If Manitoba Hydro had as much water flowing through its turbines every year as it does now, it would never have to worry about financial losses. Trouble is, in low-water years, including last year’s devastating drought, Hydro faces significant risk of deficits, largely because of its overbuilt generating capacity.

Low water levels have always been the enemy of profit at Hydro. Like any hydroelectric producer, it relies on adequate water flows to pay the bills. The Crown corporation has posted losses many times in the past during periods of drought.

However, those risks have been amplified since the construction of the Keeyask generating station, owing to its high capital cost (including a $2.2-billion cost overrun) and its overbuilt capacity. Keeyask’s power capacity exceeds Manitoba’s demand. That will change over time as the province grows and the power requirements of its commercial and industrial sectors increases. For now, if Hydro fails to export enough electricity to cover Keeyask’s amortization costs, it will lose money.

That won’t be a problem this year, owing to historically high water levels. Hydro is expected to make money hand over fist in 2022-23 through both its “firm” and “surplus” export markets. Hydro has long-term contracts with customers in Ontario, Saskatchewan and the U.S. Whatever it has left over it sells as surplus power on the spot market. The extent to which it can do so determines whether or not Hydro ends up in the red.

Spot sales are not guaranteed, nor are the prices Hydro can fetch for them (they’re usually lower than what Hydro gets from long-term contracts). More importantly, the amount of surplus power available for spot sales is determined entirely by water flow.

During normal water-level years, when reservoirs are full, Hydro makes good money on the spot market. Together with long-term contracts and domestic sales, the Crown corporation usually has enough revenue to turn a decent profit. It boils down to the number of high-water years versus drought years.

Hydro’s balance sheet can weather some droughts, as long as the frequency of dry periods doesn’t exceed wet ones. That could be a challenge if climate change increases the risk of droughts.

There’s little doubt the former NDP government miscalculated the export market when it built Keeyask, which has a capacity of 695-MW. It’s oversized for the current market. Even with the recent 30-year contract to provide “up to” 215 megawatts a year to Saskatchewan, there’s still plenty of surplus capacity that must be sold on the spot market to balance the books.

Those risks will fade over time with growing domestic demand and the likelihood of negotiating more long-term export contracts.

Until then, the risk of higher domestic electricity rates is real. Successive years of drought would have a devastating impact on Hydro, which has to service its $23.8-billion debt (an amount that has doubled since 2015) whether it sells power on the spot market or not. Hydro’s debt to capitalization ratio jumped to 86 per cent from 74 per cent prior to the construction of Keeyask and the Bipole III transmission line. That’s manageable as long as exports, including spot sales, remain robust. If they don’t, rates will rise and credit rating agencies will come knocking.

There are other steps Hydro can take to mitigate its financial risks, including cancelling plans to employ 400 more staff over the next two years, a planned hiring spree Manitoba’s Public Utilities Board has called “unsustainable.” In the end, though, Mother Nature will have a greater impact on Hydro’s bottom line than anything its accountants could do.

Meanwhile, the politics of Keeyask continue to be warped on both sides of the partisan battlefield. The NDP conveniently ignores the billions in cost overruns of both Keeyask and Bipole III and refuses to take any responsibility for miscalculating the export market. The Tories, on the other hand, can’t get past the fact Keeyask will eventually be the right fit for Manitoba. They continue, even while in government, to refer to it as the “biggest economic scandal of our time,” which is counterproductive. It undermines Hydro’s financial stability.

In the end, Keeyask will be an important part of Manitoba’s renewable energy portfolio, even if the road to get there was rockier than it needed to be.