CHURCHILL FALLS MOU: An Initial Assessment of the New Chapter

Today Newfoundland and Labrador signed an historic Memorandum of Understanding (MOU) with Québec to terminate and replace the 1969 Upper Churchill Contract, develop Gull Island and expand capacity of the Churchill Falls plant. The deal will result in more than $225 Billion in total revenue to the provincial treasury over the life of the agreements Ref 1.     

At face value the recently announced projects make a considerable amount of sense as an advertised win-win for all parties. Hydro Quebec (HQ) realizes access to additional capacity (MW) and additional energy (MWhr) to meet the future needs of their domestic market and their plans to optimize the value of their energy exports. Newfoundland and Labrador Hydro (NLH) achieves much needed additional near-term revenue to meet the immediate requirements of the Muskrat Falls commitments on rate mitigation. Both parties realize the benefit of longer-term certainty regarding the Upper Churchill power purchase agreement post 2041.  Also, very importantly, Aboriginal Groups have recognition for their rightful place in the development, which were not contemplated within the original 1969 deal.  The “stars may have aligned” between the various parties to finally enable a deal to fully monetize the value of water flowing from the Churchill River, with fairness and equity for all involved parties.  However, based on my initial assessment of the MOU I believe further clarification is needed from the Proponents to confirm this conclusion.

The MOU for the redevelopment of the Upper Churchill and the Gull Island development is comprised of 5 main aspects:

1. Upgrade to the existing CF(L)Co plant adding some 550 MW of additional capacity. 
2. New Powerhouse at the Upper Churchill which will add 1100 MW using water from the Churchill reservoir.
3. New Gull Island Facility
4. NL Transmission assets to the plants to the point of handover to Quebec. 
5. Quebec Transmission Assets

Those five aspects can be reduced to 3 primary components (i) enhancement of the existing Upper Churchill facility to provide more capacity (ii) development of a new power plant at Gull Island and (iii) the transmission investments required to achieve (i) and (ii). 

Within the following sections I will provide some commentary and questions related to each of these components of the deal.  This assessment is based upon information contained within the following references:

1. The MOU
2. A Fact Sheet prepared by the Government of Newfoundland https://www.ourchapter.ca/files/Churchill-Falls_FactSheet_Print.pdf
3. Press Release from Hydro Quebec https://news.hydroquebec.com/en/press-releases/2143/an-important-step-towards-securing-quebecs-energy-future/

Background

To understand the MOU, the reader must first understand the difference between Capacity and Energy. Capacity additions is a key element of the Agreement, and the likely enabler for the deal as a whole.   “Google AI” gives a very effective definition of these important terms:

Capacity is the maximum amount of electricity a generator can produce, while energy is the amount of electricity a generator produces over a period of time. Capacity is usually measured in megawatts (MW) or kilowatts (kW), while energy is measured in megawatt-hours (MWh) or Kilowatt-hours (kwHr). 

In electricity markets, capacity and energy are sold separately in some markets, while others only sell energy. In energy markets, generators are paid for the electricity they generate, similar to a pay-as-you-go plan. In capacity markets, generators are paid a set fee to provide a certain amount of capacity, regardless of how much is used or generated, similar to a fixed data plan. 

To also understand and challenge this MOU, the reader should have a general understanding of the value of Upper Churchill output in the export market today.  New England ISO (Ref. 4) is the regulator which controls the pricing of energy in the New England States.  They produce a large amount of information concerning electricity markets in their jurisdiction.  From Figure 1 (Ref 2) you can see how volatile the wholesale price of energy has been in New England over the past 20 years. At the time of writing the cost of wholesale electricity in New England is about 6 cents Canadian per kWh, which is a key reference point for evaluation of the MOU. Taking away short-term volatility, Figure 1 is surprising considering the relative stagnation in average energy prices over the past 20 years.  After removing the effect of inflation the real cost of energy appears to have decreased since 2008.

Figure 1

Today the Upper Churchill produces around 35 TWh (35,000,000 MWh) per year of production, with about 10% of that designated for Labrador Markets.   If the remaining 31.5 TWh was sold into the New England Market, and assuming 5% transmission losses, it would yield $1.8 Billion in revenue annually at the point of sale. Assuming 1/3^rd for transmission fees through the various transmission systems, CF(L)Co would have ~$1.2 Billion dollars in annual revenue if sold on the open market, at average rates today.  NLH owns roughly 66% of CF(L)Co, so assuming an annual Operating Cost of $50 million, Newfoundland and Labrador Hydro (NLH) can expect to get ~$760 Million per year based on current average market pricing.   

Component 1:  Enhancement of the Upper Churchill Facility

The Fact Sheet produced by the provincial government provides a succinct description of the 2 development projects associated with the enhancement of the Upper Churchill Plant.  The important details are summarized below:

Churchill Falls Expansion

• A second powerhouse at Churchill Falls, near the existing plant and using existing reservoir, capable of producing approximately 1,100 MW.
• An estimated cost of $4.6 Billion including financing.
• Newfoundland and Labrador equity investment to be covered by the $3.5 Billion from Hydro-Québec.
• 50-year power purchase agreement, covering all costs to develop, construct, operate, and maintain the facility including a return on equity ranging between 8-9%, set every five years.
• Price projected to increase at 2% annually.
• No automatic renewal rights.
• Hydro-Québec to manage construction and completion, including funding any cost overruns.

The terms of this power purchase agreement (PPA) for the expansion project is provided within Section 2.2.c of the MOU.

Churchill Falls Upgrades

• Churchill Falls (Labrador) Corporation (CF(L)Co) will upgrade the 11 existing generating units at Churchill Falls with modern equipment which will add approximately 550 MW to its production capability (currently at 5,428 MW).
• An estimated cost of $1.9 Billion including financing
• Power sales from the upgraded units will be a part of the contract for the existing Churchill Falls plant, ending in 2075, with no automatic renewal rights.
• Price projected to increase at 2% annually.
• NL Hydro will manage the construction and completion, with any cost overruns to be borne by shareholders of CF(L)Co.

The terms of this power purchase agreement (PPA) for the expansion project are provided within Section 2.2.b of the MOU.

The “Fact Sheet” indicates that Hydro-Québec will pay CF(L)Co. $33.8 Billion in today’s dollars, which is $180 Billion to Newfoundland and Labrador in nominal dollars. The Fact Sheet also provides an estimate of the “forecast” average price to be paid by Hydro Quebec for energy over the course of the term shown in nominal dollars. Figure 2 indicates that HQ will pay 1.63 cents per kWh in 2025 which will increase to 37.24 cents per kWh in 2075.  The use of the term nominal would suggest that the 37.24 cents would be in 2075 dollars. 

Figure 2

Schedule G of the MOU is also a key reference as it outlines the “forecasted” payments from HQ to CF(L)Co in total current year dollars for each year of the agreement.  It is provided below within Figure 3 for ease of reference.   

Figure 3

The Hydro Quebec press release on the MOU states the average net cost for power from the existing Churchill Falls site will be 4 cents/kWh in 2024 dollars, with some general language that the deal will support the “pledge to cap annual residential rate increases at 3%”.

This is where the details provided to the public appear to diverge.  Figure 4 plots the 4 cents per kWh escalated by 3% compared to the Government of Newfoundland and Labrador data provided within Figure 2.  As evident there is a wide divergence within the later years of the proposed 51-year term. 

The MOU and the associated press material is very confusing in that it references Net Present Value, 2024 Dollars, Effective Prices, and Nominal prices, all without clear definition. 

The $33.8 Billion Net Present Value seems to be the firm commitment in the MOU and is the value of the payments from HQ to CF(L)Co in 2024 dollars.  The annual payments in Schedule G clearly state “forecast”, which is based on an escalation equal to the discount rate of 5.8 percent.  But it is not clear if this escalation is in fact binding, or if a more realistic escalation, per the terms in Schedule F would be applied? 

From my interpretation of the MOU, the Schedule G payment schedule and the discount rate of 5.82% are only to be used to arrive at the annual payment in 2024 dollars ($33.8 Billion in 2024 dollars) which is then to be escalated per the terms of Schedule F to come up with the eventual payment mechanism.  This interpretation is very key to understanding the MOU.    

This is a very complicated topic, and it is one which I will try to explain with the assistance of Table 1. 

Table 1

Within this Table Column B represent the data provided by Schedule G described as “Current Year Dollars”.  The total payments from HQ to CF(L)Co amount to $194.7 Billion over the 51-year term of the Agreement.  From the MOU the costs of the CF(L)Co Upgrade Project (550 MW), and any upgrades to the NL transmission system required just for this CF(L)Co upgrades are to be recovered through these payments from HQ to CF(L)Co.  The costs of the Expansion Project (1100 MW) are to be recovered separately outside this revenue stream. 

Column C represents the Net Present Value (NPV) of this amount shown in 2024 dollars. The values are the same as in Column B, discounted at 5.8% which is the discount rate provided within the MOU.  The outcome of this NPV calculation is $33.8 Billion, which aligns with the information contained within the MOU.

Column D is this 2024 amount, inflated not at the discount rate of 5.8%, but at an escalation rate of 3%.  This is used to demonstrate the potential sensitivity of the total benefit to NL based on the escalation mechanism.  3% was selected for this comparison as it aligns with the ambitions of Hydro Quebec as outlined within their press release.    

Column K2 is the unit rate HQ will pay for energy in constant 2024 dollars.  Over the 51-year term it appears as if HQ will pay an average of 2.5 cents per kWh in 2024 dollars.  This is a key data point. Column K is the unit rate of energy assuming the future revenue inflated by 5.8%.  This aligns reasonably well with the data presented in Figure 2. 

Column L would be the future rate which HQ will pay for power based on an expected inflation of 3% annually.  The average price of energy over the 51 year term is 5.98 cents per kwhr, which aligns with what is contained in the Fact Sheet (5.9 cent reference).

Comparing Column L to Column N, Hydro Quebec will be paying CF(L)Co 41% of the expected NE ISO market price similarly inflated over the term of the agreement. 

Column O is the total amount that HQ will pay CF(L)Co per year based on a 3% escalation.  Over the term of the project the payments are $79 Billion assuming a 3% escalation.  This is $115.8 Billion less than if this was determined assuming a 5.8% annual escalation ($194.7 B – $78.9 B = $115.8 Billion). 

This is why it is critical to understand what in fact Schedule G and F mean in the context of how the price in 2024 dollars will be escalated.   

The future revenue model does not appear to be based on absolute dollars as suggested by Schedule G, but the present value in 2024 dollars (Column C) which will be escalated per some future mechanism for escalation to be defined in accordance with the Principles of Schedule F:

• blocks with a range of different quantities, pricing and durations;
• pricing methodology either based on separate energy and capacity pricings or blended energy and capacity pricing;
• predictable, transparent and verifiable pricing mechanisms;
• reflective of wholesale electricity market value in Québec;
• replacement costs in Québec; and wholesale electricity market value in northeast export markets;
• the block pricing methodologies are intended to provide pricing flexibility, capture changes in the market value and fairness over the term of the New CF PPAs

Although the principles in Schedule F seem to be based on fairness and transparency there is nothing definitive in this language other than the 2024 / NPV reference of $33.8 Billion. At face value there remains a considerable amount of negotiation yet to be completed, with potential significant risk to the future revenue model to CF(L)Co.  

This is a complicated topic, but the future benefit to Newfoundland and Labrador is very dependent upon the escalation mechanism yet to be negotiated (Schedule F), the true meaning of the discount rate and how it will be applied in the definitive agreements.     

This analysis is very simplified compared to the likely evaluations performed by NLH. It should, however, demonstrate why this pricing model needs to be better explained by the Proponents, and confirmation or correction of the interpretation presented herein.   

There are many questions which should be clarified, starting first with related to the 2.5 cent per kWh average price for power provided in 2024 dollars (Column K2 of Table 1):

1. The Proponents (NLH / GovNL) should clarify that based on 2024 dollars, HQ will be paying CF(L)Co an average of 2.5 cents per kWh over the 51 year term of the agreement?  If this is not accurate can a corrected “average” based on 2024 dollars be provided. As Hydro Quebec has provided this figure to the Public, it too should be confirmed by NLH and the GovNL. 
2. It should be clarified if this 2.5 cents per kWh includes the recovery of the CF(L)Co Upgrades (550 MW) as suggested by the language within the MOU?
3. It should be clarified if this 2.5 cents per kWh includes the minimum investments in Transmission within the NL Transmission Assets, required to enable the delivery of additional Capacity to the delivery point (Gull Island not sanctioned scenario)?
4. What percentage of the 2.5 cents is allocated to these future infrastructure improvements? 
5. Should these Capacity projects not proceed, is the 2.5 cents per kWhr to be reduced?
6. Can it be confirmed that if there are overruns on either the NL Transmission enhancements or the 550 MW upgrade that there is an upward adjustment on the 2.5 cents per kWh?  The alternative is the net benefit to NLH as a shareholder to CF(L)Co will be reduced (ie; we will pay for overruns).
7. Will the payment to the First Nation’s groups, which I understand is yet to be negotiated, also to be paid from this 2.5 cents per kWh in 2024 dollars?
8. Within it’s press release HQ has referenced a price of 4 cents per kWh in 2024 dollars over the term.  Is this difference due to HQ including the cost of the 1100 MW expansion project, and the necessary upgrades to the Quebec Transmission system, within the 4 cent figure?  If not can this difference be explained?
9. The 2.5 cents “2024 dollars” translates roughly to 41% of what New England rates are.  This does not seem to be an overly attractive starting point considering the premium green energy, and firm Capacity should demand compared to other sources.  Can the Proponents provide some commentary regarding the reasonableness of this value?  How much of a discount over the 51-year term was due to the early termination of the 1969 Power Contract?
10. Does the $33.8 Billion, represent an absolute basement or floor price (ie; is deflation actually not possible in this agreement)?  This is a concern as over the past 15 years there has potentially been deflation in real energy prices, using NE ISO as an example.  
11. Has NLH and the Government of Newfoundland and Labrador completed any independent assessment of this deal?
12. Has the MOU been reviewed and recommended for Approval by the NL Hydro Board of Directors?
13. Has the MOU been approved by Cabinet, with formal record of the decision in minutes as recommended by the Leblanc Inquiry?

The next set of questions is concerning the topic of escalation, and how the future “forecast” payments provided in Schedule G and Figure 2 were arrived at.  The MOU is not obvious in this regard, and the Public would benefit from a simple interpretation of Schedules F and G:

14. How was the 5.8% discount rate calculated.  Can a definition be provided to support the reading and interpretation of the MOU. 

15. Schedule G provides a “forecast” annual payment structure which is aligned on the 33.8 Billion NPV value, and discount rate of 5.8%.   

(a) What is the governing number which will drive the definitive agreements  (i) the discounted value in 2024 dollars or (ii) the nominal dollar amount for every year as contained in Schedule G (irrespective of the NPV value and discount rate)?

(b) What item will be adjusted per the principles of Schedule F?

16. If the values of Schedule G are indeed representative of the dollars which will be paid by HQ in the given year, can the Proponents provide clarity as to how the language in Schedule F may adjust these values?  

17. The Proponents should confirm the basis of the $225 Billion revenue to the Provincial Treasury particularly what escalation is assumed over the term (ie; 5.8%)

18. Considering that Hydro Quebec has clearly stated in their press release that their decision to proceed with this MOU has been premised on replacement costs for green energy being in the 12 cents per kWh range, how will this information factor into the future escalation formulas.  Is this the starting point for the benchmark of future costs?  This is relevant as with changing technology it is possible that unit rates for green energy could actually decrease with improving technology resulting in potential deflation of the 2024 values.   

There are also several other items which should be clarified:

19. There is a no benefit contained within Table 1 if NLH can resell energy at rates higher than 2.5 cents per kWh in 2024 dollars, which is a weakness of my simplified model.  A key question is: does this MOU provide NLH wheeling rights through the HQ transmission system?  Is there a wheeling charge that has been agreed, or is there a potential for this benefit to be eroded due to a future negotiation on access tariffs?  For the clarity of the reader the Labrador Island Link is not able to transmit the volumes contemplated within the recapture.

20. It is not clear if NLH sells recaptured energy, are they then responsible for their portion of the CCF-Expansion (1100 MW) costs including any potential over-runs?

21. Can the Proponents clarity if the Capital Costs Estimates (including AFUDC) are provided in 2024 dollars?  What contingency are included within these capital estimates?

22. Based on the targeted Weighted Average Cost of Capital (presumably 5.8%) can the Proponents clarify what every $1 Billion in overrun on either the Upgrades, or Expansion projects will have on the total nominal return to NLH as either a shareholder of CF(L)Co and from impacts on the recaptured energy sales?

23. The fact sheet refers to “Off Ramps” however they do not appear in the MOU. Can additional detail be provided by the off ramps in 2051 and 2061 and do the Off Ramps also apply to Hydro Quebec?  This is very relevant depending upon the correct interpretation of Schedule G and F, as from Figure 2 a considerable amount of value in the MOU is post 2050. 

Jason Muise

24. With the upgrade and expansion of the CF(L)Co plant more water will be flowing at full capacity.  It is not clear if this will have any material impact on the total energy produced from the Muskrat Falls plant, and is there any potential for spillage which may downgrade the net benefit of the Muskrat Falls facility?  It is expected that the answer to this question will depend on whether Gull Island is sanctioned or not.  I believe this potential risk should be clarified by the project proponents. 

25. Will the Government of Newfoundland and Labrador commit to providing the people of the Province with an independent review of the Definitive Agreements?  Within the Muskrat Falls project the ratepayers of Nova Scotia benefited considerably due to the rigor of the UARB process. The role of the independent review in this case would not be to ascertain the “least cost option” but would rather provide a forum for independent review and validation of the deal negotiated by the Public Utility and the Provincial Government by subject matter experts. 

26. The benefit of this deal appears to be very contingent upon the terms of Schedule F, which at face value seems nothing more than a general framework for moving forward.  Can it be confirmed that there are assurances that the Revenue from HQ will always be sufficient to cover the Operating Costs, the Aboriginal Partner Allocations, the recovery of the upgrades and expansions, and any future capital works required to maintain the plant?  As the base asset will be exceeding 100 years in service is there any significant maintenance projects which could be material, and would this be reflected in the escalation mechanism? 

27. It should be confirmed that the profits from CF(L)Co will not be taxed by the Federal Government prior to disbursement to the shareholders? 

Considering the clear differences in how HQ and NLH are framing this MOU to their respective ratepayers I believe it is essential for the Proponents to explain Schedule G and F in very simple language. My interpretation of the MOU is that Schedule G and the Discount rates are only to be used to arrive at the annual payment in 2024 dollars ($33.8 Billion in 2024 dollars) which is then to be escalated per the terms of Schedule F.  This interpretation could have a significant impact on the benefits of the province compared to what the Province and Public Utility are stating – $225 Billion benefit to the provincial treasury (which seems to be clearly based on an annual escalation of 5.8%).

The Proponents should provide clarity on how each of these key statements contained within the FACT sheet were calculated:

• $225 Billion in total revenue to the Newfoundland and Labrador treasury from the new power contracts and the new developments.
• $17 Billion over the next 17 years from Churchill Falls alone— starting now, not in 2041—on average $1 Billion per year
• Effective average price 5.9 cents/kWh, which is 30 times higher than current price.

These are all substantive numbers and from an initial review of the data, they do not all seem to be based on a consistent set of assumptions.

Component 2:  Gull Island Generation

The Fact Sheet again does a good job outlining the Gull Island development: 

• A new generating station on the Churchill River capable of producing 2,250 MW.
• An estimated cost of $24.9 Billion including financing, with commissioning targeted for 2035.
• Newfoundland and Labrador equity investment to be covered by the 3.5 Billion payment from Hydro-Québec.
• Innu Nation Impacts and Benefits Agreement in place.
• Environmental Assessment completed in 2012.
• Ownership of the new entity: 60% by NL Hydro and 40% by Hydro-Québec.
• NL Hydro to operate and maintain the facility once commissioned.
• 50-year power purchase agreement, covering all costs to develop, construct, operate, and maintain the facility including a return on equity ranging between 8-9%, set every five years.
• Price projected to increase at 2% annually.
• No automatic renewal rights.
• Hiring protocol set out in the Environmental Assessment. Qualified workers hired in order: Innu Nation, residents of Labrador, residents of the island, rest of Canada.
• Hydro-Québec to manage construction and completion, including funding any cost overruns.
• NL Hydro will participate in the oversight of the project.

This deal seems very similar to the Upper Churchill original project.  An agreement to build a project on a cost recovery power purchase agreement, with some level of equity return for the investors. In this case, in return for the rights to the development, HQ will be paying for the NL equity portion.

This does appear to be a win – win for the parties and it is hopeful that the overall economics of this $24 Billion dollar development make sense.  If acceptable explanations are provided for the other issues raised, this is potentially a nation building project which could benefit Quebec, Newfoundland, and potentially the Maritimes, in the supply of green energy and Capacity to support wind developments in particular. 

There are however several questions or points that should be clarified by the Proponents:

28. The major benefit to the province is the 60% ownership of an asset, which following the 50-year term will be of tremendous future value.  It would be beneficial if the MOU referenced some language to protect this future value, particularly concerning future market access following the initial term.   Can the Proponent clarify if the MOU or discussion to date will address this future risk?

29. Should there be any considerable changes to the energy outlook, will the Power Purchase Agreement to Hydro-Quebec allow for an off-ramp to share any windfall benefit?

30. NLH will be making equity contributions into the Gull Island facility.  If there are over-runs on any of the investments, will the Province be required and able to fund the additional equity?  Is there risk of dilution of eventual ownership?

31. The payments in Schedule H also reference a Net Present Value.  Are the payments per year absolute or is there any variability to the future payments? This specifically refers to the $1.07 Billion dollar payment in 2035.  Is this a firm amount to be paid in 2035 dollars or is it subject to some potential adjustment to reflect the use of the discount rate?

32. There is a considerable benefit to the Province in terms of employment and local benefits.  This features strongly in the press material, but less substantively within the MOU.  There are some follow up questions which should be considered:

(a) Will the hiring policies within the original Environmental Review be extended to all subcontractors engaged in the Projects? 

(b) Will local companies be provided equal opportunity?  As the project will be executed by Hydro Quebec, and likely an international EPC contractor, there should be some protection within the “Definitive Agreement” that frame agreements with the existing Quebec based supply chain should not have an unfair advantage over NL based suppliers who may not benefit from being currently on the Approved Vendors List of either Hydro Quebec, or their eventual EPC contractor.   This is not an insignificant question to be answered.        

Component 3:  Transmission

There are 2 elements of transmission investments (i) the NL transmission which is estimated to be a $3.6 Billion investment by NLH for transmission in NL and (ii) the investment in Hydro Quebec transmission assets.   The MOU is clear in that the investments in the NLH transmission will be recovered in the new Power Purchase Agreements.

There is little detail in the MOU about the technical nature of these upgrades, and what they would look like if all or part of the upgrade, expansion, and development are sanctioned.   I also believe that the transmission elements of this project need to be carefully reviewed to ensure that the Government, as well as the public, understand the value and risk to the Province of Newfoundland and Labrador. 

If Gull Island is not sanctioned, and the project consists of only the CF(L)Co Expansion and Upgrade, such a potential outcome requires that other important questions are clarified: 

33. What proportion of the $3.6 Billion is attributable to upgrades of the lines from the CF(L)Co Plant to the Delivery Point at the Quebec Border, and what portion is attributable to the Gull Island Project?

34. Will the recovery of this amount have to be recovered from the rate HQ pays to CF(L)Co (2.5 cents per kWhr in 2024 real dollars)? [Repeated for Clarity and emphasis]

35. In the case of overruns on these items how will additional equity requirements be funded? 

36. What is the risk of the completion guarantee on the Province in the event there are over-runs comparable with the Labrador Island Link?

37. What is the cost of the upgrade within the Hydro Quebec transmission system to handle the additional flow from the 1650 MW of additional Capacity from the Upper Churchill. Will the costs, and potential overruns in the transmission upgrades, factor into the future pricing mechanisms, or the future wheeling rate for the Power recaptured by NLH?

These same questions apply if Gull Island is sanctioned.

Net Benefit to the Province

Should the interpretation of Schedule F and G indeed be correct the net benefit to the Province will be less than presented for a more realistic escalation in rates.  Within Table 1, the Author has also attempted to calculate the net benefit to the province assuming a 3% annual escalation.  Column S provides what would be net disbursement to NLH from the CF(L)Co subsidiary considering revenue streams from sales to HQ and NLH (recaptured power for resale), with reductions for Operations Expenditures (OPEX $50 Million per year) and the upgrade costs associated with the 550 MW upgrade ($1.9 Billion, 5% debt, mortgage style). 

Considering a reasonable escalation of electricity rates, the Newfoundland and Labrador Hydro can expect to receive around $61 Billion over the term of the agreement in nominal dollars.  This is an average of $1.2 Billion per year in nominal dollars. This does not include any benefit if NLH can resell the recaptured power at rates higher than what HQ will be purchasing.  This is a key unknown. 

This is not a small number, but there are other subtractions which should be considered before concluding how much will be available for general revenues into the Province, namely, the rate mitigation obligations for Muskrat Falls and the impacts of additional supply needs to meet the reliability targets within the island’s electrical grid. 

This again is a very complex topic, and NLH should provide clarity as to the long term returns to the Provincial Treasury following the need to supply reliable energy (and capacity), and the public pledges of rate mitigation.  This is not so much to determine the robustness of the deal, but rather to curb the public’s expectations.  A large part of the revenue from this deal will be used to pay for Muskrat Falls, and other electrical grid reliability investments, over the 50-year term. 

With a recent cash deficit of nearly $2 Billion, it is clear that this New Chapter will not solve the structural issues within the Government of Newfoundland budgeting process.  The Public need transparency on this. 

Conclusions

It is easy to understand the sense of relief, even euphoria, expressed by the leadership of NLH and GNL when they announced the MOU. They seem to have a deal which will help pay for Muskrat Falls rate mitigation, and accounting for the caveats mentioned, also provide a model to move forward on the Upper Churchill.  There is a clear and unmistakable benefit associated with termination of the 1969 Agreement and finally receiving material revenue from the Upper Churchill prior to 2041. Nevertheless, this value is eroded by both the Capacity investments which Hydro Quebec is the primary beneficiary thereof, and the ultimate price paid by Hydro Quebec over the course of the 51-yr term. 

With the apparent starting point at a modest 2.5 cents per kWhr in 2024 dollars, the method of escalation needs to be very well understood.  Although premised on “fairness”, Schedule F does not yet exist in and binding and quantifiable form. 

If what is presented in this paper is correct, and a more conservative view of future market conditions are assumed, then the future value to the province is considerably less than the $225 Billion that the Government claims the public treasury will receive over the 51-year term.  My interpretations of Schedule F and G could certainly be incorrect, and I would welcome that correction.  But if my interpretations are verified, then it would be an extremely disappointing example of communications conducted by both NLH and the Provincial Government on this MOU, especially considering our recent experience in relation to the Muskrat Falls project.   

I understand that this MOU will be debated within the House of Assembly.  This is a very complex term sheet, and with the various components one which is not easy to understand.  With no intended disrespect to the Province’s current cohort of MHA’s, this is a tall ask to ensure a deal of this magnitude gets the scrutiny it deserves, on the Public record, by politicians rather than true subject matter experts.

Irrespective of the quality of the deal, the proper public process should be ensured considering not only the impact to future generations, but also this being one of the remaining “holy grails” to ensure future fiscal sustainability of the Province.  This should not be a political or partisan debate and it should be one which is of the highest standard.   

I for one would like to see the HOA session start with a 1 Hour recap of Volume 1 of the Leblanc Report on the Muskrat Falls Public Inquiry, so the current Proponents, elected members and outside experts understand the importance of public debate, and transparency within the proceedings.  It should set the tone for the level of debate this MOU deserves, and standard of future public reviews of the yet to be negotiated definitive agreements.   

This is a historical moment in the House of Assembly, and one which should not be drawn along partisan lines.   It truly is a moment that warrants independent thought and challenge by all members of the House.     

References

1. Historic Memorandum on New Energy Partnerships in Labrador
2. https://www.iso-ne.com/about/key-stats/markets/
3. https://www.bankofcanada.ca/rates/related/inflation-calculator/
4. https://en.wikipedia.org/wiki/ISO_New_England

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I would like to thank Des Sullivan for the opportunity to provide comments to this important MOU document.   I must clarify that I am neither an expert in Hydro Electric Developments, nor am I no longer a resident of the Province.  My voice is therefore not as important as those who are reading this post. Although this is a very preliminary review of the MOU, completed over the Christmas break, I do hope it helps trigger public debate on this critical subject. 

Jason Muise

Editor’s Note: Jason Muise is an Engineer with 25 years’ experience in project delivery.  A native of Newfoundland and Labrador, Jason completed an undergraduate degree from Memorial University in 1997 and a master’s degree in engineering from the University of Toronto in 2000.  Jason was a frequent commentator on the Muskrat Falls project, and once served on the Muskrat Falls Oversight Committee as an external appointee. He currently resides within the United States.