STABLE RATES: THE ELEVENTH MYTH OF MUSKRAT (Part II)

Guest Post written by JM

Early in the Muskrat Falls debate, an old friend of mine, who
worked at Newfoundland Hydro unequivocally stated: “the upfront costs for Hydro
are high, but they will come down over time”. This was a conventional argument for Hydro developments, but one not truly
applicable to the back-loaded Muskrat Falls model. 

The prospect of long term stable rates was a key argument
used to convince the public of the benefits of the Muskrat Falls project. Its very allure may have been instrumental in maintaining popular support
for the initiative. 


Conventional wisdom might well suggest hydro power would make
sense long term.  Strangely though, in
spite of all Nalcor’s claims, the Crown Agency has never provided a comprehensible, consistent or detailed calculation of future electricity rates.  


A Table, showing how the incremental cost of
Muskrat Falls power is calculated, should have included the “back-loaded”
equity repayment (which Nalcor said it would use to avoid rate shock), operations
and management (O&M) costs, depreciation, interest costs and other
components.  This incremental cost could
then have been adjusted to reflect the other revenue requirements for both NL
Hydro and Newfoundland Power to produce a final predicted residential rate.


Despite the refusal to provide such a consistent, clear and
correct calculation, Nalcor steadfastly argued rates will decrease over
time. One of the first references is
contained in the 2011 Navigant report:
These rate projections underscored Navigant’s recommendation
that Muskrat Falls provided the lowest cost option.  The reader might want to review the rate
predicted back in 2011. 



Even though the
figure represents the average wholesale rate to Newfoundland Power, they are
still not reconcilable with any published information available today.  It bears repeating decreasing real rates,
over time, was a  convincing argument made
early in the project.  

In July 2011, Nalcor presented another set of rates to the
PUB.  They were the average retail rates,
which people could expect to pay. In 2025, the forecast figure was 17 cents per
kWh. Nalcor also projected it would be 2050 before rates rose to more than of 20 cents per kWh. 
 



The PUB requested the calculations to support this graph; Nalcor’s response was given in RFI-PUB-NALCOR-5. 

Since those long ago days of the PUB Hearings, the project
has been delayed, and costs continue to mount. 
Nalcor have updated the rate projections on several occasions.  The exhibit (below) was recently posted by Memorial
Professor, Tom Baird, on his Twitter account. 
The calculations are no clearer than they ever were.  
Little wonder David Vardy continues to seek information on
Nalcor’s revenue requirements for the Muskrat Falls project by filing Access to
Information requests under ATIPPA legislation. 
In deference to the current government, Nalcor does, at least, answer
the requests. But the clarity and detail needed to verify whether the basis of
the projections  are complete, is still
missing. The public has a right to this information, and Nalcor’s continued
obfuscation should not be permitted by either government or the PUB.   



The following table is the product of a recent request, under
ATIPPA, which Mr. Vardy filed seeking information with respect to those
projected power rates. 
Based upon the information provided, one can conclude that in
2019 the ratepayers of the province will be paying a minimum of $534 million to
cover Nalcor’s revenue requirements to meet the costs associated with the new
dam, Labrador and Island transmission.  Under
the “take or pay” contract, this revenue will be for ~1900 GWh of delivered energy
to Soldiers Pond after transmission line losses are accounted for (refer
to Schedule 2 of the Power Purchase Agreement
).


Simple math confirms, using both the energy delivered and the
revenue required in the first year of operation, that Hydro will be paying
about 28.1 cents per kWh for Muskrat Falls energy.  Since the project is only 40% complete, it is
safe to assume that the delivered cost of energy to Soldiers Pond will be
closer to 30 cents per kWh by the time Muskrat is completed. 


The Ball Government is committed to apply profit  from export sales to lower the domestic rate.
Accordingly, it seems only fair to include them, when quoting the incremental
costs of Muskrat Falls power.


Of the 4900 GWh of annual energy that Muskrat will produce,
there is presently 980 GWh which is Emera’s in exchange for building the
Maritime Link. The contract will run for 35 years.  240 GWh of supplemental energy will also be
provided the Nova Scotia company for the first 5 years of Muskrat production. 


The energy available for export is arrived at with this
simple calculation: 4900-980-240-2000 = 1680 GWh.  In addition, an estimated 7% line loss must
be applied to the 1680 GWh during transmission to Nova Scotia. Hence, about
1562 GWh of energy is available for sale. 
Assuming 6 cents/kWh is obtained from NS Power, the energy will
generate revenues of about $94 million a year. Applied for the purpose of
reducing the rate to the NL ratepayer, the sum represents about 5 cents per kWh.


In summary, if all export revenue associated with Muskrat
Falls supplemental energy is used to lower the rate to the NL rate payer, the
incremental costs for Muskrat Falls power will still be 25 cents per kWh. 


Now, let’s give this quite extraordinarily high rate some
additional perspective. 25 cents per KWh is about 2 times what we currently pay
for energy delivered to my house. 


It is about 4 times more expensive than the going wholesale rate
in New England 
 when
adjusted for currency. 
But, the figure that will unnerve the Newfoundland
public, who are taking all the risk and paying most of the cost, is that the
rate they will pay for Muskrat power will cost 2.5 times as much for Nova
Scotians

The predicted blended rate for Muskrat Falls power to the
Nova Scotia grid will be less than 10 cents per kWh.  (Refer to Figure 1 of the UARB paper on the
Sir Robert Bond Papers Blog

The UARB process in Nova Scotia also ensured that ratepayers are effectively provided all the upside of the
project.  Nova
Scotia has access to
market priced electricity in perpetuity.       


Final Rate to
Consumers


Presently, both Newfoundland Power and Newfoundland Hydro have
general rate applications submitted to the PUB. 
Based on data provided in these Submissions, I have been able to build a
table of consolidated retail rates. 


To understand how the rates are compiled I have built a table
of rates which includes both the Newfoundland Hydro
 and
Newfoundland Power 
 revenue
requirements in a single source.  The table is provided below for policy wonks and others interested in the detail of
how such calculations are derived. 


The rates shown correspond very well with the final predicted
residential rates which Nalcor provided Tom Baird.  By 2020, electricity rates in the province
will be approximately 

20 cents per kWh. 
The current rates are also consistent with those I predicted nearly 1 year ago




Stable Rates –
Another Myth Busted?


The
economics of Muskrat Falls was underpinned by the presumption of continuous growth
in domestic demand.  Nalcor predicted a
50% increase in energy requirements over the next 50 years. It was this anticipated growth in demand which was ultimately expected to generate sufficient revenues to pay for
Muskrat Fall.    


In
February 2012, during my initial submission to the PUB, I argued that there was
an equal chance of our energy demands would level off, in contrast to Nalcor’s
presumption that they could only increase. 
With changes to technology (heat pump efficiency), population changes,
and the impending rate shock, I stand by that position.    


The
variability of demand growth was never properly included in Nalcor’s DG2/DG3
analysis based on which the project was sanctioned. 


Newfoundland
Power now acknowledges that the Island may experience a decline in energy demand
in the province.  The next Exhibit,
contained in the Company’s 2016 rate application to the PUB, is revealing:

The impact of the forthcoming doubling of electricity rates
will have a significant impact on consumption. 
Anecdotal evidence suggests people are already installing heat pumps,
or converting to wood heat, in an attempt to insulate themselves from the
impending increased cost.  Newfoundland
Power suggests it is possible that conservation, alone, will result in the
demand, in 2030, staying at the level it is today. 


Indeed, I suggest there is no better way to impose
conservation, than by doubling rates. 


The problem for Newfoundland is that the “take or pay” model
proposed by Nalcor, to which the Dunderdale Government secured legislative
approval, demands that we pay for Muskrat Falls, whether the energy is needed or
not.  



The impact on ratepayers will be
profound. For example, even if only the mid point of the “Upper” and
“Lower” curve in energy consumption is achieved (as shown in Figure 1) we could see a 10%
increase in electricity rates, above
those estimated earlier
.  This outcome
is summarised in the following graph. 


The “take or pay” obligation is a critical issue, as already
noted; but most importantly, as cost overruns mount and the total revenue
requirement increases, in the absence of demand growth the unit cost of
electricity will increase well into the future. 
Each year our rates will be dependent upon how much energy is used on the Island.  Essentially the same problem exists today
with Holyrood and oil. The only
certainty is that the rates will increase. 


Additional costs, arising from reliability issues, are a
further concern; the impact on rates if  Holyrood is required for back-up, should the Labrador Island Link fail or the Water Management
Agreement is deemed unenforceable, has not even been assessed. 


That said, the most optimistic outcome is that when Muskrat
Falls is commissioned power rates will at least double, even when they are
offset by revenue from external power sales. Higher cost overruns will diminish even that odious outcome.



In a nutshell, the very notion of low stable future rates is
another Muskrat Falls myth.

The current government says it’s too late to halt the project.  That contention needs proof. Likewise, the public deserves to know when
Nalcor expects the project to finish. The Company has not provided a schedule completion update on the generating plant since July, 2014
and continues to withhold critical information about the whole project. 
  


Muskrat Falls is a public policy failure exploding in front
of our eyes. 


It is time to open the books on Nalcor in order to understand
how big this calamity really is. 

THE PROOF MUSKRAT FALLS IS NOVA SCOTIA’S PROJECT

The substance of Hydro’s mission is to satisfy the contracts with Emera to get large amounts of power flowing into Nova Scotia for the betterment of that province and its ratepayers.  The Island could easily live without the Muskrat Fals project and in fact, other than for the onerous Emera contracts, NL ratepayers would be best off if it was abandoned and left to rust.

FIRST YEAR OF OFFICIAL ENERGY DELIVERY NOT QUITE WHAT EMERA BARGAINED FOR

PlanetNL52: Happy Anniversary Emera on 1 Year of Official Energy Delivery Not Quite What Emera Bargained For Despite all the bad news related to Labrador Island...

GROUP SEEKS PUBLIC SUPPORT FOR CABOT MARTIN RESEARCH AWARD

Cabot Martin’s sudden passing, in September, has stirred his friends, colleagues, and others familiar with his work, to honor him and encourage continued work in applied research and public policy development.

15 COMMENTS

  1. Interesting. Re the gov't allowing export profits let's not forget that Hydro has excess recall from Churchill Falls available and that too should be used to soften MF impact. That cost Hydro 0.2 cents and given the slowdown in iron and mining should help as well.

  2. This piece, again masterful in an assessment of a tragedy unfolding, of which too few understand, most having concern with just the current low oil prices and government revenue loss. And JM can say `told you so, back in 2012` That energy demand growth going forward may not be as Nalcor predicted. And the danger of this `take and pay` arrangement, meaning customers pay more whether we need the energy or not. Maurice Adams correctly harped on that for a long time on his blog.
    Hope someone from the Telegram reads this piece by JM and alerts the public as to the real consequence of Muskrat Falls, and which issues of reliability and full final cost are yet unknowns.
    Spent time last night reading part of the Nfld Rate Application… it is apparent they seem to appreciate the bind MF will put them in, as they are the retailer, and will suffer the fall out from ratepayers.
    Winston Adams , Logy Bay

  3. To the first comment. We are already selling the available RECALL power through Quebec. They charge us 19 million annually to wheel 300 MW through Quebec. Shocked to hear that. Well that is another Muskrat Falls myth. We are giving up 1000 TWhr of annual production (60 million a year in revenue) to bypass Quebec, which is charging us 19 million a year to wheel power.

    • To 12:47 comment..No not at all surprised at 19. That is called open access and is not and will not be a free ride no matter which way you want to get out of NL or whose transmission system you use. If Hydro has 1.3 TWH available then that is less that 1.5 cents per KWH. Selling for 6 cents that is still $60M nwt and more profitable than MF. Except as MF is take and pay regardless some would argue MF better.

    • To 12:47 comment..No not at all surprised at 19. That is called open access and is not and will not be a free ride no matter which way you want to get out of NL or whose transmission system you use. If Hydro has 1.3 TWH available then that is less that 1.5 cents per KWH. Selling for 6 cents that is still $60M net and more profitable than MF. Except as MF is take and pay regardless some would argue MF better.

  4. Don’t stop the Project, complete the Power Line from Churchill Falls to Soldiers Pond. Send whatever power we require, either Recall power or power we purchase from Hydro Quebec. Stop building the Dam, we don’t need it.
    If the Province continues to put money into the MF dam we are doomed. Electricity rates will probably double to start and increase 2% each year for the next fifty years. If you stop the MF dam fiasco, you can repeal Bills 60 & 61, and allow free enterprise to produce power through wind, solar or other ways, and sell power to the grid.

  5. The Danger of Efficiency: I have been an advocate for minisplit heatpumps as part of the Isolated Island Option. They reduce heating costs by 60 percent and reduce the heating component of winter peak demand by 50 percent, and save residents about 30 percent on yearly energy bills, and is about one fifth the cost of MF power. But as JM shows on these charts, with low growth for energy on the island , electricity rates would need to go from about 19.5 cents in 2020 to 24 cents per kwh in 2030, almost 150 percent increase from present levels of just over 10 cents. Hence the folly of not investing in Efficiency early on, as low growth is likely what we will have. Going forward it is a vicious circle, that can be moderated somewhat if MF is cancelled with considerable billions of dollars not spent for energy that will not be used nor can be profitably sold. But this explains why the power companies are in denial on the benefits of efficient heating… it is not compatible with high cost mega projects…..high cost Muskrat and reduced energy use is about as bad as it can get….. just wish they would be transparent with that.
    Winston Adams Logy Bay

  6. Ed Hollett, in Sir Robert Bond Papers Blog comments on this JM article. He speculates that the 100 percent increase in power rates, an accurate assessment based on costs, but this may not be passed on to ratepayers. That perhaps half the cost will be added to electricity rates and the other half will be recovered from increased taxes…. but it amounts to the same thing,as ratepayers and residents are one and the same. Hollett is correct, and this may happen this way.
    I suggest it must happen this way. Remember , the higher the rates, the lower the consumption for electricity,which is this `elasticity` thing that economists use, especially Dave Vardy. This is important, and with alternatives such as wood pellet stoves, lower oil and propane costs, and especially minisplit heatpumps, Nfld Power has never before been faced with such alternatives which drive elasticity, and which can drive down electricity consumption. ELASTICITY…. I associate that word with Dave Vardy, but perhaps JM or Dave Vardy can do a article to explain it on Uncle Gnarley. I have done some research which shows elasticity may be more than 0.5 when there are alternatives. This would cripple electricity sales, and perhaps force government to moderate rates to below 50 percent increases….meaning more taxes by other means. And this switch to alternatives is in progress, though rates are still modest. People make decisions for heating systems in anticipation of high electricity costs going forward.
    Winston Adams Logy Bay

    • Have viewed numerous single family homes on Vancouver Island in past two month. Units with electric baseboard heating are older, priced accordingly and less marketable. Newer units, of course, have natural gas as option of choice where distribution is available. However, there is a very notable presence and market share of heatpumps as an acceptable and cost effective alternative, both for new market and conversion choices. FW

    • GNL/Hydro will find a way to take the cost out of the rate and to hide it elsewhere (tax, asset fire sales, etc.). Otherwise, there will be too strong an economic incentive for consumers to unplug partially/entirely from the grid. It is almost unbelievable that the lower churchill has become a greater disaster than the upper churchill.

  7. What is the cost of Holyrood produced power ? Does anyone know? Is this what we are replacing with MF?

    ""In summary, if all export revenue associated with Muskrat Falls supplemental energy is used to lower the rate to the NL rate payer, the incremental costs for Muskrat Falls power will still be 25 cents per kWh""