Industrial consumers are getting the message and saying the time has come to think about switching fuels in Canada, as natural gas prices climb north of the border in step with markets in the United States.

An Alberta pillar of electricity generation predicts power station builders will work on developing alternatives for their next projects because their gas-fired plants are being burned by high costs.

“As we look to the next wave of generation and oilsands development we’re probably going to be seeing an alternative fuel being used,” Canadian Utilities Ltd. President Nancy Southern said.

She made the prediction after telling CU’s shareholders, at their annual meeting in Edmonton, that a “difficult year” is at hand for its gas-fired power stations.

As industrial operations, CU’s unregulated plants operate on the same basis as counterparts elsewhere in Canada and the U.S. The sites have no shield against high gas prices like Alberta’s rebates to residential consumers.

Results of unprotected exposure to hot gas markets show dramatically on the Alberta version of the “spark spread” yardstick.

In first quarter 2004 the spread — the difference between the price fetched by a MWh of power and the cost of gas burned to produce it — fell by 88%, down to C$3.21 (US$2.31) from C$25.74 (US$18.53) during the first three months of last year.

Canadian gas averaged C$6.08 per gigajoule (US$4.60 per MMBtu) in Alberta during first quarter 2004, down from a winter spike of C$7.76 (US$5.87) a year earlier but still 57% higher than the 2002 annual average of C$3.88 (US$2.93).

The first quarter 2004 Alberta average power price, undermined by a surplus hitting the market from newly-commissioned generating stations, dropped to C$48.81 (US$35.19) per megawatt hour from C$83.94 (US$60.44) a year earlier.

The Alberta power producers expect their electricity prices to stay down until economic and population growth catch up to generating capacity. But gas is forecast to rise due to persistent tight supplies and strong demand partly fueled by high oil prices lifting the ceiling on gas.

Gas prices topped C$7 per gigajoule (US$5.30 per MMBtu) in Alberta trading this week. Forecasts of the 2004 annual average were increased into the C$6.40-$6.70 (US$4.80-$5.10) range by market analysts such as the oil and gas shares boutique of Peters & Co. and the energy consulting house of Gilbert Laustsen Jung Associates Ltd.

High gas prices have arrived to stay, suggested Jerome Engler, president of CU’s Atco Gas subsidiary. (CU is 73% controlled by the Calgary Southern family’s Atco Ltd., as a holding company for the conglomerate’s international interests in gas and power).

High gas prices have proven to be a sustained trend for five years, Engler told CU stockholders. The last time formerly glutted markets held gas down to its older historical range of C$1-$2 per thousand cubic feet (US$0.72-$1.44) was in 1998, when the annual average price was C$1.92 (US$1.38).

“The reality today is prices are not going to return to 1990s levels,” Southern said. She said she would like to believe conservative forecasts that the North American average gas price will settle down to US$4.00/Mcf in two to four years. But, she added, that can only happen if demand stabilizes, arctic pipeline projects are built, and new sources such as coalbed methane and LNG are aggressively developed.

The next generation of oilsands projects is at work on using formerly discarded bitumen byproducts to replace gas as fuel for their power and processing plants, she said. That includes CU, which built cogeneration stations for the last crop of oilsands mining and processing developments.

In Alberta coal already shows potential to be an environmentally acceptable alternative to gas, said Don Lowry, president of Edmonton’s city-owned EPCOR Utilities Inc. He pointed to a 455 MW expansion of EPCOR’s coal-fired Genesee power station currently nearing completion under a permit that specifies a variety of technical innovations that will assure emissions will be no greater than if the new generator burned gas.

CU’s chain of power stations in British Columbia, Alberta, Saskatchewan and Ontario has begun to branch out into hydroelectric and wind generation, while also supporting trials of a commercial-scale fuel cell at the Northern Alberta Institute of Technology in Edmonton. CU also has long experience with coal-fired plants and once conducted a lengthy experiment at using peat as power plant fuel, Southern added.

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