15 October 2012

The Simple Litmus Test #nlpoli

by JM

There has been a new group of business people who have been formed in support of the Muskrat Falls Project. I would ask that these individuals review the following key facts and figures before they confirm their support of the project. I would also ask that they push the Government to answer the questions raised at the end of this short post

The Cost – Muskrat Falls Infeed

The best summary of the Muskrat Falls project costs has been produced by Nalcor  in RFI-KPL-27. This has been subdivided into both the generation and the transmission costs. The total annual revenue requirement to support this project is provided in Figure 1. This is the cost which will have to be recovered from Newfoundland and Labrador rate payers through a power purchase agreement (PPA) and/or export to meet Nalcor’s target profitability.

Figure 1: Annual Revenue Requirement in Canadian Dollars (Annual)


The Potential Sales Revenue – Muskrat Falls Infeed

It is worth considering what the Muskrat Falls project will generate in terms of revenue over the 50 year life time if the energy was sold at market rates. For this exercise, forget the confined Newfoundland and Labrador market, and consider if the energy is sold on the open, competitive, North American market.

Table 1 summarizes what the United States Energy Information Agency (EIA) has predicted for electricity rates for the next 30 years.

Table 1: EIA Energy Price Predictions


The value of energy is six (6) cents per kwh in 2010 dollars, which is escalated by 2% per year.

The total export revenue from Muskrat Falls can then be calculated assuming that there is 3900 GWh in the first 35 years, and 4900 GWh following the expiration of the Maritime Link.

The summary of the potential annual sales revenue is provided in Figure 2. The total PPA obligation from Figure 1 has also been included. It is clear that if all energy was exported through to Nova Scotia, and/or Hydro-Quebec there would be shortfalls of several hundred million a year. This is before the additional transmission charges through New Brunswick, Nova Scotia, and Maine (MEPCO) are considered

It is clear that the project is being paid for by the rate payers of the province. In Year 1,  Newfoundlanders and Labradorians will pay 23 cents per kwh for Muskrat Falls power. In comparison, in New England the rate would be in the 10 to 11 cents range. It is the premium due to our isolation, and Nalcor’s monopoly on electrical generation and distribution. This premium to be paid by island consumers is ensuring the current predicted feasibility of this project.

Figure 2: Newfoundland Hydro Obligation Versus Export Revenue With Noted Shortfall


Opening of Markets – A Potential Loss of the Monopoly?

Nalcor’s business plan is centered on the fact that Muskrat Falls is less expensive than continued oil fired generation in Holyrood, the latter being one of the most expensive ways to generate electricity in the world. But it is the way we have been meeting our peak demand for the past 30 years.

Nalcor has looked at other options.  This included the import of electricity from other jurisdictions.  The purchase of energy from other generators was discounted prior to Decision Gate 2.

But the question must be asked with the connection of the island to the mainland grid, will Nalcor be able to enjoy a continued monopoly on energy generation and distribution within the island?  Will they be able to prevent other companies from offering to market power within Newfoundland and Labrador?

With his recent paper, Dr. Gordon Weil, an independent electricity expert with extensive experience in the New England market, raised this very interesting subject.  I provide it here for the reader:


This means that if Nalcor is planning to sell energy to the United States, they have to de-bundle the generation and transmission components of the company. This de-bundling is a requirement if the US Federal Energy Regulatory Commission to get an export license to sell energy in the US. 

But another requirement is that the local market is also opened for competition.Theoretically, companies such as Hydro-Quebec, Emera or other generators will be able to sell power in Newfoundland and Labrador.

There has been much discussion about Hydro-Quebec selling power to Quebec mines. But will Hydro-Quebec also have the ability to sell energy to other Newfoundland and Labrador industrial customers. Can Vale, North Atlantic Refining, or Duck Pond now have the option to purchase energy from Hydro-Quebec or Emera?  Could even Newfoundland Power now be able to purchase energy from these external generators?

Will Newfoundland and Labrador power now face a competitive domestic market for the relatively expensive Muskrat Falls energy obtained under the fixed power agreement [between Newfoundland and Labrador Hydro and Nalcor (Muskrat Falls)]

The loss of any of these industrial customers would lower the Newfoundland and Labrador demand growth.  But it does not change the money which is required to be paid by Nalcor under the proposed PPA (Figure 1). The reduction in demand from Newfoundland and Labrador Hydro will increase unit rates to the consumer. If this is true, how stable will rates be in the future?

For a project which depends on a monopoly to make money, it is essential that this monopoly is protected. There remains fundamental questions which the AIMS report has raised:

  1. Can Hydro-Quebec now sell power on the island of Newfoundland?
  2. Can Emera now sell power on the island of Newfoundland?
  3. Are industrial consumers in Newfoundland and Labrador or Newfoundland Power able to go to the market for energy and simply pay the transmission tariff?
  4. Does Nalcor and Newfoundland and Labrador Hydro have plans to now de-bundle their generation and transmission business?
  5. Could CFLCo (as a joint venture) be able to enter the Newfoundland and Labrador Market and provide the very cheap Churchill Falls power, post 2041.  This plant is not owned 100% by Nalcor.  They would have the opportunity to sell very cheap power in Newfoundland and Labrador, pay the transmission tariff, and also potentially add new generation into the island demand.  This would again have severe impact on the economics for Muskrat Falls.
  6. Would the PUB now have the legislative mandate to explore all options for power and not be restricted to the historical generators in the province?
  7. If Nalcor sells energy to Labrador mining there will be capacity on the Labrador Island Link.  If in 2017, Hydro-Quebec launches a complaint to FERC about open access to Newfoundland markets, what would be the potential repercussions regarding potential exports into the US?  Would this change if Gull Island proceeded?
  8. Do the existing agreements between Nalcor and Emera ensure the transmission capacity on both the Maritime Link and the Labrador Island Link is effectively “spoken for” and would preclude Hydro-Quebec from using the capacity?

Until now, there has been no public comment on by Nalcor, Navigant, the Joint Review Panel, Public Utilities Board, Manitoba Hydro or any of the pundits on the possible opening of the Newfoundland and Labrador market to electricity competition.  But these remain as fundamental questions.

I am sure that Nalcor has considered this subject, even though it has not been publically discussed. I, as a concerned citizen, would like to have clarification from Nalcor prior to the committing to the sizeable expenditure we are about to embark on.  As a ratepayer, I would also welcome a competitive environment for supplying my electrical needs. 

If Hydro Quebec and Emera are “blocked” from transmitting power over either the subsea links we must ask ourselves why? As a minimum our industrial customers should be afforded the opportunity
to seek lower electrical rates from outside generators.

I recommend those who want to learn more to listen to Dr. Gordon Weil on On the Go with Ted Blades. This interview highlights the importance of public discussion on the issue.