DEER LAKE POWER: MISSED OPPORTUNITY FOR KRUGER AND PROVINCE

When I
posted “SMALL POPULATIONS AND GUT WRENCHING DECISIONS”, Corner Brook was not on
my mind as I considered the position of declining populated island communities.  Yet, two comments, left on the Post, conveyed
the innovative thinking of two writers who saw a ‘win win’ for the Province and
Corner Brook in Kruger’s hydro capacity. 
Winston Adams, a local Professional Engineer, said “(w)e need that power
for winter heating of our houses, but…not…in the other 8 months, when the mill
would use it”.  He added, “This power…is
a big piece of an island solution for our power needs”. 

The second writer
was JM, who has written extensively on the Muskrat Falls Project and has made
several contributions to this Blog. JM echoed the views of Adams: 

“The real solution
to both the Corner Brook and our (Province’s) electricity requirements is
looking us in the face. The mill should operate 8 months of the year. From
December 1 to March 31 the mill should shut down. Kruger should sell the power
from Deer Lake into our grid. This combined with the Upper Churchill RECALL
power, would hold us over to 2041. It would likely also provide Kruger enough
revenue to keep the mill alive. We would also save $3 billion in the
construction of Muskrat Falls”.

Many Newfoundlanders
have been enriched by the pulp and paper industry. Few would do or say anything
to hasten its demise. While any such debate may seem ‘water under the bridge’,
given Muskrat sanction, the public might expect our resource industries to
prosper, in a way that permits us to calculate benefits rather than the costs. 

Financial
support to the woods industry has a long history.  My own first encounter was in 1978 when I was
preparing a Speech the then Premier planned to give in the West Coast City.  A briefing note, from the Dept. of Forestry, outlined
various supports the Government offered to that sector.  They included funding for ‘silviculture’
(forest thinning and growth control). I was unfamiliar with the word then, though
I never forgot it; more overt methods of support came later.

I was still
on the 8th Floor, in 1984, when Bowater handed in its notice, to
Brian Peckford, following which Kruger became a household name; an early crises
was averted, with $100 million from the Government.

The Kruger
saga has endured for 29 years, a good run. 
It did not happen without subsidies, lay-offs, deals on power, the ‘indefinite’
shutdown of #4 Machine in 2009 and almost annual temporary closures of mixed
duration. It has been a rough saga.   

The
Stephenville paper mill closed in 2005.  Grand
Falls followed in 2008.

Last year,
2012, Kruger Inc. announced it would close in the absence of wage and pension concessions
and a “take-it-or-leave-it” contract. 
The Province, petrified that it might make good on its word, committed further
assistance from the Government, if the workers agreed.

A Canadian
Press Reporter, in a wire story dated June 20, 2012, captured the sense of
exhaustion over the promise of yet more support for the Mill:

“I think
this is money that goes down the drain,” Gabriela Sabau, an economist and chair
of environmental studies at…Grenfell Campus, said from Corner Brook. “This is a
dying mill. It’s not going to be revived in any way,” without a massive
retooling investment…”

The second
was Michael Wernerheim, an economist at Memorial University who agreed with
Sabau’s assessment.  Said he, “I realize
the extent of the economic devastation that this is going to wreak on, first of
all, the workers that are directly and indirectly affected at the mill…the continued
subsidization…diverts productive resources to ends that are not the best.”

Last year,
some critics of the Muskrat Falls Project, who recognized the potential of
Kruger’s hydro power, were accused by the current Minister of Natural Resources,
a Corner Brook native, of hoping that the Mill would fail.  Never a strong Cabinet Member he has worked
hard for Corner Brook even if his analytical skills are questionable.  The Minister might have stopped to consider that,
just possibly, better alternatives existed which might secure greater longevity
for Kruger and better electricity options for the Province, too.

Notwithstanding
the pessimism of the Economists referred to, I doubt that the Province could
deny Kruger the promised $90 million “loan”, not that anyone thinks it
will ever be repaid.  Joe Kruger is not a
stupid fellow.  His business savvy would alert
him to Government’s failure to obtain a ‘quid pro quo’ well before Muskrat’s
sanction. He would recognize his position was one in which, for at least the
next four or five years or for as long as the Government remains under the
‘spell’ of fiscal happiness, continued financial support will not be denied
his Company.

When Winston
Adams and JM, were commenting upon an “island solution” they were arguing that Kruger
possessed all the ingredients to satisfy the Province’s “peak” power needs in
the most demanding months of the year. 
They recognized that a deal with the Province would not only have secured
much of the revenue to save the jobs of the Mill; it would have undercut any
argument in support of the ‘whole’ Muskrat Falls development.  As JM states, the
Government might have limited the investment to the transmission line only; it
would have been able to bring remaining low cost ‘recall power’ to the
island. 

I asked JM to
take a look at the arithmetic to help define how Corner Brook Paper might be
assisted by the arrangement.

He
referenced a Study submitted to the PUB indicating that Kruger’s Deer Lake
Power Plant produces 879,000 Megawatt Hours (MWhr) of energy per year.  Assuming a four month shut down of Corner
Brook Paper, this would indicate 290,000 MWhr of energy available to the island
grid. 

That amount
of power displaced at Holyrood, and costing 120 $ per (MWhr) to produce, is
equal to $35 million a year.

At market
value, of about 50 $ per MWhr, this would equal $15 million a year to Kruger; still
a nice annual subsidy. 

But, that is only Kruger part of the perspective. Notes JM, the 100 MW, in winter, would have allowed the entire project
(link and generation) to be delayed by 3 to 4 years until after the current
resource boom, and when the future of the mill is better known.  He could have added that it would have given us time to
assess the fast changing U.S. energy market and await receipt of Husky Energy’s
feasibility study into the potential of offshore gas (a story for another day). 


Alternatively, there is still the ‘isolated island’ option
which, with additional time and less myopic thinking, Deer Lake power might have confirmed.  Alternatives to Muskrat Falls we were not
without.

As Adams and JM suggest, the $90
million ‘loan’ to Kruger could have had far wiser underpinnings. 


Although there
is nothing wrong with JM’s math, it must be remembered that because Deer Lake
power offers the potential to save the Province billions of dollars and the
ability to shield us from significant construction risk, the award to Kruger for that power could have been more generous than
JM’s numbers suggest; likely, given the value of the trade-off, the deal could
have facilitated the Mill’s much needed modernization scheme. Its future and the solvency of the Province could have been favourably and
inextricably linked.

Unfortunately,
such ideas could not come from a Government that wanted Muskrat Falls at any price.
Will Joe Kruger come back for more? Of course, he will. What leverage will we have to extend the Mill’s life? None. What will we do when Joe asks for millions more? We will hand it to him.
Will we continue to favour the unwise with elected office? Kruger is counting on it.
Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.

END OF THE UPPER CHURCHILL POWER CONTRACT: IMPROVING OUR BARGAINING POWER

This is the most important set of negotiations we have engaged in since the Atlantic Accord and Hibernia. Despite being a small jurisdiction we proved to be smart and nimble enough to negotiate good deals on both. They have stood the test of time and have resulted in billions of dollars in royalties and created an industry which represents over a quarter of our economy. Will we prove to be smart and nimble enough to do the same with the Upper Churchill?

AN ETHICAL WALL FOR AND A TÊTE-À-TÊTE WITH PREMIER FUREY

I've been wondering if the whole "ethical wall" business has prevented the Premier of our province from acting where he might and should act?

3 COMMENTS

  1. Interestingly Hydro Quebec is selling power in the US for about 3.5 cents a kwhr. The use of DLP, the Upper Churchill RECALL and some limited purchases from Hydro Quebec would meet our needs. Nalcor have never publically stated the CPW of this option. Nalcor and Government by not considering this option have neglected their obligations to supply the lowest cost power, as legislated in the Electrical Power Control Act. When the government changes in 2 years this should be Chapter 1 of the Royal Commission which will be undoubtably called.

    A phased approach is all about risk mitigation.

    The current approach is to provide power to Nova Scotians at approximately 50% of the cost it will be provided to Newfoundlanders. It is amazing how steadfast this government is to shackle three generations of Newfoundlanders to the most expensive power in North America.

    However, if Nalcor can bring this project at or under the DG3 budget, then they may be able to redeem themselves.

    Has Nalcor commented what the forecasted budget is with many of the contracts now being awarded. It is 6 months since their release of the DG3 numbers. How has it changed?

  2. 1.Manitoba Hydro Int stated that Muskrat Falls offers no real economic advantage over the island option, should the Corner Brook mill close as it would make Deer Lake power available to our grid. The winter shut down of the mill gives the same result, but revenue benefit to Kruger.
    2.The rationale for Muskrat Falls was to offset a growing oil fired energy production at Holyrood, primarily to meet our growing winter heat load.
    3.Holyrood produced as much as 30 percent of our total generation in 2002. Holyrood's share dropped to about 14 percent by 2008, thanks to Stephenville and Grand Falls mill closure and offset from our wind generators.
    4.Holyrood's share has now fallen to just 10.8 percent of our total. And this is despite bigger houses and the record housing unit additions since 2008. An excellent chart showing this can be seen on Maurice Adams' site WWWVISION2041.COM. In particular notice the diversion of the trends: Nalcor's forecast rising while in reality Hoyrood's production dropping.
    5.This drop in Holyrood's production is despite a present feeble EFFICIENCY CONSERVATION PLAN.
    6.The PUB has now ordered Nfld Power to present a revised Plan, and to incorporate the use of efficient heating and other measures.
    7. The Maebec Report, the bible of sorts, for efficiency measures, comments as to what percentage of energy sale revenues should be plowed back into CUSTOMER efficiency measures, whether this should be 0.5, 3.0 or 5.0 percent or more. The accepted wisdom is to throw as much as necessary as long as the measures are cost effective and reliable. This allows large reductions of oil fired generation.
    8.For Nfld, this suggests up to 140 million dollars per year, the present cost of Holyrood oil purchases. At present we are spending only about 5 million dollars, preferring to spend big on oil consumption and pollution rather than cost effective efficiency conservation measures. Holyrood production has recently been as much as 18.9 cents per kwr, and there are many efficiency measures below 15 cents and many below 10 cents.
    9. JM says that deer Lake can shave 35 million from Holyrood's oil cost, That would trim Holyrood's production to about 8 percent of our total.
    9. What does it take in Efficiency measures to bring Hoyrood production of 8 percent to near zero in 10 years? My estimate is 50 million dollar a year, about 1/3 of what we spend on oil. It would take a few years to ramp this up. It would be great if JM did some calculations to verify my arithmetic. And this cost, paid by customers, is more than offset in energy savings on the yearly bills, so no net increase to customers overall.
    10. The more recent MHI report stated we can increase our wind energy up to 15 percent of out total, as we now have just 2 or 3 percent.
    11.Taken together: Deer Lake power for winter heating, reduction from a good efficiency conservation plan, and modest additions of wind: all three of these are missing from the original isolated island option. In my opinion,it's a game changer for low cost power for the island customers. Given the downward trend in Holyrood production, and likely reduced demand from a better efficiency conservation plan, shouldn't Muskrat Falls be re-evaluated? Winston Adams

  3. Muskrat Falls should be scrapped, as a source of power to the Island and, in my opinion, scrapped anyway. It is being built in the face of declining demand on the Island, declining oil prices, declining energy prices worldwide, and declining opportunities for export sales to the U.S. market.

    By any reasonable measure, this is a grandiose pipe dream, engineered by Danny Williams and his cronies who continue to inhabit the House of Assembly. Their gross ineptitude to forecast and manage budgets, their continual crisis-oriented approach to governance, their obsession with polling optics and over-expenditures to support those optics….all of this points to a group who are grossly incompetent and unfit to govern.

    They will reap the wrath of the voters in 2015 but my concern is that their "legacy project", Muskrat Falls, will become an even greater financial burden on our people than the loss of revenue from Churchill Falls. How we, as a people. can just sit by and allow this to happen is beyond me. Where is the fighting spirit that we have been known for? It seems that it is okay for our own to screw us and we only get riled when somebody from outside does it.

    Maybe, just maybe, we are the ones who have done it to ourselves and it is time to reassess our relationship with our own "leadership".