01 February 2012

It’s a nice project, but… #nlpoli #cdnpoli

Manitoba Hydro’s limited review of Muskrat Falls is now available publicly.

Manitoba Hydro concluded that the project is indeed the lower cost option of the two they were limited to studying and using all the assumptions they had to use under the question set for them by the people behind the project.


Let’s take a look at a couple of areas of the report.  There’ll be more to follow.

The opposite of good practices

Nalcor should have completed an alternating current integration study before clearing Decision Gate 2 but didn’t.  (Executive Summary, p. 10 and Vol. 2, Ch.4 )

That study would look at how all the bits of the generating and transmission system would play together given the physical characteristics of different parts of the system. The study would look at things like back up systems, load balancing and similar operating requirements needed to maintain power across a range of possible events (e.g. equipment failures, weather problems etc)

As Manitoba Hydro put it:

Good utility practice requires that these integration studies be completed as part of the project screening process (DG2). MHI considers this a major gap in Nalcor’s work to date. These integrations studies must be completed prior to project sanction (DG3).

This stands out for two reasons.  First, it’s the type of study Tom Adams pointed to in his second post on Muskrat Falls.  Ed Martin will have a much harder time now dismissing Adams’ critique.

Second, Nalcor was very proud of the review of clearing Decision Gate 2  done by Navigant.  How did they miss this?  Are there other equally serious problems with Navigant’s other reviews and endorsements of this project?

Manitoba Hydro didn’t look at the Nova Scotia link.  It wasn’t part of their terms of reference.  They did note however, that Nalcor also doesn’t comply with current North American Electric reliability Corporation standards.  Those are the ones that allow the North American network to fit together.

Those are two big reviews that need to be done.  Nalcor says the system review will be done by March 2012.

Lower cost?

One of the most obvious criticisms of the Muskrat Falls project is that Nalcor simply didn’t look at all the reasonable alternatives.

The second one has been the basis for the cost estimates for the two options that Nalcor did assess.  According to its proponents, Muskrat Falls is the right option because:

  1. It costs about $2.2 billion less than the alternative, and,
  2. That cost differential is all about fuel prices.

You can find that sort of analysis in Wade Locke’s recent presentation in which he endorsed Muskrat Falls.  Not surprisingly, the current administration loves Wade Locke because he agrees with them so often.

Manitoba Hydro’s Cumulative Present Worth Analysis  (Summary and Vol 2,  Ch. 12) show just how vulnerable those claims are to shifts in their underlying assumptions.

MH asked Nalcor to review their assessment in light of a theoretical closure of the Corner Brook paper mill and the consequent availability of its generating capacity for use by the island system.  The Infeed advantage dropped from $2.2 billion to about $400 million.

Similarly, a change in world oil prices dramatically changed the cost differential.  Nalcor uses forecasts prepared by the internally respected analysts at PIRA Group.  Using PIRA’s March 2010 forecasts, the Muskrat falls advantage drops from $2.2 billion to $120 million.

A change in capital costs – up to a 50% cost over-run on the project – would leave Muskrat Falls a mere $194 million cheaper than the isolated island option.

MH also performed assessment’s in which they varied several factors using reasonable assumed changes.  They reduced the Muskrat advantage in the reported scenarios to less than $200 million and in one instance had them equal. 

Bear in mind that this does not compare Muskrat Falls to other options such as natural gas generation using local supplies.  The preliminary reviews are promising, but neither Nalcor nor its supporters have bothered to do the work.

Also, MH did not run an analysis using a marginally lower fuel price assumption than the one Nalcor used but with a 50% cost over-run on the project.  That’s actually a likely scenario given recent capital cost experience in places like Manitoba.

- srbp -