Churchill River hydro-electric power is an emotionally and politically charged issue in Newfoundland and Labrador. Disappointment over the outcome of the Upper Churchill contract the province signed in the 1960s with Quebec and brought into production in 1971 has driven every successive provincial government to pursue more megaprojects on the river since at least 1978. During the last federal election campaign, Prime Minister Harper promised a loan guarantee that would effectively subsidize the current project proposal. The availability a federal subsidy plus rich oil royalties to the province are now burning a hole in the provincial government’s pocket, fuelling its ambition for a project that could not not otherwise stand on its own. The government claims that the project will cost $6.2 billion. Contrary to normal utility practice, this figure does not include interest costs to support the investment during its construction. It is not clear whether this figure includes the complete cost of the transmission upgrades required and adequate contingency should events unfold unfavourably. The government’s development case for the project depends on radical financial measures such as negative cash flows over many years of initial operations. The government’s case for Muskrat Falls development hangs on its displacement of oil-fired generation now used to provide power on the island during the time of winter peak demand. Here is a link to a wonderful paper by David Vardy, former chair and CEO of the Newfoundland and Labrador Public Utilities Commission. Vardy‘s resume also included a stint as a deputy minister for the provincial government, Clerk of the Executive Council and Secretary to Cabinet, and president and chief executive officer of the Newfoundland and Labrador Institute of Fisheries and Marine Technology.Vardy’s paper describes the background for the project, the basic project economics as known so far, and a survey of alternatives. Vardy makes it clear that the provincial government is confining the public review process so that a full range of credible alternatives is not being considered. Vardy’s analysis makes it abundantly clear that the notion of business risk is not getting full weight in the government’s analysis. For example, a full 40% of the output of Muskrat Falls has no identified market at this time. The province’s assumptions supporting the project include massive growth in demand for power on the island, lucrative export markets, and sustained sky-high oil prices which inflates the case for displacing oil-fired generation on the island. All of these assumptions are questionable.Vardy reports on a meeting Ed Martin, President and CEO of Nalcor Energy, the provincial government’s energy agency, and his senior officials, on April 14, 2011. One of the credible alternatives to Muskrat Falls to displace oil-fired generation on the island would be to use of natural gas now produced by the off-shore oil platforms east of the island but currently reinjected on site. Here is how Vardy reports the government’s response:
The appropriate size for the gas delivery infrastructure would be scaled to optimize value based the foreseeable market demand.
The prevailing electricity rate structure for service on the island also suggests that the government is not serious about seeking the lowest cost options for meeting the province’s energy needs. The sale of power during the winter is highly subsidized, with the financial losses recovered by overcharging the rest of the year. Although this rate design is normal utility practice in far too many jurisdictions, given the cost structure for the power sector on the island where two thirds of the power is supplied by hydro-electric facilities, this practice is particularly wasteful of public resources. It would be interesting to know how much potential energy from on-island hydro-electric facilities is spilled during the spring, summer and fall. The prevailing rate structure encourages electric heating, where the power to drive those electric heaters is derived from oil. Using the oil directly for heating would be about three times as efficient as using the oil indirectly through electricity. If the government was really serious about mitigating the high economic and environmental costs of oil-fired generation, why would such a wasteful pricing methodology be allowed to persist?
Here is another review of questions about the viability of Muskrat Fall plan left unanswered by NALCOR from the respected Newfoundland political observer and blogger Ed Hollett. Hollett points to the absence of publicly available cost impact analysis describing the outcome of the project for the citizenry who are the involuntary guarantors for its completion.
The project will drive up power rates substantially even if there are no cost overruns. Whereas the fully bundled retail cost of delivered power for households is in the order of 11 cents per kilowatt hour, the lowest cost of power from Muskrat Falls that the government has mentioned is 14 cents per kilowatt hour.
The province of Newfoundland and Labrador would be taking a profound risk pursuing the project at a time when power prices in the U.S. are at rock bottom levels and vast new supplies of natural gas on the mainland of North America are seeking any market they can find. Even if Lower Churchill power was free in Labrador, transmission costs alone would destroy any payback it might earn in the current New England power market.
A complete and independent review of credible alternatives to Muskrat Falls should be undertaken before any more public money is sunk. There is a public review underway. However, as Hollet highlights here, there is a serious question as to whether the review can be independent after the government refused an extension the review schedule. The extension appears to have been necessitated at least in part by large gaps in NALCOR’s application.