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Energy and Resources A guiding light: For Hydro-Québec CEO, chasing new revenue, assets key to averting solar ‘death spiral’

Hydro-Québec chief executive Eric Martel chats with guests after speaking at the Canadian Club of Toronto on Feb. 15. Mr. Martel aims to double revenue at Hydro-Québec to $27-billion by 2030.


For a guy talking about the danger of a "death spiral," Eric Martel sounds remarkably calm.

The Hydro-Québec chief executive, who has been at the helm of Canada's biggest electricity utility for two years, is sitting in a boardroom at hydro headquarters discussing what he sees as a looming risk for the power business. The threat, regularly discussed in global energy circles and on the radar for hydro officials internally for years, is important enough that he's bringing it up publicly now.

It's called the utility "death spiral" scenario. In this nightmare, Mr. Martel explains, homeowners start to produce more of their own electricity with solar panels and consume less from the grid. But all the utility's fixed costs – transmission lines, for instance – stay the same, forcing it to raise rates. That in turn makes producing one's own power even more attractive compared to buying it and the spiral continues.

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"We do foresee at Hydro-Québec that solar panel costs are going to continue to go down and that eventually the gap [with utility-supplied power] will be less and that people may adopt it," Mr. Martel said, adding it's already happened in some places in Europe and the United States. "Rates are exploding in some cities. We don't want this to happen here."

With Hydro-Québec boasting some of the lowest power prices in the world, it seems inconceivable that the utility is anywhere close to a death spiral. Still, Mr. Martel's team has in hand a study showing that by 2025, the cost of producing power using solar panels in Quebec will be similar to Hydro-Québec's rates.

Hydro's disadvantage compared to utilities that burn fossil fuels is that all its investments are fixed costs in hydroelectric development, said Roger Lanoue, a former vice-president of strategic planning at the company. In turn, that means the utility must "find new important customers" and stop building new generation projects, he said.

Mr. Martel says his mandate is simple: Make sure Hydro-Québec's sales volume stays above 170 terawatt hours a year to avoid pressure on rates and avoid sliding into the spiral. As he puts it: "Chase business."

That might not be as easy as it sounds, especially for a crown corporation that got used to a seemingly endless increase in demand over several decades until it flattened in 2007. But Mr. Martel, a former senior aerospace executive with Bombardier, brought with him some urgency from his private-sector days to break any lingering inertia.

The 49-year-old wants to double revenue at Hydro-Québec to $27-billion by 2030 and lift profits by 65 per cent to $5.2-billion. To accomplish that, he's aiming to increase multiyear power sales to the United States, lure big power users to Quebec and invest in power assets in the Americas and Europe.

The utility is now waiting to learn the outcome of its monster electricity sale to Massachusetts, the biggest export contract in its history, after regulators in New Hampshire rejected an application to build a transmission line through the state. The rejection came just days after Massachusetts utilities selected Hydro-Québec and U.S. partner Eversource to supply 9.45 terawatt hours of hydropower, a proposal known as Northern Pass.

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Mr. Martel strikes a confident tone when asked about Northern Pass's chances for survival. "The project is definitely not dead," he said, adding Massachusetts has now asked the three companies that would distribute the power whether they want to pursue negotiations over Northern Pass or turn to another bid. The companies are still analyzing the situation.

Hydro-Québec has two other projects in the running for that Massachusetts contract and Mr. Martel is hoping one of them could be retained if Northern Pass were to fail. Beyond Massachusetts, the utility has also made a formal proposal to supply power to New York and reached out to Ontario, he said.

Hydro-Québec's push back into the market for international energy assets also remains a work in progress.

At a news conference in 2016, Mr. Martel declared that the utility would resume a hunt for stakes in power generation or transmission companies outside Quebec or other attractive investments. It was a strategy it used in the 1980s and '90s before the provincial government pulled the plug. Nearly two years later however, the utility hasn't struck a single deal. Mr. Martel acknowledges the delay, but insists the deals are coming. He says it took time to assemble a proper mergers and acquisitions team and that it's now evaluating every potential target. Hydro was close to a transaction a year ago but decided against it.

The utility joins a growing chase for such assets globally by pension funds and other buyers, meaning valuations are high. That's led the utility to think about how it can unleash its own expertise to generate returns – for example, by buying a problematic hydro plant that no one will touch. If it was looking just at existing assets before, it's now open to greenfield projects such as building a transmission line.

"We have to be careful that the first transaction is something we'll be successful with," Mr. Martel said. "There won't be a second one if it's not."

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