Propósito

in Québec’s Energy Sector

Energy is not only central to the modern-day economy, but also to our quality of life today and in the future. Whether for basic needs like heating or for leading-edge technologies, the importance of energy and our concern with using it efficiently will continue to grow. The efficiency of Québec’s electrical system as a whole is already substantial. Extra-high-voltage transmission, for example, helps keep energy losses to a minimum. The hydropower option, which is the most efficient energy source, has been instrumental in increasing Québec’s energy efficiency.

In order to continue improving Hydro-Québec’s energy performance, a large proportion of its technological innovation activities will focus on the generation, transmission and distribution of high-quality power at the lowest cost and as efficiently as possible. The payoff will be more high-performance processes and products for Québec industries, businesses and homes.

For more than 30 years, technological innovation has been an integral part of Hydro-Québec’s strategies. This ongoing effort has built powerful innovation capabilities, making Hydro-Quebec a driving force behind technological breakthroughs in Québec’s energy sector.

Integrated Technological Innovation Management

Technological innovation centred on the company’s core businesses, expertise and world-renowned areas of excellence

Projects selected according to their economic value to the company

Efforts focused on the successful implementation of innovative products in the company or for its customers and, where appropriate, focused on their successful commercialization

Projects open to partnerships Projects that meet short-, medium- and long-term needs A vision to ensure the

The strength of innovation and the momentum it creates in the energy sector enhance the company’s performance and long-term viability, while improving the energy efficiency of the whole electrical system. This leader- ship position, which is acknowledged worldwide, results from a combina- tion of skills unique in Québec in the energy sector. Researchers, engineers, technicians, and experts in the fields of project management, commercial- ization and technology business development work with external partners on a project portfolio representing a value in excess of $550 million for the company.

Hydro-Québec’s research institute opened its Varennes facilities in

1970, concentrating its efforts on innovation projects related to electricity transmission, distribution and generation. In 1987, the research institute opened new facilities (LTE) in Shawinigan, which are dedicated to the development of technologies designed to improve Québec customers’ energy performance.

Hydro-Québec’s research institute is one of the few integrated innovation centres operated by a utility in North America. As well, one Hydro-Québec department is responsible for value creation through innovation, and works to optimize the innovation management process in conjunction with the research institute and the company’s divisions.

In the energy sector, Hydro-Québec is second only to Shell Canada for the number of patents filed in Canada. Since Hydro-Québec’s research institute was first established, close to 1,500 patents have been filed as a result of its technological innovation efforts.

Hydro-Québec enjoys an international reputation, promoting Québec know-how in the field of energy technology. Just as an example, the Institute of Electrical and Electronics Engineers presented the 2003 Herman Halperin Electric Transmission and Distribution Award to Dr. Sarma P. Maruvada for his exceptional contribution to the establishment of design criteria for high-voltage wires during his three decades of work at Hydro-Québec’s research institute.

Every year, the company’s researchers and engineers produce some 60 scientific lectures and publications. They also conduct close to 300 technical studies in support of Hydro-Québec’s technological progress.

Hydro-Québec’s Research Institute – Highlights 430 researchers, technicians and engineers Two locations $134 million in assets More than 30 years of know-how Six areas of expertise: • Chemistry and materials • Power system analysis,

operation and control • Electrical equipment • Energy use • Mechanical, metallurgical and civil • Automation and measurement

With a budget of approximately $100 million allocated to technological innovation, Hydro-Québec is comparable to Japanese utilities, which spend close to 1% of their sales on research and development. As the Canadian utility that invests the most in this area, Hydro-Québec ranks among the country’s leaders in technological innovation. In Québec, the company accounts for more than 60% of investment in technological innovation in the energy sector.

Technological innovation focuses on core businesses and creating value. As such, it contributes directly to the company’s mission, which is to supply reliable electricity at the lowest possible cost, while respecting the environment.

1. Contribute to the Company’s Net Income

Technological innovation helps increase Hydro-Québec’s net income in several ways: costs avoided, additional electricity sales, productivity gains or deferred investments.

If the projects launched since 2001 achieve their objectives, technological innovation would generate close to $180 million in net income in 2008.

1.1. Continue to Focus Innovation

on Core Businesses

To help increase net income, innovation has been centred on core business requirements. Hydro-Québec will continue to develop its technological innovation projects around major themes that are defined and periodically reviewed with the divisions according to their needs. This dynamic and concerted approach ensures that technological innovation themes create value for each division and are aimed at achieving their respective business objectives.

Impact of Technological Innovation on Net Income ($M) 0 20 40 60 80 100 120 140 160 180 200 2008 179

Projects implemented before 2001 Projects launched since 2001

2004 117 2003 103 2007 166 2005 134 2006 152

1.2. Pursue Careful, Integrated Innovation

Management

For technological innovation to contribute to net income, Hydro-Québec must also manage technological innovation projects in a disciplined and integrated way. It intends to continue implementing the integrated inno- vation management process, which enables all players—researchers, users, technology business development specialists, technological subsidiaries, external partners, etc.—to interact throughout the process, adding value during each phase of a project.

Hydro-Québec selected an integrated management model at the leading edge of best practices in the field of innovation. This model was adapted to the company’s size and to the specifications of innovation projects that focus on improving core businesses.

• Increase long-term operability of dams and other structures

• Improve the performance and long-term operability of generating equipment • Increase the profitability and acceptability of the generating fleet

• Increase the useful life of certain types of equipment by 10% and lower maintenance costs for designated equipment by 10%

• Reduce the cost of building new lines and substations by 10% • Increase the capacity of designated corridors by 33% • Optimize transmission system management

• Reduce the impact of extreme weather conditions by 50% • Improve the quality of electricity service

• Reduce underground system costs by 50%

• Reduce the net discounted cost of the overhead system by 10% • Develop electrotechnologies and new energy-efficient applications

for electricity

• Increase the energy efficiency of customers’electricity usage • Lower the distributor’s supply and operating costs

• Increase satisfaction among residential customers Core Business

Generation

Transmission

Distribution

Customer Service

Integrated Innovation Management

The “stage-gate” project management process is used to create value and manage the risks inherent in technological innovation activities. Each project must go through five stages, from the search for technological options to the innovation’s implementation in the division or the market- place. Every stage is a stopping point where results are verified. A joint decision is then made on whether or not to pursue the project.

Hydro-Québec’s “Stage-Gate” Process

Hydro-Québec will pay close attention to the final stage: the implemen- tation of the innovation in-house or on the market. This stage provides concrete proof of the value of innovation projects. In 2002, Hydro-Québec passed through over 50 gates on all projects combined, which shows how

Stage Gate Follow-up

Implementation in the company or for customers External commercialization 1. Search for options 2. Proof of concept 3. Prototype design and demonstration 4. Industrial equipment development and testing 5. Final testing and homologation 2. Proven concept and preliminary prototype design 3. Demonstrated prototype 4. Industrial equipment 5. Homologated industrial equipment 1. Options identified 0. Selection of new projects Energy sector Technological vision

related to core businesses Growth and profitability

Technological roadmap Divisions’ themes Divisions’ innovation projects Strategic innovation projects Hydro-Québec CapiTech Divisions: Implementation of new technologies Hydro-Québec IndusTech Technological innovation at Hydro-Québec

Research and industrialization partners in Québec Technological innovation networks around the world

1.3. Ensure the Development of Scientific Know-How

Hydro-Québec will develop its scientific know-how based on techno- logical issues and in a way that complements the expertise in Québec universities and research centres.

Skills management in the sciences presents an additional challenge, because it takes several years to train a researcher to meet Hydro- Québec’s specific needs.

Skills development will be supported by a training or hiring policy in promising fields, such as power system command and control.

1.4. Some Results from the Divisions

Generation