Power and Politics

Up Here Business August 2010

When the Pine Point mine went into production on the south shore of Great Slave Lake in 1964, it needed power, and lots of it. The work of separating lead and zinc from rock is energy intensive, as is powering a town site that grew to 1,200 people. So the Northern Canada Power Corporation developed the Taltson River Hydro Dam, which to this day generates 18 megawatts of energy, enough to power every home in the territory with plenty to spare. When Pine Point mined its last ore in 1987, the hydro plant soldiered on, but even with Hay River, Fort Smith and Fort Resolution drawing power from the dam, it can produce far more power than is now being used.

The answer to using that wasted power, paradoxically, lies in expanding the dam, which is exactly what Dan Grabke wants to do. Grabke is the managing director of Dezé Energy Corp., a partnership between the NWT Energy Corp., the Akaitcho Energy Corp. and the Métis Energy Co. Dezé proposes to add a 56 megawatt hydro plant to the existing plant, and to run transmission lines 700 kilometres around the east end of Great Slave Lake to the territory’s three diamond mines. The plan is to finance the construction of the new plant and the lines on the basis of power-purchase agreements from the mines.

The idea began to take hold a decade ago, when world crude prices began to rise, taking with them the price of diesel fuel and, in tandem, power generation costs for the diamond mines. “The Snap Lake diamond mine was under consideration,” says Grabke. “It was relatively close to Taltson, and Taltson had some surplus energy since the Pine Point mine closed down.” But further studies showed that the existing 5 to 10 megawatts of extra power wasn’t enough to justify construction of the power lines. With a little more investment, however, there could be power for all the diamond mines. “We looked at the hydrology of the river and the water resource was really very under-utilized,” says Grabke. “And we had 40 years of data to analyze. So there was a lot of potential at that site. It kind of expanded from there.”

As the idea grew, Dezé Energy was formed in November 2006. As an equal partnership between the Akaitcho, the Métis and the territorial crown corporation (through its subsidiary NWT Energy), Dezé recognizes the aboriginal groups as resource owners. “That’s the equity they bring to the project,” explains Mike Bradshaw, Dezé’s director of corporate communications. “Any project in Canada that involves Aboriginal resources covered by treaties or land claim settlements is structured to recognize ownership through partnership arrangements (like Dezé), outright compensation, or some other financial mechanism.”

The Taltson River Hydro Expansion Project, as it’s called, will build a new canal parallel to the existing spillway to run water through a new power plant. The transmission line will take the power northeast past Reliance (pending the outcome of final regulatory approvals), around the tip of Great Slave Lake’s east arm, to Snap Lake, Diavik and Ekati. Environmental benefits will be considerable, including a reduction of a million litres of fuel used every year, which means 300,000 fewer tons of greenhouse gases. And the mines expect a significant reprieve from their pricey power, which now averages 28 cents per kilowatt/hour using diesel generation. If Dezé can beat that price, the mines will sign on.

The capital cost of the expansion project is pegged at $700-million, about half for the transmission line and half for the new plant installation. The cost of the transmission line amounts to a relatively expensive million dollars every two kilometres, but as Lew Voytilla, chairman of NWT Energy, points out, the company is looking to the future. “It will be a transmission line with capacity over and above the needs of the diamond mines, even though our generation will be sized to the needs of the diamond mines,” he says. “We’ll have a transmission line into the heart of the Slave geologic province where if other mines materialized we would have the backbone of the distribution system in proximity to them.” In that case, he says, Dezé would be looking at additional generation.

“That river system has upwards of 200 megawatts of potential,” says Voytilla. “There are 100-plus kilometres of river downstream from the reservoir. So there are other sites along the Taltson River that could be developed to add new generation.”

And there are potential takers, including Tamerlane Ventures, which is trying to launch a new lead-zinc mine in the shadow of the original Pine Point, and Avalon Ventures, which is developing the Nechalacho rare earth project. “They aren’t there today, they are still in their formative stages,” says Voytilla, but Nechalacho “is one of those developments that is in reasonable proximity to where we will have the transmission line.”

Avalon’s vice-president David Swisher was a little more circumspect, but says discussions have occurred with both Dezé and the power company regarding power from Taltson. “Avalon is hopeful that Dezé Energy along with NTPC will be amenable to providing reasonable industrial rates along with all of Avalon’s power needs,” he says, but it’s somewhat early to commit: Production is not expected before 2015.

But Voytilla says these possibilities aren’t factored into the economics of the current expansion. “We have looked at how this project positions us to serve other clients and customers, particularly in the Slave province but also outside it,” says Voytilla. “But our only customers now who we are in active negotiations with are the diamond mines. If you want to finance a $700-million project you have to have a customer; it’s not like the government will build it and they will come. We need to have a customer that the banks will feel comfortable with, one that will give us the revenue stream to repay the debt.”

Because there is no other backstop, Dezé is looking for strong agreements from the mines, which might include a “take-or-pay” clause (whereby the mine must buy the power or pay a specified amount) and guarantees from parent companies. “This is the important part, those commitments have to be bankable, something we can take to the bank and get financing with,” says Grabke. “We have been in discussions with the financial institutions and have a pretty good idea of what they’re going to need.” All costs, and a profit margin, are to be recovered through the power purchase agreements with the diamond mines.

For the financial structure, Grabke says they are looking at various options. “Some depend on what the construction climate is like,” he says. “A few years ago you couldn’t get fixed-price on something this big because Fort McMurray was sucking up all the resources. Now the construction climate is quite a bit different. Some of these things are possible again. We review them as we progress and that feeds into how it gets financed.”

Hydro projects generally require less equity investment than other projects of similar size. “You have long term contracts and there are commercial investors that like those type of things, insurance companies for instance, who like a place to park their money for a long time,” says Grabke. “And hydro is stable, there’s very little operational maintenance. It’s just a cost recovery type of thing.”

Repayment terms are generally geared to the project’s cash flows. “You stack the debt the same way the power purchase agreements are stacked,” explains Grabke. “Some of the mines are longer term than others; you pay down more of your loan when you have the bigger customer base. Some of the other loans are spread out over longer periods, because you have longer term contracts with other customers.”

Any financial institution or backer will of course be waiting for official approval. The Dezé application currently sits with the Mackenzie Valley Environmental Impact Review Board. “We submitted a 4,000-page Developer’s Assessment Report, and the only opposition was in the routing around the east arm [of Great Slave Lake] through the Lutsel K’e territory,” says Grabke. “Everything else was pretty benign.”

But that opposition is significant. The Lutsel K’e Dene First Nation are unconditional in their opposition to the transmission line’s proposed routing through Desnedche (the Lockhart River between Great Slave Lake and Artillery Lake) and Kachne (the East Arm area of Great Slave Lake). “The proposed transmission line cannot be constructed in the Desnedche-Kachne area,” says Lutsel K’e Chief Antoine Michel in a letter to MVEIRB. “This area is off limits to development, it is the most important sacred and cultural site of the Lutsel K’e Dene people.” He states the area is full of burial sites, cabin sites, harvesting sites, legend locations as well as petro-forms (rocks or rock alignments that can be shaped like animals or tell a story). He further cites an academic study that found cultural continuity and self-determination were larger factors than economics in reducing social ills in First Nations communities. The LKDFN offered no alternatives. “There is (sic) no identifying areas … that would mitigate the overall impacts of the staging and construction of transmission line towers over, through or across the Desnedche-Kachne area.”

Grabke says Dezé has done its best to deal with the Lutsel K’e concerns. “We listened to their concerns and tried to accommodate and touch up the project to address them, but it didn’t seem like we could get them resolved,” he says. “We looked seriously at different routes with so many technical challenges and costs.” While emphasizing that costs aren’t always the biggest driver, Grabke says three other, more expensive, options were considered and rejected: A submarine route beneath the East Arm ($50-million more), a stepping across the Simpson Islands ($40-million more) and a transmission line around the west end of Great Slave Lake ($220-million extra) have all been considered.

“If you start going across the islands and Great Slave Lake you’re talking hundred-metre towers and esthetics,” says Grabke. The towers and lines would also pose a hazard to aircraft. “The route we have proposed uses standard towers; you can get to them easily to fix them. And for an underwater route, what can you do under five feet of ice?” The western route would entail a new 1,250-kilometre line, the length of which would come with losses of 20 per cent of the electrical energy. Substations would also be required.

In the meantime, as the environmental impact review board deliberates, Dezé hasn’t been sitting on its hands. Negotiations with the diamond mines for the power-purchase agreements have been increasing in frequency, and engineering studies have been advancing. “The engineering firm is figuring out everything down to how many buckets of bolts for this,” says Grabke. “We are down to that kind of estimating. Now we are getting to how you optimize the plant size and the wire size. As we get more information as to how much power will be moving, then we can decide on what size makes sense. All those things feed back into the cost.”

2010 is a pivotal year, when “we expect to formalize a Partners’ Development Agreement, receive a decision from environmental authorities, and sign preliminary power purchase agreements with the mines,” says Voytilla.

So what might happen when the diamond mines peter out like Pine Point did after years of production? “Not that long ago, everybody thought Ekati might be a one-shot affair until other mines came along,” says Grabke. “In future there might be other mines. And with the power there’s the impetus for mines to stick around longer, maybe get into the poorer grade resources because costs are lower. Energy is usually the number one cost of developments. There’s also the possibility of the Yellowknife system. That would require an extension; you just keep on going around the lake. You’re three-quarters of the way there already. Snap Lake is around the east end of the lake and heading back towards Yellowknife already. So there’s the opportunity for development of a grid.”

Voytilla, who is also chairman of NWT Hydro Corp., (the crown corporation with responsibility for power systems and strategy in the NWT) even anticipates the possibility of exporting electric power. “Certainly once we have the Taltson expansion done if for any reason the diamond mines’ lives end and we have all this power with no customer, and there’s no other mining development large enough, connecting with a southern grid if it is in reasonable proximity would be an option we’d be interested in pursuing,” he says. “But the issue is the length of the transmission line.” It would be tough to justify building a 400-kilometre transmission line when energy costs in the south are lower. “Saying that, there are larger potential sites in the NWT that could generate enough power where those distances could become economic. And our Hydro Strategy contemplates that.”

As Voytilla pointed out at the NWT Association of Communities’ annual general meeting in May this year, “the NWT’s total hydro potential is estimated at 11,500 megawatts. Currently we’re using about one-half of one per cent of that potential. So you can see there’s a tremendous upside.”

The Taltson expansion is a big step along that way. “Like anything that takes this long, you do one step forward, two steps back or two steps forward and one step back,” says Grabke. “But there’s never been a reason to quit.”

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