19 November 2013

20 Answers to the Telly’s 20 Questions (Part 1) #nlpoli

On October 19, Russell Wangersky wrote a column for The Telegram entitled "20 questions for the premier." Mr. Wangersky posed questions about the development of the Muskrat Falls project.

On November 9, Premier Kathy Dunderdale replied.

Unfortunately, the Premier did not provide much factual information. In the interest of informing Newfoundlanders and Labradorians on this important issue, here are 20 clear answers to 20 clear questions. The information presented here comes from the provincial government and Nalcor as well as publicly available information, such as  electricity markets across northeastern North America.  The post includes links to background information.


According to the provincial government’s own figures, electricity demand in the province will grow by about one percent a year for the foreseeable future.

That’s on par with the rest of Canada.

The province may need some additional sources of electricity in the future, but according to the provincial government’s own figures, we won’t need significant new sources of electricity until the late 2030s and early 2040s. That is about the same time that we will have access to large amounts of electricity from Churchill Falls.

The Muskrat Falls project will * may provide safe, reliable, clean energy but not at the lowest long-term price to the people of the province. There are many other sources of electricity to meet needs in the province that cost less than Muskrat Falls. Nalcor has just never looked at them.

Nalcor has no confirmed sales for any of the electricity from Muskrat Falls outside Newfoundland and Labrador including in Nova Scotia. The people of the province will pay for the entire project, in full, plus profit to companies outside the province whether they use all the electricity or none of it. The Premier acknowledged that in her reply to Mr. Wangersky’s column.

The Premier also acknowledged in her answers that what American governors think of the project has no effect on potential sales of Muskrat Falls electricity. That’s true. All the same, she used five paragraphs of her lengthy trying to hint at something else.

Politicians from Canada can meet with politicians in the United States all they want but that won’t sell a single spark of electricity. The American politicians don’t buy electricity for their states. The market sets the price and Muskrat Falls electricity is too expensive to compete in American markets on its own. That’s why Nalcor hasn’t been able to sign a single contract for electricity sales outside Newfoundland and Labrador.

The First 10 Answers

Question 1: How do comments by Nova Scotia's newly elected Premier Stephen McNeil affect the federal government loan guarantee for the project? (McNeil told The Canadian Press, "I can be very clear to her that if it's not in the best interests of Nova Scotia ratepayers, then we would not be supportive. ... Until we see something new, Muskrat Falls is where it is, which is on the drawing board.")

Answer:   If Nalcor and Emera don’t have a deal, then there’s no loan guarantee.  It’s that simple.

The situation the provincial government is in right now is actually worse than having the Emera deal collapse.  Nalcor is spending money hand over fist to build a dam and the deal with Nova Scotia is still up in the air. Kathy Dunderdale’s government desperately needs a deal to keep the project costs down.  So, the Nova Scotians are squeezing Nalcor and the Dunderdale administration as hard as they can.

Mr. Wangersky used that quote in the October and now, a month later, the situation is even worse.  On Monday, the Nova Scotia energy minister has said that unless the deal gets better still for Nova Scotia, the provincial government won’t back it.  He’s just ramping up the pressure.

And just to be clear:  this is exactly the position Brinco found itself in with Churchill Falls.  They started borrowing money and building the complex without a final deal.  When Brinco got into a financial squeeze,  Hydro-Quebec was able to extract major concessions in the infamous 1969 power contract.

Question 2: What happens if Nova Scotia doesn't play? After all, the very start of the loan guarantee agreement states, "It is essential to Canada that the projects have national and regional significance. ..." How does that change if Nova Scotia says so long?

Answer:   If Nalcor and Emera don’t have a deal to build the Maritime Link, then there’s no loan guarantee.

Nova Scotia can meet its electricity needs from many sources besides Muskrat Falls. Both the loan guarantee agreement and the deal between Nalcor and Emera allow Emera to back out without any significant penalty. Neither Emera nor the Nova Scotia government can lose.

By contrast,  the Dunderdale administration needs the loan guarantee to hold down the costs on the dam and the Labrador link to the island as that part of the project keeps getting more and more expensive.  Between 2010 and 2012, the costs for the dam and the line to the island jumped by about 25% or so

The Nalcor decision process still allows for exactly those kinds of cost increases:  there’s allowance for another 20% cost escalation  at the next decision gate and a further 10% escalation at the last gate. That would make a dam and transmission that were supposed to cost $5.0 billion come out at more than $8.0 billion 

That doesn’t mean the costs can’t go higher, it just means that Nalcor and the provincial government already accept the possibility costs could go even higher than the original $5.0 billion before the whole thing is finished. 

Question 3: Premier Dunderdale has said two other things: one, that the project could go ahead without Nova Scotia, and presumably, without the federal loan guarantee: "This project was planned around the people of Newfoundland and Labrador and could stand on its own merit, only for the people of Newfoundland and Labrador, and it did and it does. ... So if in your wildest dreams you had to come to a place that they were not at the table anymore, this project still makes sense for us." But she has also said the project can't go ahead without the federal loan guarantee. Which one is true?

Answer:    In her answer to this question, the Premier referred to “this project”.  She was referring to Muskrat Falls and the line to the island. What the Premier did in her answer is confirm yet again what SRBP has told you many times before: the provincial government plans to build the dam and the line to the island using billions of dollars in oil money and billions more in borrowing without a loan guarantee. Taxpayers will cover the costs - no matter how much they are - through future electricity rates.

The loan guarantee will help lower those costs, and it is increasingly needed to hold costs down, but the provincial government will go ahead with the dam and line to the island unless things get so bad that they just can’t borrow any more money.

Question 4: What about new and cheaper power sources? This province has no regulatory mechanisms to allow the sale of power and, with Muskrat Falls, has actually moved to make it illegal for companies to generate and sell power into the grid. Does this mean we are going to turn our backs on innovative methods to generate power in order to prop up Muskrat Falls and more expensive electricity? And does that make sense?

Answer:   Nalcor isn’t an energy company.  It’s a company that likes big projects.   Nalcor and Newfoundland and Labrador Hydro before it has had no interest in alternatives to the Lower Churchill development. They convinced a previous provincial government to freeze any work on small hydro projects back in the 1990s and the Conservatives continued the freeze in their 2007 energy plan while they worked on the Lower Churchill. 

The provincial government approved the Lower Churchill development in 2006.  Even though the economics of the project have changed dramatically for the worse ever since, the provincial government approved the then, they are pushing ahead regardless.

While they push forward with the Lower Churchill, Nalcor and the provincial government just aren’t interested in any alternatives

Electricity prices are so low on the mainland these days that even importing electricity would be cheaper and greener than Muskrat Falls. That’s why the provincial government gave Nalcor an absolute monopoly on generating electricity on the island last December in Bill 61. With a link to Nova Scotia or to Labrador, Newfoundland Power – the electricity retailer on the island -  could buy electricity in the rest of Canada or in the United States and wheel it to the island for less than what Muskrat Falls will cost taxpayers.

Heck, Newfoundland Power could even cut a deal with Hydro-Quebec for Churchill Falls electricity that would be dramatically cheaper than Muskrat Falls.

Just to give you an idea of how cheap electricity is these days, look at Ontario.  Navigant Consulting’s current Ontario forecast for the next two years puts the average hourly wholesale price for electricity at two and a half cents a kilowatt hour (2.5 cents/kwh), dropping over 12 months to about 1.6 cents per kwh.  Long outdated estimates for Muskrat Falls electricity over the past couple of years put the cost  at around 10 times that.

Question 5: What is the status of the province's search for lenders for the project?

Answer: Nalcor may be evaluating proposals,  as the Premier stated in her response, but the loan guarantee isn’t secure. On top of that the Hydro-Quebec legal challenge casts a huge cloud over the project that will make potential lenders very worried about their investment. They’ll calm their nerves either by walking away or, worse for taxpayers, charging higher interest rates or looking for other performance guarantees that will drive the costs of the project even higher.

Question 6: What interest rate are those lenders being told to expect to make?

A: The interest rates will depend on many things, including whether or not there is a loan guarantee.

No one can tell what the interest rates will be until the lenders are confortable enough to cut deals with Nalcor. 

Question 7:   Nalcor has yet to release whether or not there is a power purchase arrangement (PPA) with Newfoundland Hydro - that arrangement will require ratepayers to pay for electricity whether it's used or not. Will that PPA continue to be in limbo until all the bills come in?

A:   Don’t be in such a rush for bad news.

No matter how much Muskrat Falls costs, the people of Newfoundland and Labrador will pay for all of it plus profits to the lenders and Emera. Nalcor can’t decide how much one part of the company will charge another part  - and therefore how much taxpayers will pay - until all the bills are in.

Question 8: The federal loan guarantee requires full insurance of the project. Has Nalcor obtained insurance?

A: The Premier’s answer was “no”. She just took 20 words to dance around the issue without really saying it.

Question 9: What's the rate for insurance, and what kind of risk are the insurers concerned about?

A: Insurers are like the people who may lend Nalcor money to build the project. They think this is “quite attractive from a risk perspective”  - as the Premier said - because taxpayers are on the hook for the whole thing. They can’t lose. Governments never go out of business so there is pretty much a guarantee you will always get something out of it.  The only question for the insurers is how much they can make on the project.

Generally, the insurers and the lenders are both worried about the same things:  anything that drives up the project costs and makes it less likely that the provincial government can finish the project.

Still, the risk to insurance companies and lenders is low in this project. For taxpayers, it’s unlimited.

Question 10: How much has it cost to find a solution to the quick-clay landslide threat of the north slope?

A: Nalcor hasn’t said anything publicly that would give us an answer to this question.  The Premier’s replies to Mr. Wangersky don’t add anything.

Likely Nalcor doesn’t know right now. They have a contractor looking at it but, as far as anyone outside Nalcor knows, the numbers aren’t finished yet.

For those who aren’t familiar with the issue, the problem is not with a slope, but with a feature called the North Spur.  It’s a spit of land that runs from the shore of the Churchill River out to a knob of rock on the north side of Muskrat Falls.  Nalcor plans to build a dam across the falls and use the spur as a part of the structure that will hold back the water to run the power plant. It’s a key feature of the whole dam, in other words. 

The soil that makes up the North Spur seems to be a type that gets waterlogged and prone to collapse much like the ground at Daniel’s Harbour.  That’s not good if you plan to use the land to hold back all that water.  At the very least,  Nalcor will have to expand the water drainage system they have right now at the site.  At the worst, they may have to build a concrete dam the whole width of the river – more than double what they have planned now.  That would be expensive.

The North Spur problem is so significant that the provincial government (through Nalcor) should have checked this out before approving the project in 2010. It’s one of the many things Nalcor fiddled in order to give Danny Williams an announcement he could retire on in November 2010.  Three years later, they are still trying to figure out the answers to problems they should have solved long before now.


*  An astute reader pointed out that the project may not produce safe power if the North Spur problem isn’t dealt with properly.  It may not provide reliable power if the Hydro-Quebec challenge is successful.  And as for green energy, it is not considered green by the New England states who supposedly would buy the electricity from it.