THE NEW DEAL WITH EMERA. WHAT WILL NALCOR THINK OF NEXT?

The latest “deal” called the “Maritime Link Compliance Filing” , between Nalcor and Emera, to satisfy The
Nova Scotia Utility and Rates Board (UARB) did not get
much coverage in the media.  Understandably,
it is tough to compete with topics like the disintegration of the NDP.

Nor could we expect the Dunderdale Government or Nalcor might offer the public a “Coles Notes” version and their implications
for this Province.  That would look too
much like openness and transparency.  We could not possibly expect that, could
we.

Next we need Cathy Bennett elected leader of
the Liberal Party and our Bibles replaced with copies of Lewis’
Carroll’s Alice in Wonderland. To paraphrase the Author: ‘You would have to be
half mad to dream this stuff up’.


The latest Submission to the UARB, compliments of Nalcor, is
a strange brew of rewards for Nova Scotia and more uncertainties, costs and
risks for us. 

Nalcor has made a noble effort to find $1 billion plus in
savings to help make the Maritime Link the lowest cost option.  The deal may still not be enough to satisfy
the UARB.

What has Nalcor offered this time?

Let’s take a look.

Nalcor, with approval of the Dunderdale Government, has
offered EMERA the equivalent of up to 60% of Muskrat Falls power (incl. the
Nova Scotia Block).  NL ratepayers will
still assume all the risk of constructing the Project including 80% of the cost
overruns on the Maritime Link. 

It permits an arrangement to guarantee “Mass Hub” or New
England “market” prices (4-5 cents per KWh) for Nova Scotia. 

It fundamentally changes the relationship between the original
agreement in terms of how Nalcor and Emera were to relate as two utilities.  Now Emera a) gains control over the largest
block of Muskrat power, b) NL backstops Nova Scotia wind power with 100
megawatts of “firm” energy (remember that Nalcor said more wind power on our
grid was not feasible but it’s OK to back up Nova Scotia’s) and c) provides for
a Nalcor Balancing Service Agreement with
Emera, which for all practical purposes, places Newfoundland Hydro at the ready
if Nova Scotia suffers a power drop.

This deal with Emera constitutes the greatest sell-out of
Newfoundland and Labrador’s resources in the history of the Province worse even
than the Upper Churchill Contract because, unlike that Project, billions of NL’s money is being placed at risk to build Muskrat Falls.

In addition, this latest Emera/Nalcor agreement is entered
into without either public discussion or the authority of the House of
Assembly.

Let’s look at a few of the details more closely.

You will recall that the UARB, in its initial Decision, demanded
access to the surplus or “market-priced power” from Muskrat Falls as a key condition for supporting the
Maritime Link (ML). 

The UARB stated (para 216, page 70) that the ML is $706
million to $1.422 billion more expensive than the alternative lowest cost
option
(even though it receives 20% of Muskrat output at zero cost).

The UARB Decision stated:

Para [225] “the price of future Market-priced Energy is not
the real concern…… the concern is that the advantageous opportunity to
purchase cannot take place, if there is no Market-priced Energy to buy.”

 
The UARB had determined that, for the foreseeable future,
market access to the surplus Muskrat power, not price, was at issue; it had
assumed that electricity prices would stay depressed, likely in the 4-5 cents
per KWh range, for many years. 

 
The UARB, in crafting its response to Emera/Nalcor
acknowledged that the New England electricity market had fundamentally
changed.  The UARB had recognized that
the shale gas revolution, Canadian (Ontario and Quebec) over- production of
electricity and new efficiency efforts were all part of the new energy
paradigm.

 
These matters also demonstrate why Muskrat Falls should
never have gotten off the drawing board in the first place.  But, I will stick with the issue at hand.

 

In
order to repair what it perceives as too high a cost of the Nova Scotia Block
the UARB stated o
n page
73 of its Decision: “(t)he Board will
impose a condition relative to the availability of Market-priced Energy …..”

Muskrat Falls is forecast to produce 4.9 terawatts (TWh) of
power. Of that amount 40% (1.79TWh) is reserved for island needs, 20% (.895 TWh)
for the Nova Scotia Block, a condition of building the Maritime Link, and the
balance 40% (1.79 TWh) is defined as “market-priced” power.

What did Nalcor offer Emera this time?

Nalcor will commit to Nova Scotia up to 1.8 TWh  of the surplus electricity, or an annual
average of 1.2 TWh.  (The 1.8 TWh figure
is almost identical to the amount of so-called surplus power from
Muskrat).  A terawatt (TWh) is a billion
kilowatts. The deal places no obligation on Emera to take the power though it requires Nalcor to make it available on
short notice, except for a 300 GWh ‘variance’
. 

The commitment runs until 2041 (a 24 year deal rather than the
35 years demanded by the UARB). 

Now that Nalcor and the Dunderdale Government has committed
us to MF, you might suggest if the power is surplus, it may as well be sold to
Nova Scotia.

That might be true except:

  1. Nalcor advanced the
    proposition that 3TWh of power will be needed on the island by 2030.  (As noted above NFLD. takes 2 TWh from
    Muskrat initially.) That means, by 2025, the commitment of up to 1.8 or
    even the average 1.2 TWh, to Nova Scotia, could cut into the amount of
    electricity in-feed needed for the island. It is unclear whether this
    additional 1TWh requirement becomes what the deal calls “Native Load”.  Indeed, if another full TWh is taken by
    Nfld. by 2030, under “Native Load”, the question must be asked where
    Nalcor intends to find the additional power to satisfy the UARB demand and
    comply with the intent of its Agreement with Emera. Is this where the case for retaining Holyrood begins?   Figure 23 below indicates Nalcor’s own forecast demand on the Island.  Note the steady increase to 2030 and beyond.

  2. The forecast in-feed, into
    the island system, is integral to Nalcor’s version of the economics of the
    Project.  Nalcor’s revenue
    projections, for amortising the cost of Muskrat, are tied to an increasing
    demand profile.  It assumes NL
    ratepayers will be paying the higher Newfoundland rate per KWh, for
    more of the power.  If this
    power has to come from another source it will simply mean higher costs for
    our ratepayers.
  3. The deal requires that NL
    bid its surplus power into the “Mass Hub” pricing mechanism which
    establishes electricity pricing in the New England states.  NS receives the lowest possible “market
    price” for a very large block of power to meet its long term needs.
  4. The commitment of up to
    1.8 TWh (1.2 TWh average annually) makes it impossible for Nalcor to
    commit the energy as “FIRM” power to NL mining or to new NL users
    (remember
    when Alderon was supposed to be the first customer for surplus Muskrat
    power). While the “market-priced” or surplus power is not offered to Nova
    Scotia as “firm” power the Agreement contemplates that the electricity
    will be available to NS.  The upshot
    of the deal is that Nalcor will be able to engage only in short-term or ‘spot-market’
    sales of the surplus power.   Yet,
    the deal gives Emera the flexibility to “…not accept Nalcor’s bid if
    taking the energy is not in the best interests of NS Power customers.“
  1. If the UARB deems this
    deal to make the cut, Nova Scotians will know their electricity costs
    after 2017 right away; Nflders will have to wait until all the bills come
    in and be ready to pay 80% of the cost overruns on the Maritime Link, too.

While the “economics” of Muskrat Falls never made any sense
in the real world,  Nalcor having now committed
all the surplus power as well, has essentially cut the last legs out from its
own rationale for the Project. 

There is more.

The new agreement fundamentally integrates the NL and
Nova Scotia electrical systems
, at NL’s cost and risk.  It amalgamates them! This is where the
proposed “Nalcor Balancing Agreement” comes in. 

Emera uses one and a half pages of its nineteen page Submission
to inform the UARB of Nova Scotia how Newfoundland’s power system will be
changed to accommodate that Province.  THE
IDEA DOES NOT EVEN GET MENTIONED IN THIS PROVINCE LET ALONE EXAMINED BY THE
PUB!!!!!!   NL’s “firm” energy will, if
the UARB allows the deal, become the ‘battery back up’ for Emera’s proposed
wind power project.  The PUB was never
advised of this plan nor was it contemplated at Sanction.

This is a major public policy issue.  It goes beyond the construction of a hydro
project, even a reckless one.    It needs
to be dealt with in the House of Assembly. It needs an independent analysis of
an NL Agency like the PUB.

Beyond
the issues outlined lies the risk that Nalcor will lose Hydro Quebec’s challenge
in the Superior Court of Quebec of the Water Management Agreement.  There is the issue of cost overruns and the
complete lack of oversight on the Project by our own Department of Finance.

Finally,
I have added the contractual commitment found on page 132 of Emera’s initial
Application to the UARB.  This one should
keep your mind off the problems of the NDP. 
It states:

(para
437) “NSMPL (Emera) confirmed that there were no risks to ratepayers from the
non-delivery of energy by reason of any legal claim respecting the flow of
water, or arising from the reduction of water flow itself on the Churchill
River:

The contractual arrangements between Emera and Nalcor
do not allow for non-delivery of energy. 
If energy is not delivered, Nalcor is liable to pay compensation damages
to Emera.  If the non-delivery is as a
result of Government Action, the Government of Newfoundland and Labrador has
guaranteed payment by Nalcor the compensation damages.  Risks relating to Muskrat Falls are borne by
Nalcor.”

I
don’t think that clause requires any further interpretation. Do you?

Meanwhile, the Government can’t talk with you and the opposition
politicians are all busy.

It’s simply not good enough.
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.

NALCOR (Masquerading as ‘Hydro’)LIVES IN AN UPSIDE DOWN WORLD

If a Big Mac costs McDonalds $10 to produce and it is sold for $1.50, McDonalds will go out of business. They would not declare a profit!

REMEMBERING BILL MARSHALL

Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

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.

11 COMMENTS

  1. We must ask what is the point of the entire Emera partnership. We are giving Nova Scotia 1 TWhr of energy annually (40 million per year in current value) to be able to sell an additional 1.8 TWhr of energy (72 million in value) to Nova Scotia. But this energy which we are offering is I expect largely the remaining RECALL from the Upper Churchill. This is presently being sold through Quebec, for an annual fee of 15 million. Nalcor have sold the shop for the Loan Garuntee… to protect the 2 Billion they have spent to date, or committed to spend.

    The FLG will reduce our costs, but it puts a considerable risk on Nalcor, and by extension us, for cost overruns on the ML, or for damages in the event we can not supply the power to Nova Scotia. Is the downside risk worth the upside?

    If find it ironic that during our own PUB hearings Nalcor said their was insufficent RECALL available to meet our needs, that UC power was not garunteed in 2041, and we needed all the additional "surplus" for industrial development in Labrador. These were the basic tenants to confirm that MF was the lowest cost option.

    Nalcor have now abandoned these fundamentals in order to Salvage what they can from this mess.

    From a salvage perspective the UARB filing is indeed a win for Newfoundland. But it is a windfall for Nova Scotians. We have the fisherman of Petty Harbour now subsidizing electrictiy rates for the Fisherman of Peggy's Cove.

  2. After their defeat, can the politicians and technocrats responsible for this terrible mess be held accountable? Can we launch a criminal investigation into gross mismanagement of public funds? Do you think there are grounds for other charges?

    We have to hold elected and appointed officials accountable!!

    – Ward Pike

  3. We will now backstop 100 Mw of wind energy for NS. Here we have 2 percent of our energy is wind. The original isolated island option said more wind here was technically unfeasible. After protests that wind was not sufficiently assessed, Nalcor did a another wind analysis, assessing 600 MW on the east coast plus 600 on the west coast plus a battery back up for this. This was silly and outrageous a proposition, designed to be uneconomic to prove wind was of no value. But hardly noted at the time, the report by MHI upgraded the technically feasible wind for the island to 10 percent of our total, and to 15 percent if additional controls were implemented. This was a huge increase from our current 2 percent. We could have added another 100 to 150 MW of wind to the island, an important factor for the isolated option. We could have added 25 mw per year for 4 to 6 years. We can handle this wind because wind needs a large hydro generation backup, which we have on the island. Nova Scotia has little hydro, so they cannot connect much wind (unless backstopped by the Nfld water generated power). In operation the wind varies, making wind generation somewhat unstable. The water generation is steady, and the large inertia of the large hydro generators gives stability to the wind generation, so they work well together. Yet we failed to use this asset to boost our wind capability here, by up to 150 MW, but now use this asset to boost NS wind. And this limits our ability to maximize wind on the island here for our own needs. The little wind generation we now have is an important contribution to reducing Holyrood oil consumption. Holyrood production has gone down from 30 percent to 10 percent of the total, and wind has helped this decline. So now, we not only give away our hydro, but also our own wind capacity here on the island. And the CEO of Nalcor and Emera are receiving awards and being honoured in Nova Scotia today. Should we change our name from Newfoundland to Wonderland? I wonder what our local association of engineers think of all of this? Pity they are silent, but many must be shaking their heads in disbelief. Winston Adams

  4. It seems to me that, should the court challenge by Quebec Hydro go sour for NALCOR, and, by extension, the province of NL, we will indeed be in a quandary of our own making. This agreement is heaping stupidity on top of stupidity. It grows worse by the day, but NALCOR and the government are hell-bent on proceeding over the dam…. so to speak.

    The cruel irony is that we will likely need to retain Holyrood, not only for ourselves, but as a backup when Muskrat Falls production does not meet the needs of Nova Scotians. How unbearable with that be? And we thought the Upper Churchill deal was terrible.

    It is sad beyond belief!

  5. Mr. Sullivan. I appreciate your significant effort to go over these documents and provide an insightful analysis. I am on the edge of my seat as to whether they are going to go far over the $7.7 B plus interest during construction (current total $8.5 B) and the corresponding higher interest rate for each incremental billion particularly if the loan guarantee is lost. Hebron went from $5.4 to $14 B in costs and $14B for this project could bankrupt us.
    All that being said I would like some clarification why you and others keep saying that Emera is getting 20% of the power for zero cost. This hurts your analysis because they are paying full bore for the link which is about 20% (we pay 80% of the overrun). The issue is the incremental 40% of the power for 4 to 5 cents. The bigger issue is why are we doing this. There is very little strategic value. It doesn't make sense to pay about 15 cents (which at 4.9 twh is about $735M per year) to lock into a market and sell for 5 cents for 25 years. It only exports about 5% of the Labrador power to the mainland away from Quebec so no long term benefit.
    I tried to make sense out of what Ed Martin said in the paper and the logic is difficult. When he talks about variability in the rivers he is not talking about Labrador because Muskrat as I understand it comes from the Upper Churchill Reservoir which is massive and undersubscribed at the moment. In some years there was spillage of upwards of 700 gwh from the island reservoirs but that is not a controlled amount. It only happens after large rainfalls or melts so it will not backstop a planned release of power. If that were the deal and the 700 gwh was an average amount of island spillage then that would only take an average of 500 gwh from Muskrat but according to the contract terms mentioned above it is not the case.
    One other little thing. Bay d'espoir and Cat Arm were both designed to allow a 25% expansion in generation capacity which would drain the reservoirs more quickly and take care of some or most of that spillage. It also could be paired with wind power and pumped storage. Add some energy efficiency and incremental pricing to force monster house developers to install heat pumps or pay 30 cents per kwh for the incremental power and we would have a load decrease in winter. No need to go out on a limb to spend $10B to employ construction workers from all over the world because all of ours are already working on other projects. Again, I can not make any sense out of why we doing this when there is such a dangerous downside and very little upside.

    • Your comments speak to the difficulty many observers are experiencing with the logic of this Project. I want to especially note that my reference to the Nova Scotia Block could have been better described in the context of zero revenue rather than zero cost. When Nalcor will receive in the 4-5 cent per KWh range for the 40% that is surplus, at least in the early years after commissioning, averaged down on this side of the ML by zero revenue for 20% of the power, the absurdity of risking so much capital to replace Holyrood and to secure the Federal Loan Guarantee defies all logic and common sense. Of course, the "Nalcor Balancing Agreement" represents another "new" cost to NL. It does not even get mentioned in this Province. Please continue to share your knowledge and insights to this Blog.

  6. You have to think there is 2 transmission lines. The first is payed for by NL'ers, and the second is paid for by Nova Scotians.

    Yet the power comes from the white elephant in the wilds of Labrador. The plant is payed 100% by Newfoundlanders.

    So in reality Nova Scotia is getting free power. They are just paying for their extension cord.

    The 20% of the costs for 20% of the power was how the deal was branded, to make it palatable to us. The reality is that when our demand does not grow as predicted, Newfoundlanders will be subsidizing the power for Atlantic Canada.

    The last comment is correct though. Why are we doing this, when we could have just built the cable to labrador and purchased the power we need from Hydro Quebec. This would have low risk . Now we will put a large financial risk to future generations of Newfoundlanders.

    It is despicable what this government allowed to happen.

  7. Suit yourself but as far as the UARB in NS were concerned they were getting 20% of the power for 20% of the money so they demanded a guarantee on an additional 40% at cheap rates to bring their average cost 10 cents. From where I sit the only part that appears to make sense is that extension cord. It is extremely difficult to manage an isolated island grid. The extension cord allows a better balancing system and the ability to export when we have surplus water. At 10 cents we would be in very good shape to ship NS combined hydro and wind or improve the viability of bringing gas ashore (it is already viable) and double the size of the plant.

    Build the link to Labrador in 2041 and leave Muskrat Falls alone in its pristine shape.