27 August 2014

Big Dams and Empty Promises #nlpoli

Conservative leadership candidate Steve Kent may be running in third place in the race, but the guy makes bold promises.

His energy policy includes the pledge about Muskrat Falls that he will “bring this project in on time, and on budget.”

That’s a rather silly promise considering that the project – originally budgeted at $5.0 billion  - is already officially estimated to cost $7.0 billion and will more likely cost something well above $8.0 billion before everything is done. For those of you doing the math,  that puts the project officially at 40% more than when the project was approved in 2010 and more likely about 60% over budget.

Kent is really just promising to keep the thing within the most recent budget estimate. It’s a moving target in other words, and it’s also what Nalcor has been doing with its financial estimates.  They don’t count things from 2010, when the government committed to build the project and announced it publicly.  They are counting from the most recent artificially selected spot in their management process called a decision gate.  Of course, at each “gate”,  the budget figure isn’t a firm number.  It is the centre on a range so if the final number is 10% or 20% more than the “gate” figure, the whole thing can technically be still on budget even though the cost is actually more than the number quoted.

Get it?

Let’s use the real numbers.  Manitoba Hydro International explained it during the Public utilities Board Hearings.

At Decision Gate 2 (2010),  the $5.0 billion cost estimate could have been 30% less or 50% more and still Nalcor would have considered itself within budget. 

By the time they got to Decision Gate 3,  the new cost estimate was $6.2 billion.  That’s 24% over the DG 2 budget estimate but it falls within that allowed range so everything is cool.

At DG 3 in 2013,  that $6.2 billion number came with a similar range  high and low.  This time, though, Nalcor allowed itself to be as much as 30% over and they’d still be “on budget”.

The cost figure they released in July was $6.99 billion.  It’s almost $800 million more than the 2013 estimate and almost 40% more than the 2010 forecast.  But everything is supposedly on budget because Nalcor’s management process allowed the company to be out by a certain amount at each stage. 

Steve Kent’s promise is a bit like the old joke about gunners in the army:  on time or on target.  Pick one.  People use the same joke, in a different form, about big projects:  on time or on budget.  Pick one.  In either case, the people who make big holes in the ground can only deliver one.

Steve Kent’s promise would be a joke if he wasn’t talking about $8.0 billion in new public debt that ordinary taxpayers in Newfoundland and Labrador will pay all by themselves.  Kent’s promise may be as sincere a statement as anyone ever made, but with the reality of the project,  it just winds up looking like yet another cynical line from a politician with as much sincerity behind it as veracity.

On the question of dams and cost,  you might want to have a look at a recent opinion piece in the New York Times about large dams and the cost associated with.  The piece starts off with a discussion of the social impact of some really large dam projects.  There are places in the world where governments have uprooted entire regions of people and re-settled them for a dam project.  The social costs have been horrendous.

The Times piece includes a reference to the cash cost of these projects as well, using a reference to an article from last March that regular readers will recognise.  It’s a reminder that proponents of these big projects tend to over-estimate the benefits and grossly under-estimate the costs, risks, timelines and so forth.  We have seen that on Muskrat Falls both in terms of the cash and in terms of the need for other sources of generation.  

What was once touted as the answer to all our future prayers, without the need for oil fired generation, has now quickly become what it truthfully always was:  just one of several types of generation needed to deliver power reliably when needed.  we never could afford to dump thermal generation.  Nalcor’s plans for Muskrat Falls included, more thermal generation than we currently have at Holyrood.  The company just stopped talking about the future of thermal  because it was part of the political lines worked out to justify the project and its enormous costs.

Lots of people believed the politicians when they said thermal was gone.  As it turned out,  Nalcor has had to rush plans to install a new 100 megawatt thermal unit at Holyrood after insisting a couple of years ago that there’d be no need of such a creature, at all.  One of the justifications for the new thermal generator is the need to replace Muskrat Falls if, and when, the line from Labrador goes down.

Like no one knew that was coming.

-srbp-

2 comments:

Tom Adams said...

Manitoba Hydro's suggestion that Muskrat Madness might be delivered for 30% less than $5B sure looks like a knee slapper, especially in light of their record at Wuskwatim.

Nalcor won't know the amount of thermal generation required on the island of NL until there is some clarity around water rights. If HQ wins its court application claiming that Nalcor has no right to use Upper Churchill for winter supply to NL above and beyond "recall" power, Nalcor may want to consider putting a coal plant on NL. Nalcor has a firm winter delivery commitment to Emera, on top of local load but Muskrat Madness delivers almost nothing in winter.

Ed Hollett said...

Just to be clear, Tom, it wasn't MHI's suggestion. They were describing the project management approach Nalcor was taking. At each gate, they aimed for a specific accuracy based on accepted industry standards. As such, the actual number could be a certain percentage above or a certain percentage below the one indicated.

But yes, it is a laughable since most of these enormous projects tend to go over budget and over schedule.