Review of “AIMS Commentary – The Muskrat Falls Hydro Project: Opportunities and Risks”

The Atlantic Institute for Market Studies published earlier this week an analysis by Gordon Weil, an electricity sector consultant, addressing the Muskrat Falls hydro-electric project planned for Labrador.

Dr. Weil has a long record addressing power issues in the Maritimes. As with his previous efforts, there are many sensible comments and useful observations Weil’s new report. However, the report adopts the proponent’s position about how the project will operate, a position contradicted by substantial evidence. As a result, the report ignores a key risk to ratepayers in Newfoundland and Nova Scotia.

Nalcor’s Power Purchase Model

Weil comments that, “the project will continue to rely on extremely long-term forecasts, whose lack of reliability, in any context, is well understood.” The track record of energy forecasting strongly supports this comment. The foundation of Nalcor’s proposed cost recovery methodology for Newfoundland ratepayers depends on long term forecasting. Nalcor uses what it describes as a “power purchase agreement” structure. Unfortunately, Weil’s paper does not address Nalcor’s proposed cost recovery methodology directly.

Nalcor’s “power purchase agreement” is structured to back-end load the recovery of Muskrat generation costs to consumers up to 57 years in the future. Under this approach, a great portion of the overall costs of MF will be recovered from Newfoundlanders AFTER the Upper Churchill contract expires in 2041. According to the group Vision 2041, over 50 years, about $14.5 billion will be paid for debt servicing and operating costs alone, of which about $6.5 billion will be paid after 2041, when the province has access to nearly free Upper Churchill power. Even if its forecasts all prove correct, Nalcor’s “power purchase agreement” model perpetuates the harm to Newfoundland consumers arising from the original 1969 Upper Churchill contract with Quebec.

Atlantic Utility Integration

As with many of his previous reports, Weil advocates deeper integration of the electricity markets in Atlantic Canada. I am a longstanding fan of greater Maritime electricity market integration. Unfortunately, although this basic concept has been discussed for at least 30 years, even the electricity markets in the relatively strongly interconnected Maritime provinces are today not optimally integrated. For example, Nova Scotia Power and NB Power maintain separate dispatch functions.

Although not an issue addressed in Weil’s paper, one physical approach that could facilitate greater Atlantic integration would be to build transmission interconnections from Labrador to Newfoundland and potentially also to Cape Breton without necessarily proceeding at this time with incremental generation development in Labrador. I recommend that readers interested in this fascinating model look up the report by the anonymous author JM and published by blogger Ed Hollett. Such a transmission upgrade might allow better utilization of surpluses of low cost generation now available in Quebec and also seasonally on the island of Newfoundland.

Unsupported Storage Assertions

In his discussion of storage issues inherent to Nalcor’s Muskrat Falls plan, Weil’s report betrays a misunderstanding of a key element of the legal, operational, and commercial reality of the project. Blind to the underlying issues arising from storage, Weil fails to address one of the major risks facing Newfoundland ratepayers and federal taxpayer about to guarantee the project.

Repeating comments often uttered by Nalcor, the report says, “Hydro is the most valuable of resources for generation on the grid, because it can be varied in amount to meet demand as it changes and because, especially in the case of Churchill, it can be stored for use when needed.”

Nalcor’s CEO, Ed Martin, repeated exactly this claim on CBC Newfoundland TV show On Point on Saturday October 6th. The show’s interviewer, David Cochrane, did not challenge Mr. Martin to explain the basis for this claim.

The actual storage issues associated with Muskrat Falls are very different than these claims.

The Muskrat Falls design being pursued by Nalcor has almost no forebay storage capacity. Instead, the facility is a run-of-river design. The water availability and therefore the output of Muskrat Falls is lowest in Winter when Newfoundland and Nova Scotia both need power but highest in May and June, when both markets are well supplied. Today, on-island generation in Newfoundland spills potential generation in normal conditions during the Spring freshet.

Although not detailed during its appearance before the Public Utilities Board in 2010, Nalcor has a plan to mitigate the problem inherent in Muskrat Falls delivering its power out of phase with demand. Nalcor is depending on using excess Muskrat generation during the Spring to meet some of the obligations of Upper Churchill generation to deliver power to Hydro Quebec. Nalcor assumes this will allow Upper Churchill to store energy during the Spring runoff, to be recovered and delivered to Nalcor the next Winter.  The legal basis to make all of this work is a Water Management Agreement the province enacted in 2010 that binds all provincial water users.

Here is the problem: Diverting Upper Churchill generation in Winter away from serving Quebec and instead using Upper Churchill storage and generation resources to serve Newfoundland and Nova Scotia is likely to have significant negative impacts on Hydro Quebec’s use of Upper Churchill. Hydro Quebec is on the record before the Public Utilities Board explicitly stating that the Water Management Agreement does not affect Quebec’s rights to control Upper Churchill.

Because of the physical electrical transmission capacity limitations of the connection proposed between the island of Newfoundland and Cape Breton, only a portion of the Spring generation in Labrador and on the island of Newfoundland excess to Newfoundland’s Spring needs can make it to Cape Breton. Without access to storage, Muskrat Falls will be forced to spill massive amounts of potential generation. Weil’s report ignores this issue.

Official Newfoundland has acknowledged no negotiations with Quebec to ensure that Nalcor has rights to use Upper Churchill in the way that Nalcor operate its new system. Nor has Nalcor has presented modeling of any kind quantifying its operational requirements for Upper Churchill storage and generation resources.

On October 12, Group 2041 issued a press release indicating that it is seeking copies of all communication between Nalcor and Hydro Quebec related to water rights associated with Muskrat Falls. Disclosure of this information is absolutely essential if the province is to have an informed debate over the proposed Muskrat Falls development.

Given the state of all the information publicly available, it appears that Newfoundland’s lack of rights to key ingredients it intends to use to make Muskrat Falls work has huge implications.

Nalcor in sinking vast sums in a project for which is does not yet have in hand the necessary rights to make Muskrat Falls operational. The more Nalcor spends, the more it strengthens Hydro Quebec’s hand once the inevitable negotiations begin. This is precisely the failed strategy that disadvantaged Newfoundland in the 1969 Upper Churchill deal. There is a potential commercial solution for the dead-end Newfoundland is building for itself but it will further burden the already dismal economics of Muskrat Falls. I will discuss these issues in more detail in a forthcoming post.

When presented with my concerns that his report makes assumptions about storage that are contradicted by evidence, Dr. Weil explicitly refused to comment.