Guest Post by PlanetNL
a Hurricane – Muskrat To Destroy Utility System in 2020
blog series is offered to demonstrate the true value of Muskrat Falls (aka Lower
Churchill Project) and to expose the risks and burdens imposed by it on Newfoundland
ratepayers and taxpayers. The view will
be predominantly forward looking, relying on best available project and market
information to deliver plain economic analysis that can be appreciated by a wide
range of people. There will be little
ranting as the dire economic concerns will speak for themselves.
deeper exploration of consumer billing rates than Nalcor and Government have
been providing. The Nalcor rate projection
has consistently gone up as the Muskrat project has advanced with cost overruns,
yet it seems they have not given all the facts. They already have a prediction of more than
doubling rates after the project is commissioned in 2020 but PlanetNL projects
that rates will actually shoot much higher.
rate on the island of Newfoundland depends on two basic things: revenue and
First is the
required revenue needed to keep NL Hydro and Newfoundland Power running. NL Hydro generates over 90% of the energy
production and they provide all the high voltage transmission while NL Power
does over 90% of the retail distribution.
In recent years these two entities combined, have typically needed about
$700M annual combined revenue to service the island market. The same island market which is solely responsible
to pay for Muskrat Falls and will bear the entire costs and debts demanded by
Muskrat come 2020.
key detail is the NL Hydro energy sold into the main island market. This is the energy base that sets the rate
both before and after Muskrat Falls.
This figure has been riding along near 7000GWh (1GWh = 1000MWh = 1,000,000KWh)
in recent years.
To get the
billing rate, simply divide total revenue by energy sold. In recent years, this
was typically $700M/7000GWh = 10c/kwh (before HST). The Newfoundland island rates have been
stable around this level and typically right about average within Canada or
slightly lower than average.
NL Hydro’s 7000GWh supply is hydropower with the Bay D’Espoir system contributing
almost two-thirds of the energy. About
3% of energy comes from two small wind turbine projects in Fermeuse and St.
Lawrence. The Holyrood thermal plant makes
up a significant 20% of energy but it comes with a substantial annual fuel cost
of about $150M.
About 60% of
the total island energy consumption is in the domestic residential category, just
over 30% is commercial, and under 10% is industrial usage. Each market segment gets its own rate
structure but for simplicity the discussion here will be centered on domestic
retail rates. Commercial rates work out
close to the same as domestic and the rate increase should be comparable. The small industrial sector is a different matter:
they pay about half the domestic rate and would be adversely impacted by large
price increases. Assuming industrial
rate impact is likely to be minimal, the rest of the customer base will see
their subsidization of industrial power increase substantially.
Will Decrease Energy Requirements
June 23, 2017 Muskrat Falls project update indicated the domestic retail rate
will be over 23 c/kWh (before HST), approximately a 140% increase over the
2016/2017 rate of 9.7 c/kWh. Despite the
massive rate hike, they forecast energy sales to hold quite steady to the 7000GWh annual level with a brief 4% reduction centered on the year the rate hike
is introduced and returning upward a year or so later followed by endless years
of steady demand growth.
any energy authority that isn’t trying to push a costly project onto its
customers would anticipate a much greater drop in demand than 4% when a
permanent 140% rate increase occurs. An
excellent source, and there are many others with similar findings, is the US
Energy Information Administration (an agency of the U.S. Department of Energy):
a comprehensive 2014 EIA study asserts that when electricity rates double, long-run
demand will drop by 40%.
Nalcor’s suggested 140% price increase, the EIA energy sales reduction factor
would be 140% x 0.4 = 56%. It’s simple and widely accepted economic logic that
when price increases substantially on any commodity, consumers soon buy less of
it and look for substitutes so they can save money.
detailed analysis will be saved for a future post, this analysis will
conservatively use a modest 30% drop in energy sales from 7000GWh to
5000GWh. Lower levels than this pose
greatly increased hardships on consumers.
Subject to a
more than doubling of electricity rates, consumers are guaranteed to change
their habits and find ways to use less power in general. Large numbers will seek out more efficient
heating alternatives than the simple resistance heaters that are in 70% of Newfoundland
households and probably a higher percentage of commercial buildings. The 30% energy sales drop can be easily found
and it is a massive reduction to the bottom part of the rate formula.
the formula’s top half, revenue requirement, is about to balloon. Nalcor has not released a 2017 revision of Muskrat
future annual costs but the assumed contractual payments with latest overruns
will exceed $800M annually in the early years (climbing steadily beyond
that). Partially offsetting the big increase
is the elimination of $150M in Holyrood fuel savings. Total revenue requirement is therefore raised
To get the
new billing rate, divide $1350M revenue by the predicted 5000GWh energy sold: this
computes to a 2020 rate requirement of 27 c/kwh.
that industrial users get largely exempted from the rate increase, pushing
domestic and commercial rates up to about 30 c/kWh.
there’s more. As a double-check on future
revenue requirement, multiply Nalcor’s 23.3 c/kWh projection by the near 7000
GWh sales forecast: their implied revenue requirement is about $1550M. It appears they have an extra $200M costs
buried in there. Is it possible that the
rate increases of 2017, and more forecasted for 2018 and 2019 represent
permanent additions to the cost base and not just short-term project driven
costs which was their supposed justification for these near-term increases?
permanent cost base is rising by $200M, then rates are directly impacted by
another 4 c/kWh. As every cost increase
motivates consumers to use a bit less, the future bill rate is easily in the
neighbourhood of 35 c/kWh. That would be
a rate triple the Canadian average and double or more the next most expensive
consumers already struggle with rates around 10 c/kWh. They scrape by and make tough spending
decisions while some depend on formal assistance programs or informal
assistance from family and friends to make ends meet.
At 15 c/kWh,
it’s easy to foresee that a number of homes would likely close as seniors and
other low-income people decide to live elsewhere in multi-family homes to
reduce their cost of living. Likewise
some businesses will have to downsize or close as their costs rise – these
actions cause job loss and subsequent socio-economic pressure.
20, or 25 or even the stratospheric 30 -35c/kWh suggested above, swaths of
additional customers simply can’t go on paying their bills: large numbers of
ratepayers become casualties and heavy damage mounts.
this distressing scenario, NL Hydro will find itself in the position of trying
to collect revenues no matter what. When
a group of consumers don’t pay, utility revenue shrinks and the remaining paying
consumers will be targeted with additional rate hikes. The Public Utilities Board, solely committed
to the reliable operation of the utility, would have to approve the increases. Theoretically, rates would spiral further
upward as the customer base diminishes with every increase.
will never materialize as more consumers flee, don’t pay, or get disconnected. NL
Hydro will never get close to collecting its required revenue. Theoretically, at some critical price point
on that upward path, no more revenue can be raised and rate increases actually
decrease revenue. Beyond the tipping
point, the stability of the market gives out and things collapse, including big
things like utility companies.
consumers fail to deliver the cash, Hydro and Nalcor (including all the subsidiaries
that make up the different lines of business within the Lower Churchill
Project) will find themselves in financial default to their lenders and equity
holders. Staying the course guarantees that
the Newfoundland utility system is headed straight to a catastrophic bankruptcy
in 2020 or 2021 latest with maximum socio-economic harm to all ratepayers.
July, Premier Ball spoke of a maximum 17 c/kWh rate and that rate mitigation
measures must be found to make up the difference. Is permanent government subsidy an acceptable
solution? PlanetNL runs the numbers and
the outcome is an even bigger unnatural disaster.
References / Recommended Reading Material
23, 2017 LCP update – http://muskratfalls.nalcorenergy.com/wp-content/uploads/2017/06/Muskrat-Falls-Project-Update-Presentation-June-23_Final.pdf
submissions – http://www.pub.nl.ca – a vast number of documents have been reviewed to
prepare this series and a couple of them will be cited individually in the
future. For the full breakdown of how
rates are set, feel free to review about 1000 pages of information in the latest
General Rate Application – or accept my simplified version.
by the continuing lack of honest and credible information from Nalcor and
Government, PlanetNL, having a suitable analytical background, is presenting
independent research and calculations. This is a spare time activity outside of
regular professional commitments. All key
information used to develop the views and analysis are publicly available. The analysis cannot avoid entering into
public policy space: if Government or Nalcor wish to refute the analysis, they
are welcome to present an open and honest rebuttal.