RHODE ISLAND GOV. LINCOLN CHAFEE steps up to the podium at a conference of power grid geeks in Boston and says what everyone is thinking. The region is becoming overly dependent on natural gas to run its electricity plants and needs to diversify its power portfolio. Coal and oil are out of the question because of climate change concerns. Nuclear power is not an option because of regulatory, environmental, and safety hurdles. Promoting renewable energy is a high priority for every state, but Chafee says he is growing frustrated with the continuing high cost of wind and solar. He says the New England states need to address climate change but in the most economical way possible. And then he delivers his punch line.

“Perhaps now is the time to look to our Canad­ian friends,” he says, referring to the prospect of importing large amounts of hydroelectricity from eastern Canada.

The provinces of Quebec and Newfoundland and Labrador have vast hydro resources and are eager to sell their surplus electricity to New England. The electricity would be reliable, renewable, and relatively cheap and green. Plugging into Canada would also offer a major hedge against the region’s over-reliance on natural gas. Northern Pass, one proposed Quebec-New England power link, would deliver 1,200 megawatts of electricity into southern New Hampshire, about the same power output as Sea­brook Station, the nuclear plant that provides more than 8 percent of the region’s electricity, and seven times the expected output of Cape Wind.

The big question facing New England policymakers is not whether to import Canadian hydro but how it gets tallied once it’s here. Every New England state has responded to climate change by setting targets for greenhouse gas reductions and renewable energy development. Massa­chu­setts officials say they want to use Canadian hydro to help the state reach its greenhouse gas goals but not its renewable energy targets. Connecticut Gov. Dannel Malloy, by contrast, thinks Canadian hydro can be used to do both.

Hydro-Quebec’s EastMain reservoir in northern Quebec. Photo courtesy of Hydro-Quebec.

The policy dispute may sound trivial, but a lot is riding on the outcome. At stake are millions of dollars in ratepayer subsidies used to support a select list of renewable technologies, a list that currently does not include large-scale hydro. Massachusetts wants to make sure those subsidies continue to flow to renewables such as wind and solar that need financial help to get off the ground, and not to big hydro projects owned by foreign governments. Officials in Connecticut are worried that renewable energy subsidies are spiraling too high, and think Canadian hydro can be used to reach both renewable and greenhouse gas emission targets at far less cost. As Gov. Malloy of Con­necticut likes to say, Canadian hydro is part of a “cheaper, cleaner, more reliable energy future.”

Canadian officials aren’t weighing into this policy debate with a specific proposal, but they are quite emphatic that the combination of hydroelectricity’s lower price, reliability, and environmental benefits makes it superior to solar and wind power and deserving of similar regulatory treatment. They also pointedly note that New England isn’t their only potential buyer, that they’re also talking to New York and Ontario. “Our position for years now has been that jurisdictions should not discriminate against hydro,” says Jean Charest, who stepped down as Quebec’s premier last Sep­tember after nine years in office. “You need renewable energy and we have a lot of it. It’s a very good match.”

Stephen Molodetz, the vice president of business dev­elop­ment for Hydro-Quebec US, suggests the New England states should stop playing enviro-politics. “Rather than picking technology favorites, let the real scientific data determine what meets the definition of renewable and let the market compete to provide that at the lowest possible cost to consumers,” he says.

WINNERS AND LOSERS

Over the last decade, New England has embraced renewable energy on an all-for-one and one-for-all basis. Every state has set its own individual renewable energy goals, but those goals are attained by subsidizing the development of renewable energy technologies on a regional basis. Subsidies are handed out based on where the renewable energy is consumed, not where it is produced. So even renewable energy that is produced in New York and eastern Canada and sold into the New England power grid qualifies for subsidies.

The approach has led to the rapid development of renewable energy in New England, but it has also created some clear winners and losers. Most of the renewable energy subsidies are coming from ratepayers in the heavily populated states of Connecticut, Rhode Island, and Massa­chu­setts, but those subsidies are flowing out of state to projects in New Hampshire, Maine, and New York.

The system runs on renewable energy credits, or RECs. A wind company in Maine receives one REC for every 1,000 kilowatt hours of power it produces. The wind company can earn one revenue stream for its electricity and another from its RECs. Each state requires the power sellers that operate within its border to purchase enough RECs to match the state’s renewable energy target. In Massa­chu­setts, the renewable energy target is 8 percent of sales this year and rises 1 percentage point a year. Connecti­cut’s goal this year is 10 percent, rising to 20 percent by 2020.

RECs are a subsidy for renewable energy developers and their cost gets rolled into the overall price of power paid by ratepayers. If the supply of RECs is greater than demand, the price of RECs falls. If demand is greater than supply, the price of RECs rises. If there are not enough RECs to go around, power sellers are required to make a hefty compliance payment to the state in which they are operating.

In a report last year and a follow-up study in March of this year, the Connecticut Department of Energy and Environmental Protection found that Connecticut rate­payers in 2011 were paying through their utility bills for a third of the region’s renewable energy subsidies. Three-quarters of that money was going to support biomass plants in Maine and New Hampshire, which the report describes as among the least “clean” renewable resources. Another 13 percent of the subsidies was going to landfill gas projects, many of them in New York. Only 11 percent was going to projects in Connecticut.

Massachusetts has not done a similar cost-impact study, but its latest report on renewable energy efforts confirmed that most of the RECs being purchased by power sellers in the Bay State are coming from Maine (wind), New York (landfill methane), Canada (wind), and New Hampshire (biomass). Only 8 percent originate in Massachusetts, and those were primarily from landfill methane plants.

EastMain power station. Photo courtesy of Hydro-Quebec.

The Connecticut study foresees a gap developing in coming years between REC demand and supply, leading to an uptick in REC prices. The study said the cost of RECs for Connecticut ratepayers totaled $152 million in 2012 and is forecasted to rise to as much as $380 million by 2022. The projection assumes the development of Cape Wind off the coast of Massachusetts and the development of other renewable energy projects currently in the pipeline.

Officials in other states aren’t raising alarms yet, but they’re nervous about the pace of renewable energy development with electricity prices down (due largely to the drop in natural gas prices) and federal energy policies in flux. All six New England states are planning a joint procurement for renewable energy later this year, but that hasn’t stopped the push for Canadian hydroelectricity.

Thomas King, the president of National Grid USA, a utility with operations spread across New England, says he thinks Canadian hydroelectricity is so close and so vast that it has to be included in the region’s energy mix. “It’s in our best interest to tap into the resource,” he says. “The question is how we do it.”

Gordon van Welie, the president of ISO New England, which operates the regional power grid, says the definition of renewable energy is starting to shift in New England. As it becomes more expensive for states to reach their renewable energy goals, van Welie says the allure of Can­adian hydro is growing. But he also says there is growing concern that lumping Canadian hydro in with wind, solar, and other long-accepted renewables could wreak havoc in the market. “The effect could be to reduce the value of all those RECs in the marketplace,” he says.

A GOOd FIT

Officials with Hydro-Quebec are fond of saying their company is a good fit with neighboring New England. New England is energy poor, its electricity prices are among the highest in the United States, and more than 50 percent of its power comes from natural gas, a fossil fuel. Hydro-Quebec, by contrast, operates in a province with more than 4,500 rivers, providing ideal conditions for producing electricity from running rivers or the release of water from reservoirs. Hydro-Quebec produces more power on its own than all of the New England states combined, and 98 percent of its electricity is relatively clean and cheap hydro power.

Quebec and New England also have complementary power needs. One of the perks of having a province-owned power utility is cheap electricity rates. By law, Hydro-Quebec is required to sell electricity to its residential customers at cost, which means they pay some of the lowest rates in the world. The power is so cheap that two out of every three Quebec residents heat their homes with electricity. Peak demand for power in Quebec comes during the winter when temperatures plunge and heating demand rises. By contrast, peak demand in New England is in the summer, when temperatures soar and air conditioners are running at full blast. Since Hydro-Quebec designs its generating system to meet peak winter demand, that automatically means it has surplus power available during the summer, when New England needs it most.

Hydro-Quebec earned $1.2 billion last year exporting electricity and is looking to ramp up sales. Company officials know they have an attractive product. Hydro is dependable; it doesn’t rely on the sun shining or the wind blowing.

The power is also relatively clean, judging from a unique and thorough study conducted by scientists over a seven-year period before and after the construction of Hydro-Quebec’s EastMain reservoir in northern Canada. The scientists discovered that emissions prior to the construction of the reservoir were neutral, with trees and plants absorbing as much carbon dioxide as the environment was giving off. After the reservoir was created, emissions sharply increased as the area was flooded and vegetation began to decompose. By year five, emissions had peaked and begun to decline. By year 10, emissions had returned to levels comparable with a natural lake, in part because the sub-arctic temperatures reduced vegetation decomposition.

Yves St. Prairie, a professor of biological sciences at the University of Quebec in Montreal and one of the scientists who worked on the study, says emissions at their peak were comparable to an efficient natural gas power plant, but fell well below that after the five-year mark.

“It’s a lot greener than using fossil fuel, even the best fossil fuel,” St. Prairie says of hydro. “Is it zero emissions? No, it’s not. There are emissions. But it is a gift of nature that is much more clean than digging oil sands. This is a pretty good way of generating electricity.”

Hydro-Quebec wants to sell its electricity to New England using a $1.2 billion power line called Northern Pass that would run from the Canadian border to southern New Hampshire. Northeast Utilities, which owns NStar in Massachusetts, would build and operate the power line under contract with Hydro-Quebec. Northern Pass is controversial in New Hampshire, where opposition to new power lines is strong. An initial proposed route has already been scrapped; another is in the works. The project is also financially risky for Hydro-Quebec. The company is betting that it can produce the electricity and transport it to southern New Hampshire, and then sell it at competitive market rates.

Initially, Hydro-Quebec said it didn’t need any subsidies to make  Northern Pass work. But as the price of natural gas dropped and electricity prices fell, the company began hedging its bets by pushing for recognition that its product is renewable and deserving of some sort of premium. In 2010, Hydro-Quebec signed a 26-year contract to start delivering 225 megawatts of power to Ver­mont utilities starting in 2012. The initial price was 5.8 cents a kilowatt hour, and was scheduled to track market prices going forward. At the time the contract was signed, the Vermont legislature passed a law designating large-scale hydro as renewable, a largely symbolic move since Vermont doesn’t participate in the region’s subsidy system for renewable energy.

Renewable Energy New England, a collection of wind energy companies and environmental groups, says the price Vermont utilities are paying for Hydro-Quebec power is 50 percent higher than existing market prices. The group says the Vermont contract undermines “the myth about large hydro­power’s costs in relation to other forms of generation.”

Yet Hydro-Quebec’s price in Vermont is still substantially less than what wind and solar companies are charging for their power. “You have to compare renewable to renewable,” says Robert Dostis, director of government affairs for Green Mountain Power in Vermont, one of the utilities that purchased the hydro power. “Compare that to any other renewable and Hydro-Quebec is without a doubt lower-cost renewable energy. Wind energy is probably the next cheapest at 10 cents a kilowatt hour.”

ROOM FOR COMPROMISE?

It’s not often that the governor of one state tells the governor of another state to come out against his own legislation, but that’s what New Hampshire Gov. Margaret Hassan did when Malloy, her Connecticut counterpart, proposed counting Canadian hydro as renewable.

Malloy was pushing legislation to create a special category of renewable energy for large-scale (read Canadian) hydro. This special category would help the state reach its renewable energy goals but would not qualify for renewable energy subsidies, although presumably the designation as renewable would give Canadian hydro companies leverage in negotiating power contracts. The legislation was a delicate balancing act, an attempt to treat Canadian hydro as a renewable without upsetting the existing subsidy system for renewable energy.

The proposal prompted a region-wide backlash from renewable energy developers, environmentalists, and other power producers. The financial services firm UBS, however, saw good news for Northeast Utilities, upgrading its recommendation on the company’s stock from neutral to buy.

“Canadian hydro is not a threat unless policymakers make it a threat,” says Gary Long, the head of the Northeast Utilities subsidiary in New Hampshire. Photo courtesy of Public Service New Hampshire.

Malloy’s initiative also kindled a debate about the purpose of the region’s renewable energy effort. Is the goal to move away from fossil fuels and reduce emissions, or is it to support specific types of renewable energy technologies? And what role should cost play in the effort?

In her letter to Malloy, Hassan said large-scale hydro was purposefully excluded from the region’s renewable energy standards. “These plants don’t need incentives to stay in operation,” she wrote in May. “To include large-scale hydroelectricity in your Renewable Portfolio Standard undermines our common goal of fostering new and small-scale renewable resources here in New England.”

Malloy, through his chief of staff, dismissed Hassan’s concerns and implied they were sour grapes about Con­necticut’s decision to reduce support for New Hampshire biomass projects. “Connecticut residents pay among the highest prices for energy in the country, and Governor Malloy believes our consumers deserve some much needed relief. This proposal does just that,” Mark Ojakian said in a statement. Malloy later signed an amended bill, one that included large-scale hydro as a renewable but only if overall renewable production fell short of the state’s targets.

Patrick administration officials stayed out of the Con­necticut-New Hampshire fight, but they generally side with Hassan. Steven Clarke, the state’s assistant secretary of energy, says Massachusetts wants to import Canadian hydroelectricity to diversify the region’s energy portfolio and reduce greenhouse gases, but doesn’t think it should qualify as renewable and be entitled to any subsidies.

What’s the point of the state’s renewable energy goal?  “It’s definitely geared toward reducing emissions,” he says, “but not from technologies that are mature like large hydro.”

Ian Bowles, the state’s former energy and environmental secretary, is more blunt. He says Massachusetts ratepayers shouldn’t be subsidizing below-market power rates in Quebec or other parts of Canada. He says the subsidies should be used for technologies closer to home that need them. Bowles is a former president of MassINC, the publisher of CommonWealth.

Environmentalists are taking the same position, arguing that Canadian hydro would be disruptive to the renewable marketplace. Christopher Courchesne of the Conser­vation Law Foundation says he would be a lot more sympathetic to Northern Pass and Hydro-Quebec if North­east Utilities used the hydro to displace the company’s two coal power plants in New Hampshire. A Northeast Utilities spokesman says the coal plants are needed to diversify the region’s energy mix.

Bill McKibben, an environmentalist and one of the nation’s leading climate change activists, argues that any preferential treatment for Canadian hydro could undermine efforts to ramp up other forms of renewable energy. “We’ve got to get to zero carbon emissions very fast,” he says. “Tapping into existing hydro capacity may be cheap, but it doesn’t really get us much nearer the place we need to go. Connecticut needs solar panels on rooftops, not a thousand-mile extension cord to Hudson Bay.”

But Dan O’Connell, another former cabinet secretary of Patrick’s who now heads the Massachusetts Competi­tive Partnership, a group of 16 influential CEOs, argues that policy-makers need to pursue their renewable energy goals in the most cost-effective way possible. “If the goal is backing out carbon emissions, large scale hydro is every bit as effective as other means. Why is it the poor sister?” O’Connell asks.

Despite the sharp differences of opinion across the region, there still appears to be room for compromise.

Hydro-Quebec officials are careful not to close any doors as they seek some form of preferential pricing for their power. “We’re delivering a premium product, yet we’re being paid the same as coal and oil,” says Molodetz of Hydro-Quebec US. “We don’t like to talk about subsidies, but we do think there is room in northeast energy markets for market signals or market mechanisms that would recognize and value the product that we deliver into those markets.”

Clarke, the Massachusetts energy official, says five of the six New England states are exploring this summer the best way to import Canadian hydro into the region. Clarke rules out any subsidies for Canadian hydro, but says the electricity could receive other, unspecified incentives. New Hampshire is boycotting the discussions. A spokes­man for Gov. Hassan says “it would be misguided to develop a preference for specific projects that have yet to announce routes or show their specific cost savings for New England consumers.”

Gary Long, the president of the North­east Utilities subsidiary in New Hampshire that wants to build the Northern Pass power line, strikes a very conciliatory pose in his office in Manchester. He says Hydro-Quebec officials only want what’s fair. “As business people, they want to get the full value for their products. That’s a perfectly valid business point of view,” he says.

But he thinks there is a way for policymakers to provide that full value without disrupting the rest of the renewable energy market. He says the choices are not between hydro and solar, or hydro and wind. “I don’t buy into the either or. I’m into all,” he says. “Canadian hydro is not a threat unless policymakers make it a threat. If New England wants clean, renewable energy and our neighbor has an abundance of it, it’s a natural. It’s good business. It’s almost too good to be true.”