Written by David Vardy
government of the day sanctioned Muskrat Falls in December 2012 they subjected
the province to enormous risks. They gambled the future of the province and
inflicted what is proving to be great damage on a public which was far too
trusting of their leaders. They bet the farm on increasing energy prices and we
have as a society begun to suffer the consequences.
position of the province has eroded substantially, as indicated by the fact
that the interest cost on our debt now exceeds our expenditures on education.
Our per capita debt is higher than any other Canadian province and higher than
beleaguered Puerto Rico. Our deficit, as a proportion of GDP, is 13 times that
of the average Canadian province. We are
borrowing 35% of our total spending, a cash deficit of over $3 billion, at a
rate which cannot be sustained.
of our high debt load in 1933, which led to Commission of Government, is very
real, not just a remote possibility. Government has embarked on a draconian program
of tax increases, likely to be matched in the fall with equally severe cuts to
our expenditures. These measures are necessary because of the legacy of the
former administration, which sanctioned the foolhardy Muskrat Falls project.
The new Liberal administration must now take the measures necessary to minimize
the risk of the Muskrat Falls project if our fiscal independence is to be
Stan Marshall minced no words when he said that the Muskrat Falls project was
“not the right choice for the power needs of the province”. He said that “$6.7
billion has been spent or is contractually committed.” Marshall said that we
should have built generating capacity only according to our needs and not
speculated on the future by building too much capacity. The assumption of
continuously rising oil prices has been proven false by the advent of the shale
gas revolution. He also said the demand projections for electricity were much
too high. He concluded that “stopping the project is no longer a practical
Suspending Site Work at Muskrat Falls
utmost respect, I believe that Mr. Marshall should reconsider his position with
regard to continuation of the project. A case can be made for suspending work
at the generation site while continuing only with the transmission component.
My purpose here is to state the case as well as to argue that other options
also be explored.
statement of June 24 Mr. Marshall disclosed that the generation component
represents 52% of total project cost, amounting to $4.8 billion, while $2.3
billion has been spent and $0.9 billion has been committed but not spent. The
projected balance remaining to be spent, not including financing costs, is $1.6
billion. For the transmission lines the amount spent is $2.4 billion and $1.3
billion has been committed but not spent, leaving $0.7 billion to be spent.
Therefore the decision to suspend the generation component must focus upon 52%
of the cost and not the full $11.4 billion cost projected by Nalcor in
Marshall’s update of June 24, 2016. The $6.7 billion of committed costs
included in that release includes both the generation and transmission
components and it includes a combination of sunk costs and potentially
to suspend the generation component will require that some contracts be
renegotiated, particularly the Astaldi contract, which is currently the subject
of intense and protracted negotiation. We therefore start with the proposition
that some of the contractually committed costs associated with generation are
open to renegotiation and that costs which have not been committed or incurred
can be avoided.
Young reported in April 2015 that
(Muskrat Falls Generation) civil works contract is the highest dollar value
contract. The contract involves construction of a number of areas: intake and
Powerhouse, Spillway and Transition Dams. The deliverables on this contract are
required to allow progress on other contracts, e.g. installation and
commissioning of the turbines and generators, installation of spillway and
intake gates and the balance of plant contract.
understand that Astaldi did not generate sufficient profit from this project in
2015, based on reports from the Astaldi CEO to his shareholders. What Astaldi
is now seeking is to recoup some of the lost profit and to extricate itself
from what has become a dilemma both for Astaldi and for Nalcor. Marshall said
that his negotiating strategy is that the outcome should be a win-win situation
and not a “zero-sum” game where one partner takes advantage of the other.
make Astaldi “an offer they cannot refuse”, one which would offer them a share
of their expected profit while allowing them to walk away from the project. The
avenue for such an exit is to buy out the contract by offering a share of the
expected profit (but not all) along with cessation of further construction on
site. This approach could be used as well to abort other contracts for the
Challenge by Hydro Quebec
has mounted a legal challenge to Nalcor’s ability to manage the water resources
of the Churchill Falls reservoir and thereby to develop Muskrat Falls. The
fundamental issue revolves around whether the renewal contract between CFL(Co)
and Hydro Quebec continues to allow Hydro Quebec access to all power and
energy, save for the 300 MW Recall power and the 225 MW Twin Falls block, after
years until the matter is heard by the Supreme Court of Canada. In the meantime
the risk of spending money on the Muskrat Falls project is enormous. Stopping
the project now, while taking action to preserve the generation assets, would
reduce these risks.
of the Quebec superior court is imminent. Whatever the decision may be it will
cast a cloud of uncertainty over the financing for this project. Nalcor must
have a plan to deal with any outcome in the courts, both the decision of the
Quebec court and the ultimate ruling upon appeal to the Supreme Court of
Canada. Suspension of the generation component may well be the best plan to
minimize the risk of adverse rulings.
needed in advance of negotiations with Federal Government
referred to negotiations with the federal government to reduce the financial
burden on the province. A sympathetic Liberal government in Ottawa may be
responsive to the burgeoning costs of Muskrat Falls, which have increased from
$6.2 billion in 2010 to $11.4 billion today, an estimate that Marshall
qualified as being just an estimate and likely to rise further. If these
negotiations allow us, as a province, to borrow more money, we have to ask is
that the best solution? It will continue to add to our public debt and future
generations will still be obliged to pay. The project will continue to be a
“boondoggle” and far from the best solution to our energy needs.
to Ottawa on bended knee we must do our homework. This requires a realistic
cost benefit analysis of stopping the generation component and continuing with
the transmission line. We may have to find alternative energy for Nova Scotia
to fulfill our commitments but the revised load growth numbers released by Mr.
Marshall on June 24 disclose a dramatic reduction in the projected demand for
electricity in this province.
use of electricity for space heating, including a combination of retrofitting
and use of heat pumps, which will more effectively respond to the peak load
demands of winter heating than the sledgehammer that is Muskrat Falls.
have also argued that the need for reliability necessitates an energy source on
the Avalon and that a well maintained thermal plant at Holyrood or some other
alternative source of power will be needed after interconnection. This needs to
be factored into the analysis. Only after the full analysis has been completed
should we approach Ottawa.
solution between stopping or finishing the full project
said we cannot afford to finish Muskrat Falls nor can we afford to stop it.
What we need is something in between. The suspension of the generation
component, while continuing with the transmission lines, offers a better
solution. The transmission line will allow us to access the unused portion of
the 300 MW block of Recall power and to purchase additional power from
this Blog regarding the project and he has argued that energy from Hydro Quebec
should be purchased for transmission to the Island, along with Recall
power. Hydro Quebec’s returns for
selling power in the US have fallen sharply with the shale gas revolution. We can offer to match or exceed their unit
revenue from US sales so that it will be in their profit-seeking best interest
to meet our needs and to do so at a much lower cost than that of building
the power after 2041?
those who will argue that, in the long run, inflation will erode the burden of
the debt and our grandchildren will bless us for building this long-lasting
renewable energy project. This line of reasoning ignores the simple reality
that Muskrat Falls will come on stream, at the earliest, in the second quarter
of 2020 and that, 21 short years later, in 2041, we will have access to low
cost power from Churchill Falls, another renewable energy source. We will then
have no need of power from Muskrat Falls so we cannot argue that it constitutes
the lowest cost power or that it will be a blessing to our grandchildren. Nor
can we argue that it will somehow strengthen our position with Quebec. We did
not need to prove that an alternative route through the Maritimes could be
built from a technical perspective. Other lines exist internationally and
perform extremely well.
to be proven was whether it could be built economically. The agreement with
Emera which resulted in the sale of one billion kwh of energy with no energy
charge to Nova Scotia, combined with the
sale of another 1.2-1.8 billion kwh at spot market prices, demonstrate
absolutely the converse proposition, namely that it is not economically
feasible or profitable. Furthermore, by overbuilding our capacity through such
an expensive project we have reduced our need for Churchill Falls power,
leaving us with an inability to take full advantage of the 5,428 MW from the
Upper Churchill. Rather than strengthening our position with Quebec we have
weakened it by building Muskrat Falls!
assessment of options would best be undertaken by an independent third party
who must be given full access to all contracts and other information. Ernst and
Young might be able to perform part of this task but they will require support
from a major engineering firm, other than the so-called “independent engineer,”
who has been silent for too long.
fundamental focus for assessing the options is future costs, not sunk costs.
Sunk costs are relevant for historical analysis but not for making decisions on
the future. We must focus on the future costs and revenues associated with
completion versus those of stopping all or part of the project.
Young’s April 2016 report said that only 40% of construction work had been
completed, leaving a lot of room for further escalation, possibly to $15
billion or higher. The cost is likely to exceed $11.4 billion for a number of
reasons. One is the cost of reaching a settlement with, or replacing, Astaldi.
Another is the cost of remediating the North Spur and the methyl mercury
problem. The third is the need to remedy the quality control problems that have
occurred, leading to the collapse of concrete cribbing at the powerhouse and
the loose strand of wire on 170 km of transmission wire.
Falls project was ostensibly designed to meet provincial needs but yet the
final agreement with Emera committed more than half of the energy output for
use in Nova Scotia. Mr. Marshall is now looking at other markets for firm power
since the latest load growth projection has produced a more realistic and
reduced estimate of local demand.
This revised model is similar to the
export-oriented approach to both Gull Island and Muskrat Falls adopted by the
administration of Brian Tobin. It has the potential to generate higher
revenues, as Marshall pointed out on June 24. Such an alternative business
approach to continuation should be included in the evaluation of options, with
export revenues used to offset the high costs of Muskrat Falls.
suspension option removes the risk arising from the court action in Quebec,
which could make it impossible to generate anything close to the 824 MW power
capacity of Muskrat Falls and thereby turn the project into an even bigger
“boondoggle”. It would also avoid the risk associated with the collapse of the
North Spur through the liquefaction of quick clays underlying the Spur as well
as the threat from methyl mercury arising from failure to clear cut the
run-of-the-river Muskrat Falls reservoir. These risks associated with
generation at the site are all avoided with the “transmission-only” option. It
cannot be ignored that the North Spur and methyl mercury issues constitute huge
political problems for government as they are seen as risking peoples’ lives
and poisoning their food.
are too high for us to continue blindly with this project.
the previous administration to turn their back on the advice they received both
from the PUB and the joint federal provincial environmental panel. It would be
equally foolhardy for us today to take the position that the cost benefit
analysis of the option to stop is as unknowable as the cost of “building a
transmission line to the moon”. In the language of Donald Rumsfeld the issue is
one of knowable unknowns not “unknown unknowns”.
grandchildren, who will be expected to bear the cost of a mountain of debt, we
must do the analysis and make a final decision on the basis of the best and
latest information available. We owe it to them to make every effort to avoid
the mistakes of the past, when decisions were made using false assumptions and