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.
If the transmission line ran through Quebec would you be HAPPY than, this will provide hydro for our future generations without Quebec taking all the profit.This is green power not like that of Holyrood produced from burning bunker sea.
Richard, correct me if I am wrong, but you seem to be arguing that the government’s current Muskrat Falls plan will be profitable. If this is an accurate reflection of your opinion, it would be great to hear why you believe this.
And then there’s the EMERA deal with NALCOR on the Island, and the related Star Lake fiasco around Williams expropriation, Harper’s $130 million dollar NAFTA payout and the SNC-LAVALIN scoping study for the transmission through to the States.
That’s not to mention the SNC-LAVALIN offshore contracts on White Rose, and their untendered deal in in Labrador for the Lower Churchill construction and maintenance.
Oh so interesting, and sad.
The problem here, as Mr. Adams rightly points out, is that there are huge costs associated with this project and the risk is all being taken on the backs of the ratepayers of Newfoundland. We don’t appear to have choice in whether it goes ahead. The only real beneficiary is Nova Scotia and, of course, the major players who are building it.
Tom, there is no credible evidence to show this project will ever be profitable. I suppose that some day it will get paid off but it will cost NL in the range of 15-20 billion dollars, if paid out over 50 years at a favourable rate of 5%. For every 1% increase in interest rates you are adding close to 3 billion dollars to the total cost.
This is a frightening prospect for a small province like ours, especially since we have no real shortage and may have surpluses for decades to come, even without MF power. There are numerous ways to achieve energy self-sufficiency without bankrupting ourselves but we have a government with no vision. Only in the context of the whole Lower Churchill could I see this being profitable and even then there are many concerns, including environmental issues. It is not as green as many would like to have us believe.
Juche. er, I mean: touchÃ©.
Actually Richard this project is not being developed for export at all.
The whole thing, plus profit, will be paid for by tax[payers inside Newfoundland and Labrador. Nova Scotians are going to get a huge discount on their share.
Personally, I’d take a guess that the whole Labrador issue is being developed separate from the EMERA deal. Labrador consists of Muskrat Falls AND GULL ISLAND. If its 6.5 BILLION for MFalls, how much for Gull Island? Who is going to pay for that? The Gull Island project is much larger than this first smaller project that seems like it has the capacity to bankrupt us, or our company NALCOR. In the very least it could force a sell-off of assets that we are developing without proper public oversight.
My guess is the plan is to go through Quebec and/or allow SNC-Lavalin to develop the financing with HG since they are HQ’s biggest contractor anyway and already have a very cozy relationship. Think privatization and profit for a few greedy suits collecting huge salaries. People like Gwynn Morgan and Hugh Segal of SNC-Lavalin are in the midst of the privitizing water in BC/Alberta via their Shale Gas well / Peace River pumping plan, and they’re at it here too. The whole lot of em are part of the neo-con group out of the Flanagan / Strauss / Calgary School, of which I would also assume or dear ex-leader was in some way a part of (he did campaign for Gary Marr afterall).
Since we already produce excess energy on the Island (and that’s before any wind is developed here, or an efficient grid) the EMERA deal is about Star Lake, privatization of water and satisfying some old conservative deals between MacKay’s crowd and the crowd in St. John’s (perhaps over the Deer Lake power arrangements).
Admittedly, most of this is a guess but it seems to make sense from a US corporate takeover kind of perspective…
Labrador is the mainland portion of the Province of Newfoundland & Labrador. Labrador presently has
its own hydro rate structure, because – except for remote diesel-serviced communties, another irony in this overall mess – the regional power is 100% Hydro generated in Labrador, and supplied by a Crown Corp.,namely N&L Hydro Corp.
The Island power (part Hydro, part oil-fired) is purchased from NLHC, and distributed by a commercial agency, NF Light & Power. IF a transmission line is established from Labrador’s Muskrat Falls down to the Island, Labrador becomes connected to the whole Provincial grid, and will be subject to the escalating rates with The Rest of the Province. By this means Labrador will be surrendering its Hydro power to the Greater Good, exporting it, and paying the higher price for having done so, suffering the consequences in increasing provincial rates. This is logistics, and not a dog-in-the-manger position of wishing for our own protectionism. (And the remote diesel plants in Labrador would continue to chug on, drinking their oil.)
Therefore it is incorrect for Mr. Adams to state in the first paragraph that “the project would lock in high power rates for electrical consumers on the Island of Newfoundland” It would, more
accurately, lock said rates in for The Whole Province, Labrador included.
I wish all commentators everywhere would clearly distinguish between ‘The Island”, “The Province” and “Labrador”, as there is far too much ambiguity in the casual confusion between these terms.
When one lives in Labrador, this necessary clarification is a constant battle.
I appreciate the correction. Has the government or Nalcor put on the record anywhere what the rate outlook is for Labradorians served by grid power?
Yes, Nalcor has repeated several times that Labrador Rates will not rise “because of the Lower Churchill Project”… I’m very skeptical about the words “because of the Lower Churchill Project” as Nalcor can find any number of reasons to increase rates in Labrador and thus does not have to admit that it’s due to the Lower Churchill Project! Remember, Nalcor is exempt from the Public Utilities Board and exempt from Access to Information… thanks to Danny Williams!
Sorry, I don’t have time at the moment to find the referenced places during the Joint Panel Hearings where Nalcor specifically stated this but a good place to look would be close to where Phil Raphals of The Helios Centre made his presentations… Around March 8th and again around April 13th.
Yes, Susan is correct in the assumption Labradoreans will come under the new pricing rates for the Island. There certainly is a difference between the Island and Labrador. Alternatives would or could replace the diesels, Nalcor had no intention of looking into this for that very reason, Labradorians must be made to pay to off set the island rates. My question is why can there not be an awarness programe put in place to alert the average taxpayert to what is going on here with the big money people. These people can, could or will make williams look like a penny player. This sort of ignorance is exactly the U.S. is in so much trouble. Free Lunch is an excellent book to make anyone aware of what these corporate types will do to further pad their pockets.