The commentary below highlights the key components of the MOU 2 with regard to the upgrades at the Churchill Falls (CF) plant. It compares MOU 2 to MOU 1 (December 2024) and outlines the failures of MOU 2.
The CF upgrades development involves the replacement of the existing eleven turbine/ generators within the existing CF plant such that the energy capacity of the plant is increased to that planned under the MOU. The planned capacity increase was 10% or 550MW under MOU 1 but is increased to 23.5% under MOU 2.
The key components of the upgrades are the volumes of energy to each of the owners, the capital cost and financing for the upgrades, the pricing, the term of the contract, and the benefits to each of the owners.
HQ was to receive 75.5% of the total energy over a period of 50 years from the CF upgrades. That allocation is increased to 77.4 % under the 2026 MOU. The term remains 50 years post commissioning under MOU 2.
As majority owners of the CF plant (NL owns 65.8%) one would have expected NL to gain a commensurate share of access to energy from the upgrade.
Our government claims it is getting more energy. That is not a fact. The Government gets more energy if HQ decides to develop Gull Island. If HQ decides it is uneconomical to develop GI, then NL gets only 100MW from the upgrades. HQ would then get 1175MW from the upgrades.
2. Capital Cost and Financing for the CF Upgrades
A summary of the capital cost of the CF upgrades, the construction timeframe, the CF(L)Co financing and the proportionate share of the total cost between HQ and NL is shown in the table below:
As shown above the change to increase the capacity of the CF plant from the replacement of the eleven turbine/generators increases the construction cost substantially from $1.9 billion (MOU 1) to $4.8 billion (MOU 2), an increase of $2.9 billion. This financing through CF(L)Co places a large disproportionate financial burden on NL because NL is the majority owner of CF(L)Co (65.8%). Therefore, NL will have disproportionate financial risk. While NL absorbs $3.2 billion of the investment, it has only secured 100MW, or 7.8% of capacity from the entire upgrade program, HQ gets up to 92.2% of the energy and capacity from the CF upgrades. The CF upgrades are the only development secured by the MOU, all the other developments are possibilities based on feasibility studies and decisions solely under the control of HQ for extended periods of time (up to 12 years to decide on the Gull Island development).
The upgrades replacement is postponed under MOU 2; it is delayed four years and now is not scheduled to be completed until post 2041 contract expiry. This is likely because the plan has changed so materially to increase the size and capacity of each of the turbine/generators.
3. Pricing for CF upgrades energy and capacity
As shown above MOU 2 has the same cost of service pricing as MOU 1. There is no market- based pricing for energy or capacity. Cost of service pricing is a pricing model designed to ensure that utilities such NL Hydro sell energy within its jurisdiction at cost. Afterall, the public utilities are monopolies. They are also generally subjected to independent review and regulation to ensure the public they serve gets electricity at the lowest cost possible. In NL we have the Public Utilities Board (PUB) for this purpose. Cost of service pricing works when the utility generating the electricity gets access to the energy for domestic business customers and businesses. Cost of service pricing does not work when the energy is sold outside its jurisdiction because all the benefit then goes to that outside jurisdiction. Because there is no market-based pricing for energy or capacity from the CF upgrades, cost of service pricing prevails, CF(L)Co will earn very little on this development. The Independent Review Committee (IRC) stated that the CF upgrades as structured are of no benefit to NL. Now one can further conclude that the benefit is less because HQ is getting marginally more of the energy and capacity and NL is bearing substantially more of the investment cost.
The IRC added that the project would “… provide modest economic benefits during construction.” However, it also cautioned that the project “places additional debt on CFLCo, it introduces risk to the corporation and creates a lost opportunity for the province (meaning NL) in the form of reduced ability to extract additional dividends.” In other words, the CF upgrades highly benefit HQ, there is much financial risk to CF(L)co and the majority owner NL, and the project puts very significant debt on the company which is now debt free. Therefore, it reduces NL ability to extract dividends from CF(L)co in the future.
The cost-of-service pricing provides HQ with virtually all the market benefit over the 50-year life of the CF upgrades project. As market prices for energy and capacity increase over the fifty-year term, the benefit, which is the difference between market price and cost, will accrue directly to the off-taker (HQ) who gets most of the energy. On the upgrade development HQ will secure 77-92% of that benefit while only financing 34.2% of the cost. It is a extremely beneficial contract for HQ and very unbalanced and unfavourable contract for NL.
This is exactly the same pricing problem we have today with the 1969 contract.
There is only one reasonable proposition for NL: the pricing has to be market-based for any exported electricity or capacity to HQ. If we are not able to obtain market-based pricing then in order to secure benefit we have to secure the energy/capacity in the Province for our own domestic use. This is the clear conclusion of the IRC review as well.
NL is not the principal beneficiary of the CF upgrades.
4. Term of CF upgrades contract
Both MOU 1&2 fail to address establishing a reasonable term power contract for existing CF upgrades.
It is illogical for NL to be considering a fixed term contract for CF energy for 50 years with no provisions for exit, review, or renewal. Particularly, when the contract pricing is not market -based. There is enormous financial risk to our people from this term because there will be no means to resolve the shortfalls described earlier between market value and the established cost-of service rates agreed in the contract. All of the market upside (the difference between the cost to produce and the real market value) over the entire 50 years will be all to HQ’s benefit just as it is today.
Summary
In summary, the MOU 2 places much more financial risk on NL for the CF upgrades while HQ secures even more of the energy and capacity from the investment. Is it a better deal than MOU 1? No, it is a worse deal because HQ gets more control of energy and capacity at CF. The new contract prohibits NL from changing its royalty and water rents, and it is a worse because it failed to take into account the complete analysis of the IRC report which concluded the project was of no value to NL.
As is the case for the CF contract renewal, NL is not the principal beneficiary of the CF upgrades; therefore the MOU 2 proposition regarding the CF upgrades should be resoundingly rejected by the people of our Province.