Guest Post by PlanetNL

PlanetNL37: Market
Valuations for Gull Island and Churchill Falls

Plus The Atlantic Loop and
A Curious Re-Analysis of Muskrat Falls

PlanetNL36 provided an
analysis of the fair market value of Muskrat Falls based on prevailing
wholesale electricity rates.  The analysis concluded that the project
would be completely incapable of generating any net earnings to put toward
return on debt or equity. Worse again, like a true boondoggle it could continue
losing money after it is put into operations.  The Muskrat project
should never have made it beyond round one of screening alternatives, let alone
been sanctioned and built.  That Nalcor and Government sanctioned a
project that forced ratepayers to pay ten times greater than market price, and
with cost overruns more than twenty times market price, is an obscenity.

The same methodology for
economic worthiness is used to consider the market value of the potential Gull
Island project and the Atlantic Loop.   In addition, it will be
used to put an estimate on the 2041 market value of Churchill
Falls.  Plus, one final look at Muskrat will consider whether the
project in a lesser form might have been more viable.

To better understand the
methodology, be sure to read PlanetNL36 first.

Gull Island – No Chance,

Some guesswork is required
and shall be based on the Muskrat Falls experience.  We do know
Nalcor and Government promote the potential Gull Island plant capacity as 2250
MW (2.7 times Muskrat) yielding 11.9 TWh of energy (2.4 times Muskrat). 

The last detail allows
computation of the gross annual revenue potential of near $480M using the
current 4 c/KWh wholesale market energy price projection.

Operations and Maintenance
costs might be the same as Muskrat at about $80M as the larger size of the
plant is offset by a shorter and less complicated transmission
system.  Water power royalties to the Province should scale at 2.4
times that of Muskrat for $39M.  Another expected allotment for First
Nations settlements could easily exceed $10M per year.  In total,
$130M in operating costs leaves $350M remaining to go toward capital
return.  That is a lot better than Muskrat.

Using a 10% factor for
overall rate of return with depreciation, which is not allowing much for risk
given how poorly Muskrat has gone, the available $350M in annual return on
capital indicates a sustainable maximum capital investment of
$3.5B.  That doesn’t look good.

Nalcor has not publicly
uttered a cost estimate for Gull Island.  Around 20 years ago it was
thought to be about $4B but Muskrat was thought to be about $1.5B or so at the
time.  Those numbers are surely far too low.  While Gull
Island will not have nearly the same transmission line expenses, the generating
facility will likely cost at least double that of Muskrat.  A total
project cost in the ballpark of $20B is a reasonable estimate.

Clearly the economics of
Gull Island look like a dismal failure and the project should never be
sanctioned.  To achieve financial breakeven would require wholesale
market energy prices to be at least 17 c/KWh.  It would need to be
even more than that as Hydro Quebec’s and other jurisdiction’s transmission
fees must be costed into sales.

With wind and solar energy
suppliers entering the North American market in abundance and pushing market
prices ever lower, and more new technologies in development for both energy
generation and storage, it appears that any notion of Gull Island ever being
developed is the epitome of nonsense.

Inside the Churchill Falls Generating Plant

Gull Island Atlantic Loop –
Really, Stan?

The proposition of the
Atlantic Loop cannot go unassessed.  The Gull Island scenario above
allows only just enough new transmission line construction to get the power
onto the Quebec grid.  For the Atlantic Loop, a dedicated
transmission line must extend all the way to New Brunswick, across it and into
central Nova Scotia.  A solid  comparable is Manitoba’s
Bipole III, which cost $5B.  This raises the required wholesale cost
of energy to 21 c/KWh.  At that whacky price, the Atlantic Loop is
Boondoggle II.

The Atlantic Loop concept
is a mere political pipedream intended to distract the people of Newfoundland
of their grief and fear associated with Muskrat Falls and for shameless vote pandering
in the Maritimes. 

New Brunswick and Nova
Scotia have several better alternatives.  Firstly, they have
Hydro-Quebec next door who could supply energy if they accelerated some
internal policies.  Quebec would need to reduce in-province peak
demand and they would need to reprioritize away from exporting energy to the
US.  Both things are slowly happening, the first by choice and the
second a result of getting squeezed out of the market.   

The cost of large-scale
transmission line construction is a substantial handicap even to the
Hydro-Quebec concept.  New Brunswick and Nova Scotia are just as
aware as anyone of trends in wind and solar generation and other developing
technology opportunities.  Dispersed pockets of renewable generation
that avoid new transmission line construction, eventually supported by economic
energy storage, is the economic roadmap toward full green energy at competitive
market prices in all jurisdictions.  Big hydro has had its day.

Stan Marshall said in an
interview to CBC on June 10, “The problem we’ve had in Newfoundland, we’ve
gotten terrible advice on our hydroelectric things.”  Somebody needs
to get Stan a mirror.  And a calculator.




Churchill Falls – A Top
Quality Asset

The scenario involving
Churchill Fall is to assess its market value, not for construction, but as if
it were to be acquired by a new owner.  Post-2041 cash flows provide
the answer.

Churchill Falls could not
be more different than Muskrat Falls or Gull Island.  Churchill Falls
is a proven and reliable plant with exceptionally low operating
costs.  Its output is a staggering 5428 MW (10th largest
hydro plant in the world) and it typically produces 35 TWh of energy annually.

Roughly 90% of the energy
is taken under contract to Hydro Quebec until 2041 at the super-low price of
0.2 c/KWh. Supplemental revenue streams bringing total revenue, according to
the recent 2020 Financial Statements, up to $146M while total expenses were
$97M.  On an energy basis, the revenue averaged 0.5 c/KWh while cost
was 0.3 c/KWh.

Clearly the energy is being
sold at way below market-price and will remain so until 2041.  Doing
an asset valuation on $49M profit will lead to a ridiculously low number, even
less than the very low 2020 asset book value of $1.0B.  We know the
true market value is something far greater.

Beginning in 2041, all
production should be expected to sell for the wholesale market price of
energy.  Hypothetically, if that contract ended today, the gross
annual revenue would rise almost tenfold to $1.4B with expected gross profit of

The appropriate rate of
return on a known low risk asset should also be adjusted lower than for Muskrat
and Gull, by at least 2%.  Dividing the gross profit by a rate of
return and depreciation of 8%, indicates a fair market capital asset value of

There are several downside
concerns and risks to consider though.  Will Hydro-Quebec still want
90% of the energy or close to that?  If not, transmission fees will
apply to export sales sent through HQ at a cost of about 1 c/KWh.  As
well, will there even be a viable export market beyond Quebec
post-2041.  The plant by then is sure to require some major capital
renewal in its next 50 years and some deduction should be reserved for
that.  Long-term trends in the price of electricity will also have a
big effect – they could go up, but it seems more likely they could go
down.  These effects could easily half that the potential asset

Expressing the market value
estimate to be in the range of $8-15B may be the best way to encapsulate the
variances.  As the Province owns 65.8% of Churchill Falls, their
share of the asset value would be roughly $5-10B.

As shown in PlanetNL36,
market energy prices were right about the same in the period of 2009-2013 prior
to Muskrat sanction.  The same valuation of Churchill Falls as
presented here would have existed then.  That Nalcor and Government
spawned the far smaller and much more risky Muskrat Falls in this same cost
range defies all sense.


Muskrat Without the LIL –
Less Is More

OF the countless mistakes
made in developing the Muskrat Falls project, one of the worst concerns the
value of the Labrador Island Link (LIL) DC transmission line.  It was
very expensive and remains plagued with problems.

As this component is about
40% of budget, it is worthwhile to consider whether Muskrat might have fared
better as a straightforward export only Government Business Enterprise, without
the LIL.  In this scenario, the Island could have remained isolated
and continued to use Holyrood at a far lower cost than Muskrat in the
short-term and eventually would have weaned itself off Holyrood through
conservation measures and a small amount of renewable development added at
market energy price.

This export-only Muskrat
project would be assumed to cost $8.5B on the assumption that there is spare
capacity on the Churchill Falls transmission lines to which it is connected or
to the Gull Island lines if it were built.  These are weak
assumptions, but it reflects NL Hydro’s position from decades ago that Muskrat
was never expected to be anything more than an add-on project with Gull Island.

From PlanetNL36, the total
expected revenue on energy sales is $184M as Emera does not exist in this
scenario to siphon off power without pay.  O&M costs would be
halved without the LIL but other operating costs the same, totalling $62M.  With
a gross margin of $122M, dividing by 10% yields a capital asset value of
$1.2B.  Adjusting rate of return 2% lower only increases the
valuation to $1.5B.

The required revenue to
cover $8.5B in capital is $912M demanding roughly the same 20c/KWh wholesale
market price of energy as for Gull Island.

Even this lean and trim
Muskrat is a big fat loser but at least it is only about half as bad as the 39
c/KWh price calculated in PlanetNL36 for the project with the
LIL.  The high O&M cost associated with the very complex LIL is
half the answer while the commitment to give Emera 1.0 TWh of free energy is
the other.

This somewhat curious
finding should not be quickly forgotten.

If the LIL should prove
unfit for purpose to reliably deliver winter power needs to the Island, or if it
suffers major capital damage in a storm event, it may be time to cut losses and
do something else.  If the Churchill Falls transmission line has the
available capacity, the Muskrat Generating Station could immediately generate
greater returns for itself through energy export.

That scenario would need to
take into consideration new actions the Island must take to make up for its
energy shortfall.  An urgent conservation program and a competition
for a wind energy PPA could both likely be delivered at the market price of
energy with little capital cost.  Putting major capital into the LIL
again to hope it works perfectly next time would likely be a distant
second-best alternative.

It is a complex scenario to
analyze but there is a clear possibility that Muskrat would operate more
beneficially without the LIL and the Island electricity system would be made
more reliable without it. 

This eventuality should be
ignored by no one involved in the negotiation of the resolution of the
financial calamity of Muskrat Falls. 



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.


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?