There has been lots of discussion about the question- did we get the best value for the Churchill Falls power from the existing plant? In a previous post I concluded we have not. The value of the MOU (for existing Churchill Falls power) principally relates to what is the price for the existing power to HQ? Having listened to the representatives of NL Hydro over the past two days, they have not been able to explain the price for existing power that will be paid by HQ. The price they quote is a so-called “effective price of 5.9 cents / kWh” and that price is based on some underlying assumptions. The assumptions are not stated or part of the MOU, nor is there any reference to 5.9 cents /kWh in the MOU. This price is in fact meaningless.
The references for the value of the power being sold to HQ that are agreed in the MOU are as follows:
- the MOU states the value to be $33.8 billion (2024$) as agreed for all the existing power that is being sold to HQ for the 51 years;
- the parties have agreed that the discount rate to be applied to future payments from HQ over the 51- year term is 5.822%; and
- that the blocks of power, the term of the various blocks of power; and the indices that determine the price on a year -to year basis are all qualified to reconcile to total $33.8 billion (on a net present value basis – 2024$) .
Obviously, the pricing mechanisms have already been established and tested from a financial perspective by both HQ and NL Hydro. They would not agree to that value and state it in the MOU if they were not both comfortable and agreeable to the value. They also have agreed on the market mechanisms behind that 2024$ value of $33.8 billion. In other words, the pricing is agreed that established that agreed value. It has been modeled, reviewed, and tested, to the penny if you will, because it would be impossible for the parties to agree if it were not. You simply do not agree to buy and sell something of that enormous value without extensive negotiations and review. The issue is that neither party is willing to disclose how they arrived at that value or how it is calculated. Of course, it will be challenging to formulate those mechanisms in definitive contract wording. But let’s not operate under the illusion that HQ has agreed to pay more than $33.8 billion (2024$) it is wishful thinking and it is not in the MOU.
The (2024$) value is approximately 2.4 cents / kWh for the existing CF power over the 51-year term (as confirmed by a number of independent analysts that have researched the MOU value). At 2.4 cents per kWh that represents significantly less than wholesale market value. It is also significantly less than the replacement cost of power from any perspective.
The replacement value is substantially higher than the current wholesale price as has been disclosed ranging from about 11-12 cents/kWh for Gull Island power and much higher price for other potential replacement projects, quoted by Quebec interests, to be a minimum of 16 cents/kWh.
The average price in (2024$) for power for the next 51 years is determined and the value is established and agreed at $33.8 billion (2024$). All other prices and values, including the 5.9 cents from NLH, are speculation and are not reflective of the agreed terms in the MOU.
One can put the overall picture of value into perspective if one compares the average 2024$ price per/kWh to the New England hub price for electricity, the power is being sold at a discount of over 60%. To use an analogy, it is like selling a house in St. John’s that is valued at $750,000 for $285,000. To say the house would sell quickly is, of course, an understatement. The difference here though, as shocking as that is, NL Hydro is selling over 118,000 houses at that discounted price in the MOU. The MOU is a GIVEAWAY of historic proportions.