MUSKRAT FALLS AN UNMITIGATED DISASTER

Guest Post by David Vardy

Recent news reports have disclosed that the November 26, 2021
completion date for Muskrat Falls will not be achieved. No target completion
date has been set. Yet the project continues to accumulate costs. A recent
Tweet put the daily cost of the delay at $1 million a day. This is an
understatement. What is the daily cost, both in total and on a per capita
basis?

In this post we set out the bare facts of the unmitigated and
misguided Muskrat Falls project, its costs, without rate mitigation, and how
they compare with the cost of Holyrood-generated energy, for which Muskrat
Falls was intended to offer a less costly solution. We will also look at how
unit energy costs for power sold to Emera compare with the costs imposed by the
power purchase agreement on local ratepayers. We will show how the project was
a misguided, mistaken choice, and how, through the power purchase agreement, it
places an unsustainable burden on ratepayers.

The actual cost of servicing the debt, not the repayment of
principal and not the operation of the facilities, just the interest and cost
of equity, will amount to $770 million a year. This amounts to $2.1 million a
day.

What will be the full cost of the project, including principal
repayment and operating expenses, in the first full year of operation? How much
will the cost of our Island interconnected system rise in the transition from
an isolated island to an interconnected island system including Muskrat Falls?
How much additional cost will be incurred?

First, let us look at the system without Muskrat Falls, before the
beginning of commercial operations of the project. System cost, including Hydro
and Newfoundland Power is currently running at about $750 million. This
includes the fuel burned at Holyrood.

Second,
after Muskrat Falls comes on stream what will be the full system cost, taking
account of fuel savings, estimated at $178 million? The answer is $1.7 billion.
Once export of surplus power has been netted out, estimated at $50 million, we
arrive at a full system cost of $1.65 billion, taking full account of interest
payments, the cost of equity capital and the return of principal.

Comparing the post-Muskrat Falls cost of $1.65 billion with the
pre-Muskrat Falls cost of $750 we derive an estimate of net incremental cost,
without rate mitigation, of $900 million. This works out at $2.5 million daily
or $5 daily for every citizen.

Remember that Muskrat Falls was intended to replace the Holyrood
thermal plant. Over the past five years the average production at Holyrood has
been 1.3 TWh, which corresponds to the amount of Muskrat Falls power which will
be needed to supply the needs of the Island. GNL estimated that the cost of
Holyrood fuel would be $178 million or 14 cents/KWh. This works out to $1 daily
for every citizen.

When we look at NP’s recent application to the PUB for a rate
increase, we find they are projecting a decline in sales over the next few
years. The surging demand for power on which the case for Muskrat Falls was
built has not materialized. Electrification of transportation may increase the
demand for power, but this will take time. In the meantime, we have few options
other than to export the power or sell it to crypto-currency miners.

We have committed 0.986 TWh of energy for 35 years to Emera with
no revenues, no energy charge, to recover the enormous costs we must bear. For
the next five years there is an additional 240 GWh which must be supplied, with
no revenues, no energy charge. Then there is an average of 1.2 TWh annually
which we must supply at market rates. On top of this, if the power is not
reliable and we cannot supply power from Muskrat Falls we must buy energy in
order to supply Emera, to meet our contractual obligations, thereby fully
absorbing the risk to Emera.

The net energy from the project is 4,641 GWh, of which 2.426 GWh
is committed to Nova Scotia and 1.324 TWh will be used to replace Holyrood.
Revenue-producing exports will be about 2.1 TWh which is unlikely to generate
more than $50 million, net of transmission charges.

The $900 million cost for the 1.324 TWh which the project will
supply to replace Holyrood will be 67 cents/KWh, compared with 14 cents/KWh for
Holyrood. The daily cost will be $2.5 million. Muskrat Falls will demand a
daily cost per person of $5, compared with $1 dollar for Holyrood.

The Public Accounts disclosed that the deficit for the 2020-21
fiscal year was $1.5 billion. This amounts to $8 per day for each citizen. At
$5 per citizen per day Muskrat Falls is a large component of the province’s
fiscal dilemma. We do have flexibility to manage our fiscal deficit but the
Muskrat Falls shortfall is locked in for 50 years, by virtue of the power
purchase agreement. The PPA can only be changed through negotiations with the
GOC on rate mitigation.

Muskrat Falls was not the best alternative to Holyrood. The best
alternative would have involved a combination of energy initiatives, the most
important of which would have been efficient pricing of electricity. Instead of
promoting electric space heating the province should have charged a rate higher
than the average cost of power production, one which reflected the higher
marginal cost of thermal power. This would have modulated the massive switch to
electric space heating which exacerbated the winter peak in demand. People
would have found more efficient ways to heat their homes if thermal power had
not been cross subsidized by low-cost power from Bay D’Espoir and other hydro
sources on the Island.

Efficient pricing of electricity, combined with conservation and
demand-side-management, would have enabled baseload supply of power to be
supplied from our on-Island sources, with Holyrood used mostly for emergency
power. Instead, we embarked on an oversized, overpriced, megaproject which will
continue to require a large block of emergency power located on the Avalon
Peninsula. It was never a choice between Muskrat Falls and Holyrood because of
the need for a back-up emergency supply. We will continue to need Holyrood or a
replacement thermal plant not too far away from the main population centre.

David Vardy

In the meantime, the costs of Muskrat Falls continue to mount.
Even if GE, the software supplier for the Labrador Interconnected system, takes
responsibility for the direct cost the province must continue to bear the time
cost of the delay. First power was targeted for October 2017, allowing five
years for construction. The five years has become nine and counting. The cost
of delay is $2 million per day. Once onstream the cost will be $2.5 million
daily.

Ratepayers are required to bear the full cost at 67 cents/KWh,
under the power purchase agreement, for 1.3 billion kilowatt hours of electric
power. This compares with eight cents/KWh for Emera, to obtain 2.4 billion
kilowatt hours of electric power. Our province is no longer the “principal
beneficiary” of the Muskrat Falls project, given that our exports to Nova
Scotia will exceed our own use of the power. Is it fair that we should, by
virtue of the power purchase agreement, be expected to pay a power rate which
is eight times higher than the charge to Emera?

This could have been a good news story if better choices had been
made. We could have maintained our low power rates and kept thermal production
costs low. What we needed was practical, frugal, cost-conscious management.
Instead, we were seduced by the allure of a grandiose project, offering lots of
short-term jobs at high wage rates. We had the option of aggressive policy
management to moderate peak winter demand and to focus on Churchill Falls as
the long-term solution to the province’s power needs after 2041.

As pointed out by the Joint Review Panel (Recommendation 4.2) the
province could have included access to recall power from Churchill Falls as an
interim supply of low-cost power to help bridge any deficit emerging before
2041, recognizing that a transmission line would have to be built in advance.

It is noteworthy in this respect that the energy sales of recall
power by Nalcor Energy Marketing has been in the same order of magnitude,
namely 1.3 TWh, as the energy required to supply the Island and to replace
production at Holyrood. Nalcor Energy Marketing (NEM) sells the same amount of
power the Island needs to other buyers for 3-4 cents/KWh. It buys the power
from CFLCo for only 0.2 cents/KWh.

Instead of redirecting that nearly free power to the Island, GNL
sanctioned a project that will instead cost Island ratepayers 67 cents/KWh!
However, use of recall power would require a new transmission line to be built
well in advance of 2041. An even better solution is to be found through
efficient prices combined with energy conservation which was the solution
advanced by Dr. James Feehan, and others.

Even if the Muskrat Falls project had come in within budget, at
$7.4 billion, the annual costs would still have exceeded the cost of Holyrood
power by a factor of three. It would have cost $3 per person per day, compared
with $1 per person per day for Holyrood. Cost escalation drove this $3 per
person per day up to $5.

The February 10, 2010 joint announcement by former Premier Dwight
Ball and then Natural Resources Minister Seamus O’Regan promised a financial
restructuring of the power purchase agreement. Without such a restructuring the
ratepayer is exposed to unaffordable, exorbitant power rates which will have a
devastating impact on the province.

Did the July 28, 2021 joint announcement by the Prime Minister and
the Premier deliver such a restructuring? Did the July 28 announcement satisfy
the 10 principles which I set out in my Uncle Gnarley post
 of June
28, 2021? Did the announcement fulfill the objective a “permanent long-term
solution,” which was stated by GOC Finance Minister William Morneau in
his letter to Premier Ball
 in
February of 2020 and reaffirmed by Deputy Prime Minister
 Chrystia Freeland in her letter to Premier Andrew Furey on
July 28, 2021, which referred to a “sustainable fiscal path for the
province.”  

In future posts we will examine the impact of the July 28
Announcement on Rate Mitigation to ask if the new agreement will overturn the
fatally flawed power purchase agreement (PPA). If it does not then it cannot
form the basis for a long term, sustainable solution which will provide
affordable power to ratepayers. The power purchase agreement, between two
subsidiaries of Nalcor, must not be allowed to stand.

In the meantime what we are faced with is an unmitigated disaster,
not simply a misguided project, as described by Commissioner Richard Leblanc.

David Vardy

OPINION POLL OVER-RATES INEFFECTIVE TORY OPPOSITION

Having survived in spite of themselves, in Opposition the Tories have been lazy and uninspiring.  The fact that it is summer, and the House of Assembly is closed, admittedly makes their job tougher, except that the Party’s manifest weakness is not a seasonal problem.

REMEMBERING CABOT MARTIN (1944-2022)

He was an exceptional person. A gifted intellect for sure; irascible and argumentative, too. What endeared him to many was not just that he was analytical and insightful, but that he was honest and forthright. He was a public policy wonk; resource policy interested him most. He loved to travel and read; people, with something to say, were always important.

GNL RUSHING INTO ANOTHER “SCHEME”: CABOT MARTIN

I must say that after the Muskrat Falls fiasco, I thought our government had finally learnt its lesson and would not to rush into another such scheme where calling it “green” was enough to suspend all critical analysis.