18 October 2012

The Dangers of Being a Mythbuster – 50 is the new 70 #nlpoli

Look around and anyone can find a huge amount of information about Muskrat Falls and electricity in Newfoundland and Labrador.

For all that, though, there is a great deal of misinformation out there.  That only adds to confusion some people are experiencing.  As disappointing as it is, misinformation remains a fact of life in the Muskrat falls discussion.

As a couple of recent posts have shown, some of the misinformation turned up in a single online commentary recently posted. Something good can come out of everything, as it seems and so this third post corrects the misinformation and replaces it other issues and more substantive information.

The third “myth” is easy to state:

Myth #3: Muskrat Falls is on a 50-year timeline

And aside from this single line – “I heard this expressed yesterday on VOCM Backtalk by Liberal leader Dwight Ball” -  John Samms gives absolutely no clue as to what the myth is supposedly all about:

Nalcor has costed the project over the period from 2017 to 2067, a period of 50 years.  That would seem to correspond with Ball’s comment.  It’s a well known point.

Obvious conclusion:  no myth.

Samms’ entire “debunk” of the imaginary myth consists of a series of quotes from Nalcor’s Dawn Dalley and Gil Bennett about the value to the province of Bay d’Espoir land the cheap electricity that flows from a facility that is paid off but keeps making electricity out of an essentially free source of energy.

The Cost Issue

In place of the non-existent myth, Samms could have talked about some aspects of the Nalcor costing plan that are in the public domain and that have a bearing on how the public perceives the project.

As the public utilities board review demonstrated the usual approach to a project of this type is to finance it over a 35 year period using a method called cost of service (COS).  That puts the capital costs at the front.

Instead, Nalcor plans to finance the project over a 50 year period.  Ratepayers/taxpayers in Newfoundland and Labrador will pay the entire cost of the project plus profits to the companies involved despite using only about 40% of the electricity.  Nalcor costed the electricity based on a power purchase agreement between two parts of the company internally in such a way that the cost of electricity is distributed over the 50 year period.  Nalcor determined cost of the transmission using the cost of service approach.

This produces some interesting results.  You can find some details of these two approaches in a submission to the public utilities board by Phil Raphaels of the Helios Centre. 

Nalcor costed the transmission differently from the electricity because it is consistent with what other utilities do with transmission systems.  Interestingly, that seems to be in line with what they would need to do in the event an external generator would want to know if they needed to wheel power through a deregulated Newfoundland and Labrador market.  While that has a whole other set of implications for the costing model, let’s just stick with the cost of service versus PPA approach that has been under discussion until now publicly.

The following table is a comparison of the cost of electricity and transmission using the two approaches. The numbers come from the clearly labelled columns in Raphaels’ submission. The figures are dollars per megawatt hours

2017 372 239
2022 283 214
2027 218 198
2032 165 189
2037 142 192
2041 1969 contract with HQ expires
2042 119 197
2067 33 260

As the public utilities board found during its recent hearings, the combined cost of electricity and transmission using the traditional cost of service approach would work out to $372 per megawatt hour. (37.2 cents per kilowatt hour) using 2010 figures.

Nalcor’s proposed approach to cost out the electricity over 50 years produces an estimated cost of electricity and transmission of $239 per megawatt hour in 2017 (23.9 cents per kilowatt). Nalcor’s estimated cost in 2067 is $260 per megawatt hour (26 cents per KWh).  If you break down Nalcor’s power purchase approach, you find – surprisingly – that the cost of electricity alone in 2067 will be $247 per megawatt hour, more than the combined electricity and transmission cost in 2017!

This essentially backloads the cost of Muskrat Falls onto future generations, as analyst Tom Adams detailed in his excellent assessment. What’s more, the Nalcor approach would have consumers in Newfoundland and Labrador pay significant amounts for Muskrat Falls for 25 years after they can obtain more than 5500 megawatts of electricity from Churchill Falls.

Regardless of whether you support or oppose the Muskrat Falls proposal, these figures and the implications of the two costing methods are worth considerably more discussion than they have received.  Muskrat Falls is a 50 year project:  make no mistake about it.

Bay d’Espoir

The difference in the cost of the two approaches is one of the reasons why it is so bizarre that Nalcor’s Dawn Dalley spoke glowingly about the Bay d’Espoir project to John Samms during his interview with Dalley and Muskrat Falls boss Gil Bennett.

Samms quotes Dalley as saying that “we can look in hindsight and say it was smart to develop Bay D’Espoir because we’re grounded in 2 [sic] cent power. The hydro projects are big investments up front costs in capital, but the fuel is free in perpetuity.” 

As Dalley should know, Nalcor’s PPA approach to Muskrat Falls does exactly the opposite of that by pushing the costs onto future consumers.

Dalley’s historical account of bay d’Espoir is equally suspect:

“Our rates are competitive because of Bay D’Espoir, they really are, they’re competitive because in the ’60′s when the same discussion was happening around Bay D’Espoir; just take out Muskrat Falls and put in Bay D’Espoir. Y’know same thing, there was a big estimate at the time, there were big public discussions, there were opponents and proponents. We talked to folks who were around in the day and they say the exact same thing”. [Emphasis added;  italics in original]

The problem with Dalley’s comments is not just that they are an unfounded effort to confuse two projects at two very different stages of the province’s economic development. 

Nor is the problem that Dalley’s comparison is exceedingly superficial:  essentially she claims the two projects are the same because there was controversy then just like now. History repeats itself and look how marvellously Bay d’Espoir (supposedly)worked out.

The problem for Dalley is that Bay d’Espoir wasn’t an industrial megaproject to provide consumers with electricity, as her comments suggest.  Rather, it was part of a deliberate government policy to provide cheap electricity to industrial development at the expense of taxpayers. 

As originally proposed, Bay d’Espoir was supposed to support eight industries, including a hockey stick factory, a paper mill, a petrochemical plant, and an oil refinery.  The price for electricity was supposed to be the same rate as Hydro-Quebec will get at Churchill Falls after 2016:  two mills. 

That’s not an accident.  The project basically came out of the same philosophy and the same company that developed Churchill Falls, namely BRINCO. 

The project is well described in a 1974 paper by Peter Crabbe.  The abject failure of the original concept is plain in Crabbe’s assessment.

This is not the first time that proponents of the Muskrat Falls project have brought up Bay d’Espoir.  Finance minister Tom Marshall did it almost a year ago. The comparison is even more curious a year later, given the shift in emphasis from the Muskrat Falls proponents from consumer demand and export to building Muskrat Falls in order to provide (cheap) electricity for Labrador mining development.

These are hardly comparisons one would think the folks at Nalcor would encourage.