between now and 2015, increasethe overall energy efficiency target by a factor ofeight compared to the current targets.

This will allow for $2.5 billion in annual savings byconsumers;

These actions will bring a significant contributioto the prevention of climate change, by eventualavoiding 9.4 million tonnes of greenhouse gas emsions each year. This will be a first step in a mogeneral climate change strategy to be released by the Government.

For the first time, the Government will propose acomprehensive plan for all markets and all formenergy, with concrete implementation means. Toeffect, the Agence de lefficacit nergtique wihave a mandate to:

- identify cost-effective savings to achieve withprograms based on third party involvement, wout replac ing the Hydro Qubec and Gaz Mtrprograms.

- a new element of this plan w ill be to establisenergy savings target in the petroleum producsector: 2 million tonnes oil equivalent (TOE) by2015 (equal to just over 10% of Qubecs curreannual consumption).

- the funding mechanisms for this comprehensiv

plan will ensure stability and ongoing action. Tfunding authorized by the Rgie w ill be usedexclusively to implement and administer progrunder the plan, and may be inc reased by amopaid by the federal Government for energy efficiinitiatives.

The Government intends to promote renew ablefuels such as ethanol and biodiesel. Its goal is toachieve an average of 5% of ethanol in all gasosold by 2012.

- Ethanol allows to replace an equivalent quantof gasoline.

- The use of forest and agricul tural biomass anurban waste will be given priority over grain cAlthough it is technologically more difficult, it also environmentally and economically morebeneficial for Qubec.


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For passenger transportation, the Government w illpromote improvements to the passenger car fleet by:

- reimbursing the QST (maximum $1 000) for newhybrid vehic les (2006-2007 Budget);

- examining the possibility of creating more financialincentives towards the purchase of fuel-efficientvehicles;

- changing the standards governing vehicles sold inQubec to make them more stringent in respect toenergy c onsumption (California standards).

Public transit will be supported to make it moreattractive to new users.

Energy efficiency in the freight transportationsector will be improved.

Petroleum products consumption will be reduced inseveral sectors through various programs:

- Use of better performing equipment in heating andindustrial processes;

- improved thermal efficiency for existing building

envelopes. The Agence de lefficacit nergtique will propose

amendments to the regulations governing energysavings in new buildings in Qubec, and their inclu-sion in the Construction Code.

The Government will promote more efficient use ofelectricity. Acc ordingly, Hydro-Qubecs energyefficiency target is increased from 4.1 TWh in 2010,to 8.0 TWh by 2015. This represents twice the totalelectrical consumption of the greater Qubec Cityarea households.

In addition to its energy efficiency programs, theGovernment has instructed Hydro-Qubec to inc ludeenergy efficiency projects in future requests forproposals.

Hydro-Qubec has also been mandated to file anew pricing structure with the Rgie de lnergie,which must include:

- a wider gap between the two rate levels currentlypaid by residential consumers, or the introductionof a third rate level (without changing the total billfor consumers);

- rates that vary by season and time of use, thusallowing consumers to manage their electricityconsumption more effec tively.

In regard to natural gas, targets have more thantripled: the 96.9 million cubic metres target by 2008has been increased to 350 million cubic metres by2015.

The Government will apply a plan to improve energyperformance for public buildings and for its vehiclefleet. Among other things, the plan will be designed to:

- reduce unit energy consumption in buildings by10% to 14% between now and 2010, depending onthe sector;

- reduce fuel consumption by government departmentsand agencies by 20% between now and 2010.

Innovative energy consumption actions in the edu-cation and health and social services sectors willbe recognized, and special financial support will beprovided from a $20 million annual budget.

The Agence will provide assistance for municipali-ties requesting help in drafting and implementingenergy efficiency plans.

Energy efficiency assistance programs for low-

income households will be improved.

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SUMMARY

4) IN NOVATE IN THE ENERGY FIELD

The Agence de lefficacit nergtiques mandatehas been broadened to support and promote innovationin the energy field.

An assistance plan for new energy technologies(approved by the Government and monitored by theRgie) will be included in the comprehensive energyefficiency plan prepared by the Agence.

This plan w ill be financed through part of the levygarnered on all forms of energy, as determined by

the Rgie.- An annual target of $10 million is set. It could

generate up to $40 million in total investments peryear by all partners.

Support for ethanol and the development of anethanol production industry in Qubec will be acentral element in the new energy technologysupport plan devised by the Agence de lefficacitnergtique.

The Government intends to give priority to the

recovery of forest and agricultural residue andurban waste, rather than corn grain.

However, some significant technological challengeswill have to be met. Accordingly, the Governmentintends to:

- support Qubecs research teams in this area;

- establish a pilot cellulosic ethanol plant to beginoperation by 2008, so that the technology can bedeveloped by 2010 and production facilitiesopened by 2012.

A task force will be created to better identify poten-tial sources of feedstock and identify the businessmodel best suited to maximize the spin-offs from thisnew endeavour.

The Government also intends to increase the marketpenetration of biodiesel.

Geothermal and solar energy will be promoted asupported by:

- circulating more information concerning potengains from geothermal and passive solar ener

- introducing a financial assistance program toimprove the market penetration of geothermaenergy in the residential, institutional and commercial sectors;

- systematically exploring the potential contribuof geothermal energy in building design in the

public and parapublic sectors, including theCentre hospitalier de lUniversit de Montral(CHUM) and the Centre universitaire de santMcGill (CUSM);

- mandating the Agence de lefficacit nergtiqin collaboration with Hydro-Qubec, to developrogram to support the capture of solar energand submit it to the Rgie de lnergie.

The Government will also lift certain regulatoryobstacles that hinder initiatives by consumers anproducers to develop other energy potentials.

- For example, the Government intends to facilitthe decentralized production of electricity andmandates Hydro-Qubec to submit two proposto the Rgie de lnergie by 2007, to:

propose conditions on which individuals andbusinesses may sell excess produc tion to HQubec;

develop and propose a program to purchaseelectricity from microproducers (less than 1 M

- The Government also intends to proceed with deregulation of biogas distribution activities tensure their development and reduce their relgreenhouse gas emissions.


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5) CONSOLIDATE AND DIVERSIFY SOURCES OF OILAND GAS SUPPLY

The Government hopes to develop the oil and gasresources in the gulf of St. Lawrence and estuary.

The Governments approach will be environmentallyfriendly. It includes the following avenues:

- the application of the Guide to good practice forseismic surveys in the marine environment that iscurrently being prepared in conjunction with otherCanadian provinces and the federal government;

- a strategic environmental assessment of the gulfof St. Lawrence and estuary to ensure that devel-opment respects the marine environment;

- subjecting seismic surveys to section 22 of theEnvironment Quality Act, by incorporating theresults of the strategic environmental assessmentinto the permits issued.

The Government will collaborate with the federalgovernment to settle the territorial dispute concern-ing hydrocarbon exploration and production in the

gulf and St. Lawrence estuary. The agreementssigned by the federal government with Newfoundlandand Labrador and Nova Scotia constitute prece-dents that Qubec would like to apply to its ownsituation.

Liquefied natural gas (LNG) terminals could be usedto diversify our supply options and strengthen ourenergy security in view of our dependency on naturalgas supplies from Western Canada for which demandis high and depend on a single supply route.

The Government emphasizes that all analyses andassessments currently under way for these projectswill be carried out as rigorously as possible. It willalso ensure that citizens are able to express theirconcerns and receive all relevant information on theprojects.

To ensure the availabili ty of petroleum products, theGovernment intends to:

- require petroleum companies to file a supplysecurity plan, in the event of difficulties with theavailability of petroleum products;

- work with the industry in order to see how fuel oiland propane consumers can be protected from theconsequences of a weaker distribution network.

6) M ODERNIZE THE LEGISLATIVE AN D REGULATORYFRAM EWORK

To respond more effectively to the situation of low-income households, the Government will introducevarious measures.

Sustainable development will be better taken intoaccount when energy projects are analyzed. TheGovernment w ill give the Rgie de lnergie respon-sibility for assessing the energy-related and eco-nomic justification of projects.

- The BAPE will continue to examine the environ-mental aspects of energy projects subject to theEnvironment Quality Act.

The Rgie de lnergie will be given the power tooversee the application of electrici ty transmissionreliability standards, in the wake of recommenda-tions from the Canada-US task force concerning theAugust 14, 2003 power blackout.

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table of content

M ESSAGE FROM THE PREMIER________________________________________________________________

M ESSAGE FROM THE M IN ISTER OF NATURAL RESOURCES AND W ILDLIFE______________________________

SUMMARY ________________________________________________________________________________

INTRODUCTION ____________________________________________________________________________

CHAPTER 1 OBJECTIVES___________________________________________________________________

CHAPTER 2 ORIENTATIONS AND PRIORITY ACTIONS _________________________________________

RESUME AND ACCELERATE THE PACE OF HYDROELECTRIC DEVELOPMENT_________________________DEVELOP WIND ENERGY AS AN ENERGY SOURCE FOR THE FUTURE ______________________________USE ENERGY MORE EFFICIENTLY___________________________________________________________INTRODUCE INNOVATIONS IN THE FIELD OF ENERGY__________________________________________CONSOLIDATE AND DIVERSIFY SOURCES OF OIL AND GAS SUPPLY_______________________________MODERNIZE THE LEGISLATIVE AND REGULATORY FRAMEWORK _________________________________

CONCLUSION A MORE PROPSEROUS QUBEC, A MORE EFFECTIVE USE OF ENERGY_____________________________

APPENDIX 1 WIND ENERGY DEVELOPMENT : A FAIR AND TRANSPARENT PROCESS____________________________APPENDIX 2 THE APPROVAL AND ACCOUNTABILITY PROCESS FOR THE COMPREHENSIVE ENERGY EFFICIENCY PLAN_APPENDIX 3 ENERGY STRATEGY CONSULTATIONS_______________________________________________________

TABLE OF CONTENT


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LIST OF GRAPHS

Graph 1 Major hydroelectr ic pow er station projects by year of authorization of construction work (1961- 2010) ___15

Graph 2 Developing hydroelectric potential: comparison of the traditional and portfolio approaches _______17

Graph 3 Net electricity exports (in $ million and TWh) (1981-2005) ____________________________________20

Graph 4 Electric ity rates for residential customers in certain North American cities (cents per kWh) (2005)____22

Graph 5 Changes in the purchase cost of non-heritage electric ity (in $ million) (2004-2006)_______________22

Graph 6 Components of the electr icity rate increase in effect from April 1, 2006 _________________________23

Graph 7 Change in installed wind generating capacity (in MW) (2003-2015) ____________________________36

Graph 8 Per capita energy consumption and greenhouse gas emissions, Qubec, Canada and Alberta (2003)__39

Graph 9 Per capita energy consumption Qubec and main industrialized nations (2002) (TOE per capita) ____39

Graph 10 Energy consumption in Qubec (2003) ___________________________________________________41

Graph 11 Energy savings: the overall target set by the Government for 2015 _____________________________42

Graph 12 Energy efficiency: targets set by the Government for 2015____________________________________43

LIST OF TABLES

Table 1 Installed capacity, annual production and cost of hydroelectric projects under constructionor undergoing environmental assessment ________________________________________________13

Table 2 Areas not connected to the main Hydro-Qubec grid (2003) __________________________________34

Table 3 Refinery sector investments in Qubec (in $ million) ________________________________________85

LIST OF MAPS

M ap 1 Qubecs crude oil supplies (2004) ______________________________________________________75

M ap 2 Qubecs potential liquefied natural gas supplies___________________________________________77

M ap 3 Sedimentary basins in Eastern North Americ a_____________________________________________78

M ap 4 Current prospecting permits in the Gulf of St. Lawrence (2005)________________________________80

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INTRODUCTION

Introduction

This document, Using Energy to Build the Qubec Tomorrow, sets out the Governments energy strate

Following a broadly-based consultation processlaunched in November 2004, the Government offerthe population this new vision for our energy sectodefining the actions that must be taken and the gothat must be met over the next ten years.

The objectives selected result directly from the discussions that took place during the public consultprocess. They are consistent w ith other priorities fgovernment action.

To guide the implementation of the objectives, the

Government also sets out orientations and priorityactions in each energy sector. The orientations anpriority actions concern all players in the energy f

c itizens, businesses, institutions and organizationTheir involvement will be a key factor in the succeof the process as a whole.

The proposed energy strategy addresses several othe challenges facing us today: to increase the serity of our supplies, make Qubec more prosperouensure that energy is used more effectively and,ultimately, guarantee sustainable development.


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THE ENERGY STRATEGY CENTRES ON THE SIX FOLLOBJECTIVES:

Making our energy supplies more secure.

Making better use of energy as a lever for economdevelopment.

Giving local and regional communities and First Namore say in energy development.

Using energy more efficiently.

Becoming a leader in the field of sustainabledevelopment.

Setting electricity rates to promote our interests aensure proper management of the resource.

OBJECTIVES 1Chapter


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4

OBJECTIVES

1) M AKING OUR ENERGY SUPPLIES M ORESECURE

A secure energy supply is essential if modern societiesare to function correctly. Our quality of life depends onenergy. Our economic development is direc tly linked toenergy.

In todays deregulated energy market, the security ofthe energy supply depends on both the physical relia-bility of each source and on the price at which it isavailable.

At an equivalent price, it is obviously in our interestto prioritize the energy available within Qubec.However, hydroelectric development must be plannedover the long term, given the time needed to harnesswater resources.

For energy that must, in any case, be imported, wemust diversify our sources of supply and exchangepower in the ways that best serve our interests.

Energy secur ity also depends on the reliability of thefacilities of all kinds used to make energy availableto consumers. For this reason, we must ensure thatelectricity transmission and distribution lines operateproperly, and also that oil and gas supply systems arereliable.

2) M AKING BETTER USE OF ENERGY AS ALEVER FOR ECONOM IC DEVELOPM ENT

Energy is not just a prerequisite for economic develop-ment. In Qubec, it is also one of our key comparativeadvantages, especially for supporting and developingour industrial base. We must therefore take advantage

of this situation.A LAND OF HYDROELECTRICITYQubec is a land of hydroelectricity, which forms thefoundation for much of the development of Qubecsociety and its entry into the modern era.

Thanks to its geomorphology and hydroelect ricresources, Qubec has access to a clean, renewableand secure source of energy. Qubec is one of the

jurisdict ions in North America w ith the low est elec tric ityrates. The availability of hydroelectric power at com-petitive rates has allowed us to attract industrial

investment that, in turn, generates multiple spin-offs.To develop this exceptional heritage, we can count onHydro-Qubec one of the largest power companiesin the world and the most extensive transmissiongrid in North America.

Qubecs hydroelectric ity is a key asset, of evengreater value in a context of exhaustible resourcesand the fight against greenhouse gas emissions. Thanksmainly to its hydroelectr ic generation of power, Qubecproduces only half the amount of greenhouse gasemissions per capita as Canada.

This is one of our key advantages, but it is not theonly one.


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OBJECTIVES

W IND ENERGYQubec is lucky enough to be able to count on asecond form of renewable energy, and the use of thisresource will further improve our record on green-house gas emissions. Impressive amounts of energycan be generated in Qubec from wind resources. Inaddition, wind generation is an ideal complement to

hydroelectric generation, and Hydro-Qubec fullyintends to take advantage of this situation.

Since 2003, Qubec has moved resolutely to developwind energy resources. Hydro-Qubec has invested inknow-how, methods and management tools to ensurethat wind farms are fully integrated into its system. Wecan now use the development of our wind generationpotential to build a competitive, high-performanceindustry in Qubec, able to c ompete on an equalfooting in an area of especially rapid growth world-wide.

HYDROCARBONSQubec has an extensive, efficient system to transportand distribute natural gas. Our geographic locationexplains several major investment projects to constructliquefied natural gas terminals.

Much depends on the possible existence of significanton-shore and off-shore hydrocarbons reserves inQubec. Development of this resource would reduceour dependence on outside supplies by replacingsome of the fuels we currently have to import.

INVESTMENT AND EMPLOYMENTThe energy strategy will allow us to benefit fully fromall these advantages.

By meeting the challenge of economic development,energy projects will generate investments and jobs.

The availability of energy at competitive rates andin a variety of forms will help reinforce the economframework in all regions of Qubec, and in theprovince as a whole. Increased energy exports wimprove our balance of trade and provide additiorevenue. Overall, energy development w ill helpensure our prosperity and that of future generatio

3) GIVING LOCAL AND REGIONAL COM M UTIES AND FIRST NATIONS M ORE SAY INENERGY DEVELOPM ENT

The energy development challenge in Qubec is toensure that all stakeholders are involved in projectthat local and regional and especially Native cmunities are associated with each project, that thebenefits for Qubec as a w hole are maximized andcourse, that the projects comply with the principle

sustainable development.If these conditions are met, we can develop ourenergy resources in a way that benefits the wholepopulation and creates wealth.

We must take advantage of our energy resources build and strengthen a regional approach to econodevelopment, in which each region participates in development of its own resources. The energy straillustrates, once again, the intention of the Qubecgovernment to become the government of the regiand to build a strong partnership with the FirstNations.



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6

4) USING ENERGY M ORE EFFICIENTLYEnergy savings are a core element of the energystrategy.

Qubec is a major consumer of energy, mainlybecause of its industrial structure, geography andclimate.

Energy must be used more effectively. We must optimizethe energy used for a given purpose whether to heatour homes or travel from place to place. Our behaviourpatterns must change, and must become more respon-sible in terms of the future of the planet. Our equipmentmust become more efficient, and we must use theright energy for the right purpose.

The use of energy from emerging sources or producedby new technologies must also be considered.

Collectively and individually, we all stand to gain frombecoming more informed, more efficient users ofenergy. We will improve our energy security. We willreduce the environmental impact of our activities, andour greenhouse gas emissions in partic ular. In economic

terms, we will reduce our energy bills, which is clearlya benefit for consumers and businesses.

5) BECOM IN G A LEADER IN THE FIELD OFSUSTAINABLE DEVELOPM ENT

The Qubec government has made sustainable devel-opment one of its main priorities.

Sustainable development is an exacting c oncept,because it requires a balance between economicdevelopment, environmental protection and soc ialequity, while leaving future generations all the assetsthey will need for their own development.

The energy strategy will lead to the implementation ofthe three c omponents of sustainable development economic, environmental and social. As a powerfultool for job creation and collective enrichment, thetype of energy development targeted by the Governmentgives priority to clean energy sources. It is based onpartnerships with local communities and the FirstNations.

Practically all of Qubecs electricity is generated fromhydroelectricity a renewable energy source thatcreates almost no greenhouse gas emissions. Thanksto its hydroelectric resources, Qubec is in the bestposition of all the Canadian provinces to respond to theconcerns addressed in the Kyoto Protocol.

Wind energy is another form of renewable energywidely available in Qubec, which will make a directcontribution to the fight against global warming.Energy savings also offer important opportunities tocontribute to sustainable development.

Thanks to the characteristics of its energy resources,Qubec is in a stronger position than most industrializednations to respect all the dimensions of sustainable

development and to champion this approach.These advantages also create a responsibility. Qubecmust become a leader in the field of sustainabledevelopment and help improve the state of our planet.The energy strategy gives us the tools we need toachieve this goal.


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TO M EET THE SIX OBJECTIVES OUTLIN ED ABOVE,THE ENERGY STRATEGY IS EXPRESSED IN TERM S OORIENTATIONS, APPROACHESAND PRIORITY ACTIOW HOSE GOAL IS TO:

resume and accelerate the pace of hydroelectric dopment,

develop wind energy as an energy source for the

use energy more efficiently,

introduce innovations in the field of energy,

consolidate and diversify sources of oil and gas su

modernize the legislative and regulatory framewor

ORIENTATIONS ANDPRIORITY ACTIONS 2Chapter


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10

RESUM E AND ACCELERATE

THE PACE OF HYDROELECTRICDEVELOPMENT

A KEY ASSET

Hydroelectricity gives Qubec a c ompetitive, renewablesource of energy with impacts on the environment andclimate that remain limited compared to conventionalforms of power generation. The current energy contexthas given this asset even greater value.

AN ENVIABLE POSITION

Qubec has been able to take advantage of this primeasset. On December 31, 2005, the total available hydro-electric capacity1 in Qubec was 41 340 MW,2 makingup 94% of all capacity.

Qubec is the worlds fourth largest producer ofhydroelectricity, behind China, Brazil and the UnitedStates but ahead of Russia, the rest of Canada andNorway.

This enviable position can be traced back to the early1960s. In 1963, the nationalization of electricityannounced a new era of major projects, and thedevelopment of the Manicouagan and Outardes riversmoved ahead at a faster pace. In 1971, a major stepforward in the harnessing of our water resourcesoccurred when the first phase of development inJames Bay was launched. The project w as ofunprecedented scope, with 18,000 people involvedat various sites at the height of the work. In 1987 thesecond phase of the James Bay project began, andonce completed gave Qubec the worlds largesthydroelectric complex with a total installed capacityof over 16,000 MW. Today, the James Bay complex

represents two-fifths of Qubecs total installed hydro-electric capacity, and equals the installed capacity ofcertain countries, such as Belgium.

The development of Qubecs hydroelect ric potentialthrough these major projects has become a source ofpride for all Quebecers. It has also had a considerableeconomic impact, whether in terms of direct invest-ment in hydroelectric facilities, the arrival of newindustries attracted by the availability and guaranteedprice of Qubecs power, or the development withinQubec of technical expertise and engineering firms

of international renown.

PRIORITY ACTIONS

1) Launch new major hydroelectric projectstotalling 4 500 MW

2) Increase electricity exports, once our ow nneeds have been met

3) Use our rate advantage to benefit Qubec

4) Limit the role played by nuclear energy inQubec by developing hydroelect ricresources

1. Including elect rici ty available from the long-term delivery contract signed by Hydro-Qubec and the company that runs the Churchill Falls facility inLabrador.

2. 1 MW (megawatt) is equal to 1 million watts (106). In the electricity sector, the energy unit is the watthour, corresponding to the use of 1 watt for 1 hour.A quantity of 1 TWh (terawatthour) corresponds to 1 billion watthours (109), or the electricity needs of 50,000 households using electricity for heating forone year.

Qubecs new energystrategy aims, first, toresume and acceleratethe pace of hydroelectricdevelopment, afterthe slowdown of thelate 1990s.


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Since this time, the pace of hydroelectric developmentin Qubec has slowed, especially during the period1996-2000.

In 1994, Qubec Premier Daniel Johnson launchedthe SM-3 project, the last major construction workannounced during the 1990s.

The only large project launched between 1996 and2000 was to improve the Grand-Mre dam andreservoir, which increased Hydro-Qubecs installedcapacity by only 80 MW.


HYDROELECTRIC DEVELOPM ENT INQUBEC: A STORY OF DARING ANDVISION

In 1944, the government under Adlard Godbout

nationalized the assets of the Montreal LightHeat and Power and c reated the QubecHydro-Electric Commission, today known asHydro-Qubec. Qubec took c ontrol of its ownwater resources, to protect the interests ofconsumers and use hydroelectricity as a leverfor economic development.

Hydroelectric development in Qubec continuedthanks to the daring and vision of two laterPremiers, Jean Lesage and Robert Bourassa.

In the early 1960s, major hydroelectric devel-

opment began in Qubec w hen Hydro-Qubec began work to harness theManicouagan and Outardes rivers on theNorth Shore later to become the Maniccomplex.

In 1963, the second government of JeanLesage nationalized electricity, and Hydro-Qubec became one of the largest powercompanies in North America, and indeed inthe world.

In 1971, one year after his election asPremier of Qubec, Robert Bourassaannounced the construction of the BayJames complex the most ambitious projectever undertaken in Qubec. The projectinvolved a total investment of $14.6 billion,and at the height of the work, 18,000 peoplewere working at the various sites. Oncecompleted, the project gave Qubec anadditional 10,800 MW. Robert Bourassa gavelife to an idea whose economic, environmentaand social repercussions are still felt today.

In 1987, once again under a government ledby Robert Bourassa, the second phase ofwork at James Bay began. Over 6,600 workerswere present on site at the peak of activities.Total investment amounted to $9.7 billion, andthe new project added 5,200 MW to Hydro-Qubecs production c apacity.

The facilities built during the two phases ofthe project have given Qubec the worldslargest hydroelectric complex, with a totalinstalled capacity of over 16,000 MW 38.8%

of Qubecs current total installed hydroelec-tric capacity.


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THE COST OF DELAY

The slowdown in major projects is beginning to be feltnow that demand is increasing on Qubecs electricitymarket. In recent years, demand has seen sustainedgrowth, while supply has increased at a far slowerrate. Between 1999 and 2005, for example, Hydro-Qubecconnected roughly 250,000 new dwellings to the grid,and also supplied new power for an aluminium smelter.

We are now paying for the delay in developing ourhydroelectric potential. At cer tain times, we must

import high-priced electricity from outside Qubec.Qubecs economy has not benefited as much as itcould have done from the powerful economic leveroffered by hydroelectric development. Qubecsexpert ise in engineering and managing major projectshas not been fully utilized. The volume of our electricitysales outside the province has dropped considerably.

CORRECTING THE SITUATION

There is an urgent need to correct the situation, and

investments have already been made to further thisobjective.

In 2003, the Government clearly stated that it wouldgive priority to a resumption of major hydroelectricprojects. Several projects are currently underway,including Eastmain-1 (480 MW), Pribonka (385 MW)and Chute-Allard/Rapide-des-Curs (138 MW), andwill eventually add 1 054 MW of installed capacity.Altogether, they w ill involve an investment of almost$4.5 billion, and will create the equivalent of 18,000person/years of employment.3

Another large-scale project is undergoing environ-mental assessment: the Eastmain-1-A/Rupert Riverdiversion/La Sarcelle project, with an estimatedconstruc tion cost of over $4 billion. Once built, theproject will add almost 900 MW of installed capacityand will produce 8.5 TWh of electricity each year.

The completion of this project is essential in orderto secure the electricity supply of the Qubec popu-lation. The development costs are advantageous,and the project has been the subject of several in-depthenvironmental assessments. Several c rucial designparameters with an impact on the environment havebeen established in cooperation with the CreeNation.

It is important for Qubec that these projects becompleted within the scheduled time-frame.

12

ENVIRONM ENTAL ASSESSM ENT OFTHE EASTM AIN-1-A/RUPERT RIVERDIVERSION/LA SARCELLE PROJECT

The Eastmain-1-A/Rupert River diversion/LaSarcelle project, once the environmentalassessment is complete, will be the next majorhydroelectric project undertaken by Hydro-Qubec.It results directly from an agreement, known asthe Peace of the Brave, between Qubec and

the Crees, and another agreement, theBoumhounan Agreement, between the Creesand Hydro-Qubec that defines several importantparameters. The project is a key element inre-establishing a balance in Qubecs energysituation.

The environmental studies, as well as theconcerns expressed by the Cree Nation andJames Bay residents, have influenced thedesign of the project to ensure that theimpact is kept to a minimum.

The Eastmain-1-A/Rupert River diversion/LaSarcelle project is currently undergoing a majorenvironmental assessment that involves all thestakeholders and is in compliance with theprovisions of the James Bay and Northern

3. A person-year equivalent is the number of full-t ime jobs created for one year. Therefore, the equivalent of 70,000 person-years may be 10,000 jobs forseven years, or 7,000 jobs for ten years


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Qubec Agreement which, in Chapter 22,defines an assessment process that is differentfrom the environmental impact assessment andreview required elsewhere in Qubec andcarried out by the BAPE.

In all, Hydro-Qubec will have spent $400 millionon various environmental and technical studiesto obtain government authorization. The studieshave been approved, and the project is now atthe public hearing stage. Hydro-Qubec intendsto spend a further $260 million on work to eliminateor mitigate the environmental impacts of theproject.

Hydro-Qubec has c onsiderable expertise inthis area, and this recent process is part of along tradition of environmentally respectfulhydroelectric development.

The main hydroelectric power station projects currently in production or undergoing environmental assessme

TABLE 1Installed capacity, annual production and cost of hydroelectric projects under construction or undergoing envimental assessment

Eastmain-1 480 2.7 2 200 20

Mercier 51 0.3 140 20

Pribonka 385 2.2 1 400 20

Chute Allard/Rapide-des-Coeurs 138 0.9 680 20

Total 1 054 6.1 4 420

Undergoing environmental assessment

Eastmain-1-A/Rupert River diversion/La Sarcelle 888 8,5 3 946 2009-2012

* Assuming all the authorizations are obtained on schedule:- Rupert River diversion brought into service in 2009;- Eastmain-1-A and La Sarcelle stations brought into service gradually, beginning in late 2011.

Installed Average annual Project cost Plancapacity (MW) production (TWh) ($ million) dat

comingUnder construction ser


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MOVING FORWARD AND PREPARING FORTHE FUTURE

These hydroelectric projects will help ensure Qubecsenergy security, and will re-establish the extra productioncapacity that Hydro-Qubec Production has lostthrough the slowdown in hydroelectric development inrecent years. Hydro-Qubec Production has shown, tothe satisfaction of the Rgie de lnergie, that it needsto have sufficient excess capacity to increase thereliability of its supplies in low rainfall years.

However, we must move forward and foresee eventsbeyond 2015. Hydro-Qubec Distribution will need newsupplies to meet the grow th in demand after 2015 andto have excess capacity available to respond to callsfor bids issued by the distributor. Up to ten years areneeded to complete a major hydroelectric project. Thismeans that decisions made today will only begin tohave an impact in ten years time. For example, it isnow that the youth of today and the workforce oftomorrow must make its career choices. Preparingfor the future also means looking at ways to take full

advantage of our hydroelectric potential.With its new energy strategy, the Government is takingaction immediately to prepare for the future, turningresolutely towards further development of our hydro-electric potential for the greater benefit of Qubec asa whole.

PRIORITY ACTIONS

The Governments actions will focus on the followingpriority areas:

1) Launch new major hydroelectric projects totalling4 500 MW ;

2) Increase electricity exports, once needs have beenmet in Qubec;

3) Use our rate advantage to benefit Qubec;

4) Limit the role played by nuclear energy in Qubecby developing hydroelectric resources.

1) LAUNCH M AJOR HYDROELECTRIC PROJECTSTOTALLIN G 4 500 M W

The Government intends to launch major hydroelectr icprojects totalling 4,500 MW between now and 2010.Qubec has enough remaining hydroelectric potentialto meet this objective, and the projects will help tofully secure the electricity supply of the Qubec popu-lation. They will also create significant extra capacityto attract new wealth-creating industries and increasethe volume of electric ity exports. The Government hasdefined a new approach that will reduce the total timeneeded to complete all the projects by at least fiveyears compared to the conventional approach, givingnew impetus to the development of Qubecs hydro-electric resources. The new development will serve,primarily, to meet energy needs in Qubec and stimu-late the establishment and growth of wealth-creatingindustries. It w ill also increase Qubecs ability toexport clean, renewable energy to neighbouring markets.

Overall, these major projects will represent an investmentof around $25 billion and will create the equivalent of70,000 person/years of employment. Qubec will expe-

rience a level of hydroelectric development that hasnot been seen since the first phase of the James Bayproject in the early 1970s. The act ivities w ill generatebenefits for all regions of Qubec, but primarily theresource regions.

14


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THE RESUMPTION OF MAJOR HYDRO-ELECTRIC PROJECTS: LONG TERM ELECTRICITY DEMAND, ECONOMIC DEVEL-OPM ENT AND ELECTRICITY EXPORTS

A central element in the work to secureenergy supplies in Qubec is the identifi-cation of foreseeable trends in electricitydemand, which responds to changes in thepopulation and ec onomy.

The development of new hydroelectric projectwill help ensure Qubecs energy securityand re-establish the excess productioncapacity needed by Hydro-Qubec Productionto ensure a reliable supply in low rainfallyears. This excess capacity must be rebuiltfollowing the slowdown in hydroelectricdevelopment in recent years.

Furthermore, to meet the growth in electricitydemand within Qubec after 2015, Hydro-Qubec Distribution w ill have to issue newcalls for bids. To respond to these bids andmeet energy needs in Qubec, Hydro-QubecProduction will need extra capacity.

However, given the fact that it takes tenyears to complete a hydroelectric project,supply security for the period 2015-2025 mustbe prepared now.

Of course, it is a challenge to foresee thedemand for electricity in Qubec ten totwenty years into the future. Nevertheless, it

is expected that the demand for electricity inQubec will grow over this period at around250 MW per year on average.

Over ten years, demand is therefore expecteto increase by about 2,500 MW.

Extra demand could be created by the arrivaor expansion of wealth-creating industries

hydroelectric

projects

Major hydroelectric power station projects by year of

authorization of construction work (1961-2010)

The year in which construction began is deemed

to be the year of authorization prior to 1971.


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AN INNOVATIVE APPROACH: A PORTFOLIO OF PROJECTSThe completion of a major hydroelectric project takesaround ten years, from the time the initial decision ismade to the production of the first kilowatt-hour ofelectricity. To meet needs solely in Qubec, the devel-opment of major projects to supply an extra 4,500 MWcould be spread over twenty years. However, theGovernment wishes to move ahead more quickly, sothat our hydroelectric resources can be used as alever to create wealth in Qubec.

The Government is ready to begin the first phase ofthis ten-year program, a four to five year preparatoryperiod for all the projects in the portfolio. Thisphase includes negotiations with the nations,communities and partners involved, preliminaryengineering studies, and the environmental assess-ments needed to obtain various permits.

By 2010, once the negotiations, studies and assess-ments have been completed, Hydro-Qubec w ill bein a position to begin detailed engineering work andactual c onstruction.

By 2010, Hydro-Qubec will have in its possession theagreements and environmental author izations neededto complete projects totalling 4,500 MW. This will giveQubec a portfolio of hydroelectric projects to meetincreased demand in Qubec as well as in neighbour-ing jurisdictions. If the market conditions are favou-rable, as early as 2010, Qubec could begin theconstruction of major hydroelectric projects totalling4,500 MW, or construct only some projects ifconditions are less favourable for example, if theexport market has changed. This approach allows for

the development of more resources at a faster pace,while managing the risks associated with projects ofthis scope.

DIFFERENCES COMPARED TO THE TRADITIONAL APPROACHThis process differs from the traditional approach,which involved Hydro-Qubec launching a projectevery few years based on the foreseeable demandin Qubec. It takes into account the increasinglystringent requirements governing the negotiations andenvironmental assessments for a major project, butdoes not compromise the quality of the assessments

or the solidity of the agreements made with our partners. Presently, a decision to launch a hydroelectric

project is based on an evaluation of the marketconditions that will prevail when the project iscompleted, around ten years later. This means thatdemand and price must be estimated over a ten-yeartimeframe, which introduces a level of risk anduncertainty into the calculations.

16

that come to Qubec to take advantage ofthe availability and competitive pricing of itselectricity. Once again, forecasting is difficult.As an example, the completion of only twentyprojects of 50 MW each on average over tenyears would generate an extra demand of1,000 MW. More projects or larger-scaleprojects would create a greater demand forenergy.

With regard to outside markets, our exportswill depend primarily on how much electricityis produced in excess of demand in Qubec,including industrial demand. Surplus elec-tricity could be sold at market prices or underagreement with neighbouring jurisdictions.The agreements would be signed before theconstruction of the new hydroelectric facilities.

The portfolio approach described in thestrategy will help harmonize the pace ofconstruction of major hydroelectric projectswith demand in Qubec and opportunities on

export markets. Overall, the portfolio of 4,500 MW is

expected to exceed the forecast growth indemand in Qubec. There will be enoughenergy to attract new wealth-creating industriesand to increase our presence on electric ityexport markets.


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Once the decision has been made, the implementa-tion of the project can encounter various obstacles,especially during the preparatory period. Pre-projectstudies, environmental assessments and negotiationswith the communities and partners involved mayrequire extra time that was not part of the schedule.

The portfolio approach will eliminate some of thedelays inherent in the current process for major projects,while creating the flexibility that has gradually disap-peared over time.

The new approach makes it possible to adapt theimplementation schedule for each project to someof the unforeseen events that may affec t it. Forexample, the schedule may be modified in responseto the ongoing situation with communities andpartners, the results of environmental assessments,and market conditions.

The portfolio approach will also give Hydro-Qualternative solutions if the implementation of aproject is compromised. The projects identified apart of the 4,500 MW portfolio will, in some wabe in competition with each other, and Hydro-Quwill be able to replace a project that is difficult timplement with one or more alternative projects

By starting the first phase of projects totalling 4,500 immediately, the Government will place Qubec in advantageous position.

By 2010, Hydro-Qubec will be able to begin consttion on the projects for which the necessary agreements and environmental assessments have beenobtained, depending on the prevalent market condtions inside and outside Qubec. The delay betweethe final decision to launch construction and theproduction of the planned total of 4,500 MW will bereduced from ten to five years.

Developing hydroelectric potential: comparison of the traditional and portfolio approaches

Traditional approach

Project 1

Project 2

Project 3

Project 1

Project 2

Project 3

Portfolio approach

Advantage of the portfolio approach

Negotiations, studies and permits






Construction depending on marketconditions



Three years less

Six years less

N.B. The timeframes indicated in the graph are given for information purposes only and may vary from one project to another. The number of projects inportfolio is also variable, and will not necessarily be limited to three.


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PROJECTS FOR LOCAL AND NATIVECOMMUNITIES

The Government does not intend to promote the devel-opment of small, privately-owned hydro projects.These projects of 50 MW or less are not essential toour energy security and no block of electricity fromthis type of hydro projects has been included in theStrategy.

Some local and Aboriginal communities see smallhydro projects as an opportunity for social and eco-nomic development in their region. The Governmentfeels that the best approach is to leave local andAboriginal communities free to develop projects pro-

vided they have the support of the local population,generate benefits for the region, and are under thecontrol of the community concerned.

In other words, the development of small hydro projects(50 MW or less) w ill be pursued by, and for, localcommunities.

Each project will be subject to an environmentalassessment by the BAPE, and an agreement concerningthe purchase price of the electricity produced mustbe signed with Hydro-Qubec before the project ispresented to the Government.

18

M AJOR HYDROELECTRIC PROJECTS:MEETING INCREASINGLY STRINGENTRULES

The context for the completion of major hydro-electric projects has become more complexover time.

Qubec has taken steps to provide betterprotection for the environment and naturalheritage, to comply with new values and theexpectations of the population. What wasconsidered satisfactory in the 1970s is nolonger acceptable, and extra environmentalrequirements have been defined.

Qubec has chosen to strengthen its partner-ship with Native communities. Major hydro-electric projects often have a huge impact ontheir traditional territor ies. Once again, theapproach applied during the 1970s is nolonger valid.

The first phase in a major hydroelectric projecttherefore has to meet an increasingly stringentset of rules.

The most recent example of this situation is theEastmain-1-A/Rupert River diversion/La Sarcelleproject.

In February 2002, the negotiations begun theprevious year betw een Qubec and the CreeNation led to the signing of the Peace of theBrave. Consent from the Cree Nation for theconstruction of the project was a central

element in the agreement. Four years later, the environmental assess-

ment process entered its final phase whenHydro-Qubec invested $400 million in aseries of technical and environmental studies.

If the current schedule is upheld, the environ-mental authorizations should be obtained by

the end of 2006 and work should commencein early 2007, in other words six years afterthe start of negotiations with the Cree Nation.

STRENGTHENING THE ELECTRICITYINDUSTRY

The major projects completed since the early1970s have led to the emergence, in Qubec, ofa dynamic sector of activity that is also activeat the international level.


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2) IN CREASE ELECTRICITY EXPORTS ONCE NEEDSHAVE BEEN M ET IN QUBEC

Our hydroelectric resources must be developed primarilyin response to needs in Qubec and to create jobs inQubec. Once these needs have been met, we musttake advantage of current and foreseeable opportunitieson export markets another way to support our

economic development.Qubec c an apply the same logic to the developmentof its natural resources as Alberta. When it developsits oil and gas resources, Alberta does not limit pro-duction to demand within Alberta. Instead, it targetsthe development of its natural wealth, and its ability tosatisfy demand whether in Alberta, the rest of Canadaor the United States. The Government intends to apply

the same kind of logic to the development of Qubhydroelectric resources. Unlike Alberta, however,Qubec can provide clean, renewable energy, whistrengthens our position on outside markets.

By targeting the needs of neighbouring jurisdictionQubec is not just able to develop its own naturalwealth. Its exports of clean, renewable energy alsomake a direct contribution to the fight against climchange and the achievement of Kyoto Protocolobjectives in northeastern North America, as well helping improve air quality in the region - especial

since several of Qubecs existing and potential parthave defined objectives and guidelines that givepriority to renewable energy.

REVERSING THE TREND OF RECENT YEARSIn the export field, the Government intends to revethe trend of recent years one that has led to the of major potential earnings. The slowdown in hydroelectric development has resulted in a significantdecrease in net electricity sales outside Qubec.

Between 1995 and 2004, Hydro-Qubec net electrexports total exports minus imports droppedfrom 22 TWh to 1.5 TWh. In 2005, more rainfallallowed net exports to increase to 6.7 TWh. Netexports peaked in 1987, at 28 TWh.

Over the same period, the net revenue generateexport sales increased gradually to over $1 billio2000. It then began to drop, but not as significanas the actual quantity of electricity exported. In2004, net export revenue was $384 million, rising$830 million in 2005. Although export sales consttuted less than 4% of Hydro-Qubecs total salesthey generated over 30% of its profits. Net exporrevenue has decreased less than the actual quaof electricity exported, because Hydro-Qubec hbeen able to sell its electricity on export marketsa higher price than it has had to pay for its impo

The decline observed until 2004 is regrettable, especsince the demand in neighbouring jurisdictions hacontinued to climb and market prices are increasing

The sector includes firms specializing in theconstruction of large-scale works, and alsomanufacturers who provide the components,equipment and tools needed for powerhousesand transmission and distribution grids.

Engineering consultants and firms providingother professional services directly connectedto this type of investment are also part of thesector.

In 2003, around one thousand firms in Qubecwere estimated to be active in the hydroelectricfield, providing almost 25,000 generally well-paid

jobs.

Qubec businesses are present at all stages inthe completion of a hydroelectric project, fromresearch and development to design, engineering,construction and the fabrication and marketing ofequipment, and also for the production, transmis-sion, distribution and use of elec trical energy.According to the Association de lindustrie

lectrique du Qubec, 90% of the total investmentfor a hydroelectric project is spent in Qubec.


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In Ontario, New England and New York State, thecurrent and foreseeable demand for electricity isgrowing strongly. Electricity from Qubec can be usedto meet this demand while offering a substantialdecrease in greenhouse gas emissions. As part of theeffort to limit climate change, Qubec can offer itsneighbours a clean, renewable form of energy toreplace electricity generated in thermal power stationsthat pollute the atmosphere and emit greenhouse

gases.

20

Net exports (in TWh)

Net exports (in $ million)

Net electricity exports (in $ million and TWh) (1981-2005)$ million

ELECTRICITY DEMAND IN NEIGHBOUR-ING MARKETS

In recent months, several public documentshave confirmed the extent of the demand forelectricity in markets bordering on Qubec.

In a report submitted on December 9, 2005to the Ontario Energy Minister, the OntarioPower Authority assessed the need for newcapacity at 24,000 MW by 2025.

According to the Energy InformationAdministration (a division of the Departmentof Energy of the United States federal govern-ment), the northeastern United States w illrequire 12 400 MW of additional capacityby 2025.


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INCREASING EXPORTS TO REDUCE THE DEBT AND PREPAREFOR THE FUTURE

The Government has strengthened the intergenera-tional logic of electricity exports by making a keydecision about the way net revenue from exports willbe allocated.

As announced by the Minister of Finance in the2006-2007 Budget Speech, the Generations Fundwhose creation has just been announced by theGovernment will receive some of the profits fromexports.

This decision by the Government means that futuregenerations will benefit from our hydroelectricresources and the value they represent on outsidemarkets because of the current energy context.

To increase the volume of exports and the revenuegenerated, the Government will take three steps toprepare for the future.

First, the extra capacity that no longer existsbecause of the slowdown in hydroelectric develop-ment must be re-established. The resumption of

major projects will provide this extra capacity. Second, the Government would like to enter into

immediate discussions with possible partners todefine export possibilities, especially over the longterm, and the conditions of sale. It is important forneighbouring jurisdictions to integrate potentialpurchases from Hydro-Qubec immediately into theirown forecasts of available power.

Third, the Government will instruct Hydro-Qubec toexamine the interconnections between Qubec andneighbouring grids to determine the existing potentialfor exchanges of power and the investment requiredto increase that capacity.

- Specifically, the Government would like to seemore interconnections with Ontario in order toincrease the volume of transactions betweenQubec and Ontario.

3) USE OUR RATE ADVANTAGE TO BENEFIT QUBE

The Government intends to maintain the rate advantage enjoyed by Qubecs electric ity consumers whether households or businesses and to use it strengthen our economic structure and enrich oursociety.

To ensure that electricity consumers continue toenjoy their current rate advantage, the Governmintends to maintain the legislative provisions in fconcerning the heritage block of electricity.

Households, businesses and institutions in Qubwill continue to benefit fully from the advantagesQubecs water generating capacity.

The supply price of this 165 TWh block is set by lawat 2.79 cents per kilowatt-hour, and the Governmendoes not intend to change this. Qubec c onsumerswhether households or businesses will continue benefit from a highly advantageous fixed price formost of the electricity they consume that is producin Qubec. Since the provisions concerning the hitage bock of electricity will not change, consumewill c ontinue to have access to a source of low-prenergy. In 2006-2007, the heritage block will accoufor 95% of the electricity distributed by Hydro-Quand the cost of the remaining 5% will reflect markeprices.


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Note: Data published annually (in October) showing the prices in effecton April 1, 2005, for typical customers using 1,000 kWh per month.

Source: Hydro-Qubec

Hydro-Qubecs residential rate is one of the lowest in

North America, and Montreal ranks second amongmajor North American cities for low-priced electricity.The average Montreal c ustomer using 1,000 kWh permonth saves $574 each year compared to a customerin Toronto, and $1,683 compared to a customer in NewYork.

For industrial users, we rank at least in the top fourmajor cities for a subscribed load over 1,000 kW, andat least in the top three for a subscribed load of over5,000 kW.

Changes in electricity rates in Qubec w ill continueto reflect the cost of acquiring new, non-heritagesupplies. The additional supplies acquired by Hydro-Qubec are increasingly expensive. In accordancewith the regulations in effect and the decisionsmade by the Rgie de lnergie, their cost will befactored into the electricity bills of customers, toensure that Hydro-Qubec has the financialresources it needs to obtain supplies and developnew facilities.

The Rgie de lnergie applied this policy in its dec isiondated February 28, 2006 concerning electricity ratesafter April 1, 2006. The average rate increase of 5.3%is mainly caused by the cost of the new supplies thatHydro-Qubec requires in addition to the heritageblock.

To meet consumer demand, Hydro-Qubec expects topurchase 8.6 TWh of additional electricity at a totalcost of $707.1 million and an average supply cost of

over 8.0 cents per kilowatt-hour almost three timesthe supply cost of heritage block electr icity. The Rgiede lnergie considers that this additional cost representsaround 75% of the 5.3% rate increase. The remainderrepresents other cost increases incurred by Hydro-Qubec in distributing electricity to customers inQubec.

* Estimated data for 2006-2007

22

Electricity rates for residential customers in certain

North American cities (cents per kWh) (2005)

GRAPH 5Changes in the purchase cost of non-heritage

electricity (in $ million) (2004-2006)

*


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RATE POLICY FOR M AJOR INDUSTRIAL CONSUMERS OF ELECTRThe new energy strategy gives the Government anopportunity to define more clearly the policy used allocate large blocks of electricity to major industrconsumers.

6

24.4%

75.6%

Components of the electricity rate increase in effectfrom April 1, 2006

Other distributioncosts and adjustments

Purchases ofnon-heritageblock electricity

RULES FOR SETTING ELECTRICITYRATES IN QUBEC

Until 1996, electr icity rates were set by the

Government after an application submitted byHydro-Qubec w as examined at a parliamentarycommittee hearing. Since 1997, however, theRgie de lnergie has been responsible forsetting electricity rates, using the same open,transparent process as for natural gas prices.

The decisions of the Rgie de lnergie aremade following a process that includes publichearings, during which individuals and groupsthat have given notice before the deadline canpresent their point of view. The Rgie takes

their comments and suggestions into accountand refers regularly to them in its decisions.

The decisions made by the Rgie are final andwithout appeal. The Government has no pow erto amend a decision made by the Rgie. Underthe Act respecting the Rgie de lnergie, theRgie may revise, review or revoke one of itsown decisions only if a substantive or proce-dural defect is discovered.

A change in electricity rates is only decidedafter a long process divided into three mainstages.

First, Hydro-Qubec submits an applicationto the Rgie asking for a change in rates,generally in late summer. In support of itsapplication, Hydro-Qubec submits varioustypes of information (an assessment ofdemand, a forecast of its own expenditureand the revenues needed to generate acertain rate of return for the shareholder in this case, the Qubec government). Theforecast of expenditure mainly includes anevaluation of the purc hase, transmission anddistribution costs for electricity (operatingexpenses and amortization of capital expendture).

Next, during the fall, the Rgie de lnergieorganizes public hearings to allow all inter-ested parties to comment on the applicationfiled by Hydro-Qubec and the information

presented in support. The hearings are heldas a quasi-judicial process (lawyers arepresent, and testimony is submitted).

The Rgie de lnergie issues its decisionin the months that follow. To establish theauthorized rate, the Rgie rules on theevidence and arguments presented to it. Thefinal rate reflects the amount of revenuerequired to cover the authorized expenditureand provide an acceptable rate of return.


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In the past, the allocation of large blocks of electricityhas enabled Qubec to attract major investment projectsand to earn itself an enviable position in sectors suchas metal smelting and refining, the petrochemicalindustry and pulp and paper production. Historically,Qubec has relied on the presence of major industryto create jobs and wealth, especially in outlyingregions, and it is important for our advantages tocontribute even more to a dynamic economy. Theelectricity allocated to major industrial consumerscontinues to play a leading role in the development

of Qubecs regions it underlies almost 2% of all jobsin Qubec and almost 22% of all exports. Economicgrowth in the resource regions is largely linked to thepresence of these industries and their expansion and therefore to the electricity rates made available tothem. The Government will continue to use hydroelec-tricity to attract and support wealth-creating indus-tries. However, the policy applied must be clear, andit must maximize economic benefits for the regionsconcerned and for Qubec as a whole.

Given the cost of non-heritage supplies and their

impact on electricity rates, it is also important tocontrol and limit the effect on consumers of theallocation of large blocks of power.

Given the context, the following rules will apply:

The Government will reduce the limit below whichHydro-Qubec is required to serve customers at theL rate from 175 MW to 50 MW, for new or addi-tional requests for power;

Above the 50 MW limit, access to the L rate willno longer be guaranteed. The Government under-

takes to respond to requests for electricity justifiedby new industrial development projects or for therenewal of electr icity contrac ts, but only if theprojects concerned are likely to create jobs andwealth. The rates offered will be subject to guaranteesconcerning the economic benefits generated inparticular for outlying regions. The rate set may beequivalent to the L rate or higher, depending onthe scope of the economic benefits generated bythe project.

With this new approach, the Government will ensurethat low electricity rates effectively result in the eco-nomic benefits that justify them.

By maintaining the heritage block provisions, theGovernment is sending the message that electr icityprices will remain stable for major electricity consumers.Because a large percentage of the electricity distributedin Qubec continues to be drawn from the fixed-priceheritage block, companies, like other consumers inQubec, will enjoy stable electricity rates.

24

HYDRO-QUBECS L RATE

The L rate applies in general to customerswith a load of 5 MW or over.

It takes into account the lower distribution costsfor large quantities of electricity. It is thereforenot a preferential rate, and helps increase thecompetitiveness of businesses in Qubec.

The L rate has two main components:$11.85/kW per month for the subscribed load,

and 2.74 /kWh for the energy used, with variouscredits and adjustments. The result is a ratethat varies between 4 and 5 /kWh, dependingon the consumption pattern of the businessconcerned.

Hydro-Qubec currently has 279 L rate cus-tomers. Of this number, 53 have a load of over50 MW each, and use 79% of all the electricityconsumed in this rate category. Most are com-panies working in the primary metal processing,petrochemicals or pulp and paper sectors.

Since 1999, only one new enterprise w ith a loadover 50 MW has been given access exclusivelyto the L rate an investment project byInterquisa Canada in November 2003 in thepetrochemical sector. Most of the customerswith an additional load of over 50 MW arealuminium refiners. In these cases, the rate issubject to special conditions, in addition tothose governing the L rate.


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W ATER POWER CHARGESThe users of private or public water power arerequired to pay charges, or royalties, on the electricitythey produce. The charges allow all Quebecers tobenefit from the joint wealth that our water resourcesrepresent.

The Government confirms that the current systemof charges for the private sector will be maintained,and existing contracts will be honoured. The alloca-tion of water power in the domain of the State toindustrial self-generators is a powerful lever for

economic development in the regions. Self-generatorscan rely on stable, foreseeable production costs,and the message sent out by the Government con-cerning water pow er charges helps reinforce thisstability.

Self-generators must, however, respect theircommitments to society. If they reduce or terminatethe industrial activities based on the use of theelectricity they generate, the Government willre-assess the conditions on which they use publicwater power. In particular, the Government will not

tolerate self-generators selling or exporting, outsideQubec, any quantity of elect ricit y made availableby reducing their industrial activities in Qubec.

The Government will re-assess the conditions onwhich self-generators use public water power ifthey cease to supply their customers at the regulatoryrate in order to sell the electricity concerned on theopen market.

During the public hearings that preceded the draftingof the energy strategy, many partic ipants stressedthe need to ensure that the collective wealth repre-sented by our water resources benefits society as awhole.

In response to this recommendation, the Governmerecently announced its intention to implement thremeasures:

first, as indic ated in the 2006-2007 Budget Speethe Government w ill require Hydro-Qubec to pathe same royalties as private producers, namelystatutory and contractual royalties prescribed bythe Watercourses Act. The royalties will come ieffect gradually over a two-year period, beginnion January 1, 2007, and will be index-linked, likethose for private producers.

Hydro-Qubec will be asked to absorb the additioncost through efficiency gains and increased exportrevenues;

second, the new revenue for the Qubec state estimated at around $500 million per year will entirely paid into the Generations Fund, whosecreation was announced by the Minister of Finain the 2006-2007 Budget Speech. The GenerationFund is a tool created by the Government to redthe burden of the public debt;

third, the Government will pay into the GeneratioFund all the royalties currently paid by privatehydroelectric producers. This amount of $80 milper year will be allocated to the Fund, beginningJanuary 1, 2007.

4) LIM IT THE ROLE PLAYED BY NUCLEAR ENERGYQUBEC BY DEVELOPING HYDROELECTRICRESOURCES

By making a clear choice in favour of hydroelectric

Qubec has not had to invest massively in nucleargeneration, unlike Ontario and certain European cotries. Gentilly-2, w ith an installed capacity of 675 Mis the only operating nuclear power station in Quwhereas Ontario, to meet its electricity needs, cur-rently relies on three nuclear power stations with atotal capacity of 11,400 MW.

4. Gentilly-2 produces 5.2 TWh, w ith a usage factor of 90 % (2004 data).


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Nuclear generation appears to have returned to favourin some countries and provinces, not least becauseof the challenges they face in terms of thei

energy strategy 2006 2015 hilight

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