There are alternatives to the “bundling” of four projects approach of the December 12th, 2024, Memorandum of Understanding, such as a stand-alone agreement on the Upper Churchill, without taking on the risks of Gull Island. What follows is an overview of an alternative that would yield substantial real wealth to the province.
Certain principles would be established in preparation for any future negotiations. For example, the Province of Newfoundland and Labrador (the province) would retain sole control of the Churchill River, upper and lower, and would decide, in consultation with NL Hydro, when and if future enhancements/developments would be undertaken. Further, The Upper Churchill Lease Act (1961) would be amended to modernize the rental and royalty obligations of users of the water resource and shorten the duration of future leases. Present shareholder agreements would, if prudent and possible, be rescinded. NL Hydro would retain voting control over all major decisions.
It has been speculated that the share of benefits so far from the Upper Churchill is 90 percent in favour of Quebec, with one claim being that the value amounts to $28 billion. Assuming average annual energy purchases by Hydro Quebec of thirty-two billion kilowatt hours over the past 50 years, the resale price would have been 1.75 cents, a highly unlikely scenario. Based on an assumed resale price range of 3.0 cents and 6.0 cents, the benefit for Quebec would have been in the range of $48 to $96 billion.
Using realistic assumptions, a case can be made for the stand-alone approach. My assumptions include the continuation of Quebec as a customer. A 30-year power purchase agreement would be negotiated with an option for an additional 30-year period, subject to negotiation. Approximately 80 percent of the energy would be allocated to Hydro Quebec at a firm price of 12 cents per kilowatt hour and escalated annually. The net cost to Hydro Quebec after it receives its common dividend would be 8.4 cents.
Annual energy sales revenue for CF(L)Co would be $4.164 billion. Roughly $3.034 billion (73 percent) of that amount would flow to the province representing higher rental and royalty payments as required by the modernized water lease and higher preferred and common dividends. The net present value to the province of $3.034 billion escalated annually for 30 years would be approximately $53 billion. This is about $30 billion higher than the net present value ($23.4 billion) of the contribution over 51 years to NL Hydro/treasury as deduced from the MOU NL treasury benefits table provided in the supplemental information.
Further considerations
NL Hydro would be unable, for a decade perhaps, to take up its full allotment of 1,000 megawatts due to insufficient load. Agreement with Hydro Quebec could extend its power entitlement in the early years, on a firm power basis, for the uncommitted portion of the NL Hydro allotment. This arrangement could yield an additional $200 million per annum.
A future CF units upgrade plus two additional units would increase the plant capacity from 5428 to 7028 megawatts. Additional annual production would increase by 1.4 TWh (Expansion-0.4 TWh, upgrades-1.0 TWh per MOU) of non-firm energy at variable rates.
The contemplated development of Gull Island should be delayed as there would be no financial pressure on the province to force it to the table. Major new borrowing of billions of dollars for that development could be put off until the province achieves a sounder financial footing, unless a suitable customer comes along.
In summary, a power purchase agreement, as described, would have two significant benefits:
- a source of real wealth from the Upper Churchill for the province; and
- an opportunity for Hydro Quebec to defer by many decades the major capital investment needed to replace its access to the power of Churchill Falls.
It would be a solution based on fairness and equity.
Increased wealth for the province would lead to vast improvement in our fiscal health, thus enabling major change for the better in our societal and economic status. A stronger Newfoundland and Labrador would be well positioned to undertake its share of responsibility in the pursuit of nation building.
Andrew Grant, FCPA
St. John’s