Hydro Quebec’s Savings Will Exceed NL Hydro’s Profit
Former NL Hydro CEO and Churchill Falls Labrador Corporation Director, Bill Wells, might be retired but he’s ready to step in any way he can because he thinks the MOU gave up too much value to Hydro Quebec.
At the MOU press conference on December 12, 2024, Quebec Premier Legault made a comment saying that Premier Furey got his $200 Billion and he (Legault) got his $200 Billion and so everyone is happy. Bill immediately knew that if this was true, and it could surely be no joke or misguided comment, that Hydro Quebec got everything it came looking for and NL Hydro got less than it should have.
Unsurprisingly, a study of the numbers fully supports Bill’s keen intuition.
On the third day of the House of Assembly debate held January 6-9, 2025, NL Hydro provided the table below summarizing forecasted revenue benefits and their allocation among parts of the MOU and how they are divided among Hydro Quebec, NL Hydro, and the Province:
The table extrapolates $211 Billion total benefits to NL Hydro relative to $93 Billion in dividends for HQ as circled in red.
Those numbers would mean NL Hydro is the big winner, except that it is a misrepresentation. The figures fail to recognize the extent to which the low prices contained in the MOU create an advantage for HQ. Those savings need to be quantified and added to HQ’s $93 Billion.
Hydro Quebec and Premier Legault have stated that Gull Island and the other new developments in Labrador are their least cost option, cheaper than anything they can build in Quebec. They have at several times referred to 16 c/kWh as the cost of new hydro construction opportunities in Quebec. That replacement cost figure is the benchmark needed to calculate HQ savings relative to the 1.63 c/kWh starting price HQ will pay in the MOU.
The replacement cost figure is apparently meant to be a part of the eventual MOU pricing scheme, however, the MOU doesn’t provide the makeup of the rate-setting formula.
During last week’s debate in the House of Assembly, a consultant for Hydro and Government, Mr. Chee-Aloy, confirmed this fact and his comments are recorded in Hansard. He stated that “… in the future as Quebec needs more supply – as I’ve established this morning, needing a lot of supply urgently – when they make decisions to commit to build their own supply – so, for example, their next hydroelectric generator – that’s where the 16 cents a kilowatt hour comes in. That’s the replacement cost.”
While the 16 c/kWh might sound promising, most of the rate-setting formula seems to be based on much lower value indicators. In a news article in La Presse last week with HQ VP Dave Rheaume, the reporter indicated that 90% of the price was set by Quebec’s Heritage Pool, a collection of old but reliable and cheap hydro plants known to yield an average cost of 3 c/kWh. The article further indicated that the other 10% of the MOU is set by spot market prices in the US-Northeast which has been running 5-6 c/kWh. It excluded mention of the replacement cost benchmark altogether. Quebec-Newfoundland Electricity Agreement | A copy of the controversial 1969 contract | The Press
What we might deduce from those comments is that, at the outset, there is no allowance for the 16c/kWh rate in the MOU at all. It’s a safe guess that HQ will only allow replacement cost to lift rates in proportion to the extent that new hydro plants are built to satisfy HQ load requirements. Gull Island is one such example and the MOU rates do take a significant leap upwards in 2036 after Gull is commissioned in 2035. Presumably further projects in Quebec, assuming they are built, will result in further incremental rate lifts. The MOU’s forecast of rates, therefore, likely depends on a string of new Quebec plants being built in the 2040’s and 2050’s to prop up the price. But remember that the opposite is also true: if HQ does not build those plants, the rate forecast will be substantially reduced.
The chart below will help readers visualize the difference between the 16 c/kWh replacement cost (escalated by 2% annually) shown with the orange dotted line and the MOU rate forecast shown with the blue line:
The value for HQ and Legault comes from recognizing that MOU prices for Churchill energy are well below the cost that would be incurred by a replacement plant in Quebec. In the first 30 years of the term, the gap is especially wide. That’s the money HQ is saving by securing Churchill power as cheaply as they are in this MOU.
By calculating the total difference in rates and multiplying it by the total volume of energy to be taken by HQ over the 51 years indicated in the MOU, HQ is achieving an additional $144 Billion in savings relative to what their costs would be if they had to duplicate this amount of hydro production in Quebec.
Add that $144 Billion to the $93 Billion in dividends will earn from the actual MOU itself, and HQ’s value attained from the MOU is $237 Billion.
The basis of Legault’s $200B comment is found.
The $144 Billion in notional value is an enormous benefit to HQ, and an enormous loss of opportunity for NL Hydro and the Province.
The above calculations include the new development projects which are optional in the MOU. It’s useful to put those aside and develop the proper numbers for only the existing Churchill Falls renewal portion of the MOU. It’s shows HQ’s advantage is much more substantial.
As shown in NL Hydro’s table above, the renewal dividends, found in the columns under “To Existing CF” are worth $69 Billion for HQ and $168 Billion for NL Hydro. On its face, the roughly 30/70 split might appear to be a fair deal or slightly in favour of NL Hydro given that the share ownership is split 34.2/65.8.
When the $144B in HQ’s low rate savings is added in, however, the renewal tips firmly to HQ, $213 Billion vs NL Hydro’s $168 Billion. HQ with 34.2% share ownership is taking 56% of the total value.
There is another factor that tilts the arrangement in HQ’s favour. It’s the time value of money. The MOU rate design gives the vast majority of near-term benefits to HQ and postpones the period of higher return for NL Hydro to the later years. Knowing that dollars in the future are worth less than those in the present, this gives HQ even more value.
One appropriate basis to compute relative value over time is to discount future cash flows for inflation.
The chart below shows a clear advantage to HQ achieved through the very low rates designed into the early years of the MOU:
The total 51-year net present value of these estimated annual values computes to $111 Billion for HQ and $62 Billion for NL Hydro. The 34% shareholder is reaping 64% of the value of the resource.
At this point, risk must also be considered, and it shows again that HQ has a substantial advantage.
Technological breakthroughs in energy generation and storage have the potential to derail forecast MOU returns but those risks and impacts lie two to three decades away. If such technology materializes, HQ will cancel their hypothetical plan to build more expensive hydro plants and choose the lower cost alternatives instead.
Looking at the chart above, we can see that return and risk are not equally allocated between the two parties. HQ has very high value returns during the first half of the deal when risk is very low. NL Hydro’s period of higher return is at the end of deal and is therefore exposed to considerable threat of rate and revenue decline.
In fact the deal for HQ is near-perfect from a risk perspective. If there is no technology breakthrough they will never overpay for CF power, and if competing technologies drive lower rates, the deal will yield them that cost reduction. Their own plants will be fixed cost, unable to give cost reductions as this CF MOU rate formula does so getting CF as they have is a really great deal for them. Virtually all of the revenue risk has been shifted to NL Hydro.
It’s all the mark of very shrewd negotiating on HQ’s part, and with final agreements yet to be done, there is concern that NL Hydro will give up further concessions over the next year.
This leads to another of Bill Wells concerns: whatever NL Hydro has conceded to date, expect HQ to really turn the screws as the deadline date of April 30, 2026 approaches.
The reason is HQ holds the strongest cards. HQ owns the 1969 power contract that guarantees them ultra-cheap power out to August 31, 2041. They can stall and play hardball much as they did in the months leading up to the 1969 contract when numerous concessions were extracted from Brinco, the worst being the automatic renewal period from 2016 to 2041.
Faced with delays in getting a deal, NL Hydro may cave in on possible negotiations that transfer more risk to them. Premier Furey and the NL public may add further unwanted pressure to NL Hydro with their desire to start bringing in the new pre-2041 money promised in the MOU.
Whatever they do, it will be in total secrecy, with nothing but partisan cheerleading from Premier Furey and his Liberal party and a token miniature oversight committee headed by a known Liberal who is unlikely to clash or interfere with Government’s desire to get the deal done. There is no protection for the public.
In Quebec, Legault is facing much harsher criticism of the MOU than the opposition parties mustered in NL and he is polling behind his opponents with an election call expected in the coming months. Maybe he’ll need to see that the negotiations extract yet more value for HQ to keep his job. Perhaps he must raise his $200 Billion to $300 Billion. If ousted, the new Quebec Premier might be only too glad to do just that to make his mark.
There are a host of reasons to have a bad feeling about this deal not turning out as advertised.
History might be repeating itself and future generations may grow to resent the 2026 contract nearly as much as those of the present and past are disgusted with the 1969 contract.
There could even be another Bill Wells 40 or so years from now telling people not to shag up the next deal like it was the last two times!
