FIRST YEAR OF OFFICIAL ENERGY DELIVERY NOT QUITE WHAT EMERA BARGAINED FOR

PlanetNL52: Happy Anniversary Emera on 1 Year of Official Energy Delivery

Not Quite What Emera Bargained For

Despite all the bad news related to Labrador Island Link (LIL) transmission line, NL Hydro executives always try to end on a positive note.  One they have surprisingly failed to convey, unless they said it and we missed, is they have now achieved one full year since beginning to transmit Muskrat Falls energy over the LIL and then via the Maritime Link (ML) to Nova Scotia.  Year 1 of the 35 year commitment to provide a mix of revenue-free and low-cost energy to Emera in Nova Scotia is now complete!  Hoorah!

Let’s see if Emera has gotten everything they expected and bargained for from the project.  For those on the Island of Newfoundland, there will be a separate follow-up in the future using some of the relevant data.

Emera’s Expectations from the Project

Before presenting the figures on energy deliveries, we need to step back and lay out Emera’s anticipated benefits from their participation in the Lower Churchill Project with NL Hydro. 

Emera negotiated its side of the deal while simultaneously having it reviewed by the Nova Scotia Utilities and Review Board (NSUARB), ensuring that Nova Scotia ratepayers liabilities would be fair and represent the least cost opportunity available to them.  A deal was struck consisting of two main parts that were critical to both Emera and the NSUARB.

First, Emera would build the 500 MW capacity ML transmission line to get power from the Newfoundland grid over to Nova Scotia.  The energy takeoff would be roughly equivalent 20% of the expected annual Muskrat Falls energy production of 4600 GWh for a period of 35 years.  This part is known as the Nova Scotia Block for 980 GWh of annual energy delivery.  After 35 years, Emera would hand over the asset to NL Hydro to run and operate: On the assumption the line would still have useable life and value, a Supplemental Block of 240 GWh energy is to be provided to Emera by NL Hydro in the first 5 years only.  Both blocks are supplied revenue-free by Hydro and were planned to commence in 2017.

The initial proposals saw the roughly two-thirds uncommitted capacity of the ML being made available to NL Hydro to export electricity into the North American market.  Hydro anticipated having lots of surplus energy – in the range of 1200-1800 GWh annually – that it wanted to export and sell to the highest bidder.  Free transmission access from Emera was part of the tradeoff for giving Emera the blocks of revenue-free power.  However, the NSUARB insisted that the ML would only be approved if NL Hydro committed to give first right of refusal to purchase the power.  Furthermore, the price would not be set through an open competitive auction but would be directly linked to the frequently low spot market rates set in the New England market.  These became the key terms behind the add-on Energy Access Agreement that formed the second pillar of expectations.

When putting the two parts together, Emera and NS ratepayers expected delivery of as much as 3000 GWh annually at a very low cost.  The start of energy delivery in 2017 was just ahead of the need for the expensive refurbishment of coal-fired thermal units at their Lingan plant, 20km east of Sydney, in service since 1979.  As NL Hydro would be supplying firm hydro power, Emera counted on being able to shut down at least one unit at Lingan permanently.  Besides coal fuel costs saved and avoiding the capital cost of the refurb, Emera and the NSUARB were also banking on Greenhouse Gas credits from decreasing carbon emissions.

To recap: The free energy from NL Hydro represented fuel cost savings, avoided capital on extending the life of the thermal unit at Lingan, plus GHG credits.  Guaranteed access to as much or more low-cost surplus energy, would double the benefits for NS ratepayers.

With 1 year of deliveries now officially in the books, Emera and the NSUARB are no doubt tracking the numbers and finding themselves steadily disappointed by NL Hydro’s inability to consistently deliver power.

Energy Delivery – Weak

The only publicly available records reporting contractual delivery of energy to Emera are found in Hydro’s Monthly Energy Reports filed with the Public Utilities Board.  Over the rolling 12 Month period beginning November 2021, the month when Hydro reported its first official contractual deliveries, Emera received 854 GWh out of 1220 GWh total expected.  Given all the challenges encountered by the project in the past year, not to mention years prior, 70% in the first year of operations is not that bad.  Monthly deliveries are shown in the chart below.

To meet contractual obligations, the required average pace of monthly delivery should have been just over 100 GWh of energy per month.  Hydro managed that only in 5 months and fell way short of the target in 6 of them. 

The problem is not Muskrat Falls generation but the Labrador Island Link which is years behind schedule and struggles to operate at anything but low power levels.  Hydro continues to try and solve faults on the LIL in a seemingly never-ending commissioning phase.

Hydro is obligated to make up delivery shortfalls to Emera as soon as practical.  That will be a big challenge as performance in recent months provides no confidence in a recovery.  

The deficit in energy owed is worse than the chart appears to indicate because the contractual deliveries officially started in August 2021 but were completely absent until November.  To recover in the next year will require massive improvement in performance: Instead of averaging 70% of monthly targets in the past year, deliveries must achieve 150% of target over the next year. 

Given the recent struggles with system trips on both the LIL and ML and that transmission stability has been only modestly reliable at a fraction of rated power, the shortfall appears likely to grow rather than decrease in 2023.

Surplus Energy Export – Almost None

The NL Hydro Monthly Energy Reports indicate how much surplus energy was exported over the ML.  While the reports do not advise who bought it, it is only logical to assume that Emera would have availed of its rights through the Energy Access Agreement to take all the amounts shown in in the chart below.

Emera is contractually entitled to take 100-150 GWh monthly, however, the actual surplus available averaged only 9 GWh over the 12-month period. 

The availability of surplus energy in the second half of 2022 is puzzling given the large shortfalls in NS Block and Supplemental Energy Block deliveries during that same period.  The idea that there was surplus in several of those months makes no sense.  Given how low the numbers are, the issue is practically trivial, however.

When added together, Emera received average monthly energy of 80 MWh per instead of their 200-250 GWh expected amount from NL Hydro: a 60-70% shortfall.

Lingan Closed – No

Emera’s plan upon project sanction was that at least one thermal generating unit at Lingan would be permanently retired by January of this year directly as a result of receiving firm power from NL Hydro.  NL Hydro’s 3.5-year delay from 2017 in starting energy deliveries across the ML was the first significant problem.  Rescheduling any retirement of coal-fired assets at Lingan is now almost certainly not going to happen because energy delivery from NL Hydro is proving to be non-firm.

The past 12-month period has included many long-duration outages, providing evidence that the power is very much not reliable.  More damning, NL Hydro has recently declared in its own Reliability Review update that the LIL, on which the ML is wholly dependent, can no longer be considered firm for Hydro’s own power planning requirements.

Just as NL Hydro has had to renege on the promise that the LIL would result in the retirement of the Holyrood Thermal Generating Station, it is obvious that Emera must also renege on closing any part of Lingan.

Fuel Savings – Yes and No, Very Weak Overall

Even if the ML imports are not considered firm, those imports still beneficially reduce the amount of energy that must otherwise be generated by Emera’s thermal plants.  Fuel cost savings have certainly occurred in the past 12-months but not nearly on the scale Emera and the NSUARB were banking on.  As calculated above, the fuel-savings expectation over the past 12-months is likely 60-70% short of expectations.

The 3.5-year delay in NL Hydro’s commencement of deliveries represents an even larger backlog to the plan to reduce fuel consumption.  According to an article in the Halifax Examiner, the NSUARB, along with Emera and the Nova Scotia Government, are now anticipating an unplanned $681 Million in fuel expenditures across 2022-2024 that appears to be mainly attributable to delays in energy delivery from NL Hydro.  That is on top of unspecified losses due to missed deliveries in 2021 and earlier.  A specialist auditing firm hired by the NSUARB recommends sending the bills to NL Hydro. 

Besides the unforeseen fuel costs, Emera also missed out on 60-70% of the planned GHG credits in the past year and lots more for the preceding years. 

As Emera, the NSUARB and NS Government already seem to have a handle on expected extra fuel costs to 2024, it seems they have already reduced their expectations of what NL Hydro will be delivering in the next couple of years as well.

First Year Overall Grade and Near-Term Outlook – Fail

NL Hydro has been years late in delivering energy, and now that it is flowing it is merely trickling at a fraction of the total expected rate.  In addition, the quality of the product in terms of being firm power, has not been met. 

Emera has been and will continue to spend more money maintaining and fueling coal-fired plants than they had expected and is certain to not achieve its goal of retiring thermal plant capacity.

While there is plenty of room for improvement in future years and some should be expected, there is a substantial risk that NL Hydro will be unable to regularly fulfill all annual energy delivery expectations.

The damage done to Emera’s business, and subsequently to Nova Scotia ratepayers, is starting to appear obvious and is likely to prove irreversible and substantial.  There can be little doubt that Emera’s lawyers are building a case to attempt to recover damages from NL Hydro for its inability to satisfy contractual obligations.  The NSUARB and NS Government appear to be aligned in this.

NL Hydro and the NL Government are presumably bracing for challenging contract renegotiations if not a hostile claim for damages in the billions of dollars.  It’s likely just a question of when, not if.

Sources and References

Board of Commissioners of Public Utilities – NL Hydro Monthly Energy Supply Reports

Muskrat Falls power delays will lead to very high rate increases in Nova Scotia – Halifax Examiner

Nova Scotia Power to shut down 1 coal generator at Lingan station this fall | CBC Newswww.pub.nf.ca/applications/NLH2018ReliabilityAdequacy/correspondence/From NLH – Reliability and Resource Adequacy Study – 2022 Update -2022-10-03.PDF

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