Canada's growing reliance on gas-fired generation draws warning

Washington (Platts)--16Jun2006

Canada's growing reliance on gas for power could mean higher prices for
natural gas and electricity, the country's National Energy Board said in an
energy market assessment report.

The report, "Natural Gas for Power: Issues and Implications," projected
that gas demand in Canada is expected to jump more than 10% by 2010 with about
42% of that growth earmarked for gas-fired generation. As demand for natural
gas in North America is expected to outpace traditional supply sources, the
report said that "already volatile natural gas prices, which have fallen
recently, could climb over the long term."

"The growing use of natural gas for electricity raises a number of
questions related to natural gas supply and cost and uncertainties surrounding
the adequacy of energy infrastructure," NEB Chairman Kenneth Vollman said in a
statement. "I think these are issues that warrant some discussion and debate
by Canadians."

The NEB assessment, which was released Thursday, said nearly 10% of
Canadian electricity generation is now fueled by natural gas, more than double
the level in 1995.

The increased use of natural gas for power is not only a Canadian
phenomenon, the report said, adding that more than 200,000 MW, or 96%, of all
new electricity generation capacity installed in the US since 1998 is capable
of using natural gas.

The board's report said the North American boom in gas-fired generation
is largely due to relatively short construction times, low capital costs, low
natural gas prices through the 1990s and the preference for natural gas
because of its cleaner burning properties. Growth in gas-fired generation, it
added, is expected to be particularly strong in Alberta, where about 40% of
installed capacity is fired by natural gas, and Ontario, where the provincial
government has committed to phasing out 7,500 MW of coal-fired generation.

"This substantial and rapid growth of natural gas for electricity raises
questions about the adequacy of existing natural gas and electricity
infrastructure. In some regions, new services and infrastructure may be
needed, which means either absorbing the cost of construction or reserving
capacity on pipelines currently being used for other natural gas services,"
the board said.

Another barrier that could put the brakes on the growth of gas-fired
generation is the availability of adequate gas supplies at competitive prices,
the report said. With only marginal North American production growth expected
through 2006, any increased demand for gas-fired generation would mean that
less natural gas would be available for other consumers.

"The substantial amount of gas that is expected to be required for power
generation in Ontario alone will, at the very least, increase competition for
natural gas in the region and likely cause associated costs to climb," the
report added.

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