PlanetNL38: Large Pent-Up Demand For
Power in Labrador
An Alternative to Export With Greater
Profit
Ready for some eye-popping
news? NL Hydro has received more than enough requests in a
relatively short period, to not only sell out all Muskrat Falls energy but they
also have enough demand to sell all Churchill Falls energy if they had it
available. Yes, every watt generated would go just to meeting this
backlog of power requests and its all in Labrador – potentially nothing would
have to flow through Hydro-Quebec. If only this year was 2041!
This must be great news for rate
mitigation then? Not in the slightest really. You see,
all this demand is focused on solely the Labrador Interconnected System (LIS), home
to the cheapest utility rates in North America. Current rates are
set so low, Government would be unwise to allow the connection of any new
customer in the area. There is more money to be made selling the
power out of province.
How messed up is that?
A letter sent from NL Hydro to the
Public Utilities Board in April regarding “Restriction on Load Additions on the Labrador Interconnected System” indicates that the utility has reams of
connection requests from operators in the cryptocurrency industry.
About Cryptocurrency and Blockchain
Mining
Everyone has probably heard of Bitcoin
by now but there are over 5000 other cryptocurrency offerings now
trading. Even major financial institutions are getting
interested. Supporting the crypto industry are power-hungry
data-processing centers who compete to earn cryptocurrency by processing
encrypted transactions in a format known as blockchain. The process
of solving the blockchain and securely recoding the transaction is referred to
as mining.
The most successful large-scale
blockchain mining companies run thousands of high-power computers in a
relatively small building. These companies are scouring the globe
for cheap power and if the location has a cool climate that helps with the
immense ventilation and cooling requirements for the building, that helps
improve their operating margin. The Labrador Interconnected System
(LIS) ticks both those boxes.
By 2018, NL Hydro had already connected
some small mining companies in Labrador and was rapidly getting more requests
than it had power available. They put a freeze on the sector because
connecting just a few more of these miners would have used up all spare
capacity for any other customer load growth and put overall system reliability
at risk. Hydro-Quebec and other utilities did the same.
NL Hydro’s April 2021 letter indicates
that total requests, including both formal applications plus informal requests,
now total 6185 MW in Labrador East and 555 MW in Labrador
West. Incredibly there is more than enough demand to fully use up
both Churchill Falls and Muskrat Falls just in the Goose Bay area alone!
NL Hydro is almost completely unable to
capitalize on this demand as it presently has only 525MW available to it from
Churchill Falls. Meanwhile the main transmission lines of the LIS,
350 MW to Labrador West and 76 MW to Labrador East, are already near fully
utilized serving existing customers. A 28MW transmission system
capacity upgrade to Labrador East will soon be completed using via a tie-in at
the Muskrat plant but there are no known plans beyond this that may be
economically developed.
What useful information can we make of
this strange though interesting news? Plenty.
LIS Rates Are Non-Competitively Low
Most jurisdictions in North America are
jealous of the rates offered by Hydro Quebec. In all their different
rate classes HQ has typically the lowest electricity prices in North
America. NL Hydro’s LIS, however, undercuts HQ by a wide margin. For
example the LIS residential rate is just 3.2 c/KWh whereas the equivalent rate
paid by an HQ customer is 8 c/KWh.
For blockchain miners, HQ has created a
new large-scale commercial power rate class for them charging a minimum 5.3
c/KWh (with transmission and distribution demand charges
included). Ignoring the LIS, that is quite
competitive. Prime locations for blockchain miners include Iceland
and Sweden where rates are comparable, but the resources are getting
thin.
The comparable rate class in Labrador
is just 1.9 c/KWh, undercutting all competitors.
No wonder cryptocurrency operators are
queuing up!
Exporting is Better Than a New Customer
Under Today’s Policy
While Labrador needs nearly all the
525MW to meet peak winter loads, there are many periods where surplus energy is
available and sold by Nalcor Energy Marketing through the Hydro-Quebec
transmission system. Overall, about 2/3 of energy is used in
Labrador (mostly by iron ore mining in Lab West) and 1/3 is exported. Nalcor
Energy Marketing has typically realized 4 c/KWh on export revenue, and they
forecast much the same on surplus Muskrat Falls power when it becomes
available.
The export market returns double the
revenue of the large commercial rate the blockchain firms want to take
advantage of. Under the existing policy, Government should prefer
for NL Hydro to export all surplus energy and earn the marginal profit of 4
c/KWh. This would maximize unregulated earnings while keeping
regulated LIS costs and rates more than adequately low and stable.
By proceeding with the 28 MW capacity
increase project in Labrador East, NL Hydro will not only be taking in half the
revenue but they will be reducing the unregulated earnings of export sales that
is needed for rate mitigation! As usual the utility and Government
prove themselves adept at making backward decisions.
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| Racks of computers used for Bitcoin mining fill a room inside Genesis Mining’s Enigma facility in Iceland. Photo: Lisa Barnard |
A Better Opportunity To Maximize Profit
in Serving the Blockchain Mining Industry
What Government really needs to do is
amend LIS rate policy. That policy needs to close the opportunity
cost relative to competing jurisdictions, namely Hydro-Quebec. Do
that first and then selling to the blockchain sector on the LIS will yield more
earnings than export the energy.
Relative to the Hydro-Quebec rate of
5.3 c/KWh, NL Hydro’s present commercial offering of 1.9 c/KWh leaves a clear
opportunity cost gap of 3.4 c/KWh.
At a minimum, Government should amend
utility legislation to enable NL Hydro to create a specific rate class for
blockchain mining that mirrors the HQ rate of 5.3 c/KWh.
But that is not all. There
is a far bigger opportunity to be exploited. Explaining all this for
the sake of 28 MW to earn an extra $8M is not the payoff.
Build A New Industrial Sector in
Labrador
Government should order NL Hydro to
promptly deliver a study on the technical feasibility of selling all available
Muskrat and Churchill surplus energy at the gate of the Muskrat Falls
Generating Station. At least 2 TWh of energy, both Churchill and
Muskrat surplus, would be available for what would likely be the world’s largest
blockchain mining center.
With a rate of 5.3 c/KWh, this sector
would deliver higher marginal profit than exporting.
Exports not only have a lower price but
they incur transmission losses (about 10% of the energy is lost by the time it
gets to a far-away paying customer), surrender transmission fees outside the
province, and they require the services of the Nalcor Energy Marketing
division. All of these expenses can be made redundant.
Whereas exporting may yield $40M gross
profit after expenses, the proposed market strategy for blockchain could net
$70M more.
The total surplus power available is
only about 5% of the 6740 MW demand indicated in the NL Hydro
letter. While those operators were hoping for the super low price of
1.9 c/KWh, it is highly likely that more than 5% of them are willing to pay 5.3
c/KWh or perhaps even higher. NL Hydro should organize a bidding
auction to lease the available capacity at a minimum price of 5.3
c/KWh. Offers may come in higher than that.
This concept falls into the category of
unregulated utility operations – a Government Business Enterprise as discussed
in PlanetNL 31 – and would not directly affect the regulated LIS in any
way. The $110M unregulated earnings would flow to Government as
Dividends where they can be used for rate mitigation or deficit
reduction.
FYI – The Emera Energy Access Agreement
(EAA) is also expected to generate export revenue of $60M on 1.5 TWh at market
energy price and is an additional revenue stream. The EAA
obligation is another example of opportunity cost: Had this energy not been
committed to Emera, it might yield $80M if sold for blockchain usage plus
deliver other economic benefits. The Government of the day
committed to a strategy to look after the future opportunities of Nova Scotia
ahead of those in this province.
Is Government Capable of Processing
This Information?
Government and Nalcor communications to
date have focused solely on exporting surplus energy. It appears
they have no practical knowledge of the blockchain mining opportunity and how
building a new industrial opportunity increases utility revenues and profits
relative to exporting.
The development of a new industry also
will deliver construction benefits and long-term economic growth and taxation
benefits. With exporting, all those benefits flow to another
jurisdiction, likely Quebec who are trying to accomplish the same
thing! There should be many millions in other benefits that would
accrue to Government revenue. None of this should need a penny of
Government subsidy to get going either.
For ratepayers and taxpayers alike, the
additional revenues will also lessen the burden of Muskrat Falls complete
economic failure and will assist with rate mitigation and deficit reduction.
The blockchain industry surely has risks
but that can be dealt with. If the sector completely fails in a few
years time, as many pundits have claimed for years but are continually proven
wrong as the industry steadily grows, there is a Plan B. Return to
selling surplus energy via export markets.
The cost of catering to this concept is
virtually nothing. The only new asset to be built would be a
terminal station. Quality proposals from credible operators may well
guarantee that cost to prevent it from ever becoming stranded.
Government and NL Hydro should be
acting immediately to get proposals from industry participants and determine
the viability of the concept. Those involved in the Muskrat Falls
negotiations have a right to know what can be developed and how new revenues
can offset some of the enormous losses arising from that project.
Gaining Leverage With Hydro-Quebec In
Advance of 2041
Should the proposed concept for a major
blockchain mining industry take off in Labrador, there is yet another
tremendous benefit to be realized.
Come 2041, when Hydro-Quebec’s supply
contract ends at Churchill Falls, the Province will gain full control of its
65.8% share of the facility and energy production. The additional
energy surplus available in 2041 exceeds 19 TWh.
Until this blockchain opportunity came
along, there appeared to be no alternative to negotiating with HQ on their
terms.
If Hydro-Quebec is the only customer,
they would expect offsets from the market energy price to compensate for their
transmission cost, selling fees, and their own profit margin
objectives. Relative to today’s typical market price of 4 c/KWh, HQ
might likely have the upper hand to bargain the price down to half that.
Alternatively, with blockchain demand
lined up – many existing operators could structure their contracts and leases
in other places to expire in 2041 allowing them to move to
Labrador. That market demand forces HQ to pay the same top rate or
rely only on their 34.2% of the power available to them. Heck, if
the blockchain market is strong, HQ might even prefer to join in on the plan
for a new industrial park at Churchill Falls.
With blockchain rates at 5.3 c/KWh, NL
Hydro’s 19 TWh of surplus energy would yield about $1.0B gross profit in 2021
dollars putting it on par with oil industry royalties with far lesser risks and
environmental hazards. Without the leverage of the blockchain
business, profit on sales to a dominant Hydro-Quebec could be less than half
that.
Silently ignoring the potential to
double the returns on Churchill Falls would be a failure on the same scale as
the creation of Muskrat Falls. It’s time for the crowd at
Confederation Building to wise up and show some leadership when a real
opportunity presents itself.
