23 December 2013

The Hollowmen of Newfoundland and Labrador #nlpoli

Some of you may have been surprised to find out this weekend that Nalcor has a scheme to import cheap electricity into the province.

A couple of Nalcor officials could barely contain their excitement in an interview with the Telegram’s James McLeod. Here’s the idea in a nutshell:

Essentially, Nalcor would slow down or shut off some of its hydro dams and let the water build up in the reservoir, while buying cheap power from the market. Then later, during peak demand times on the mainland, Nalcor would run the hydro dams flat out and turn a profit.

You are probably scratching your head because the provincial government has always insisted Muskrat Falls was the cheapest way to supply the province with electricity.

Well, now you know they lied.

But that’s really the smallest implication of the weekend story.

Before we go any further, let’s make sure everyone understands exactly what Nalcor is planning to do.  Most of this will be familiar to regular readers, but it is worth reviewing the whole idea again just so everyone is clear about it.

Nalcor is going to build the extremely expensive Muskrat Falls generating complex and the line to the island.  They will use that electricity to displace not just electricity from Holyrood but – as we now know – electricity from the central Newfoundland complex of Bar d’Espoir and the Exploits River.  That electricity from  Muskrat Falls will be used on the island. Consumers in the province will pay for that entirely.

Nalcor will take the cheap electricity that is currently going to island consumers and send that to Nova Scotia for nothing.  Emera gets a block of electricity free of charge in exchange for building the Maritime Link and letting Nalcor run electricity on it. Under the revised deal, Nova Scotia can also get other electricity the island can make when there’s more rain than usual.

Now we know that Nalcor intends to save as much water as they can in their island generating system.  To do that, they will buy electricity on the mainland and bring it to the island and just build up water in the island’s hydroelectric generating system.  When the mainland markets need electricity and the price goes up, Nalcor will sell its electricity back into the system, on the spot market.

A couple of things follow from this.

First,  American electricity is so cheap that Nalcor can buy it and bring it all the way to the island for less than the cost of anything else it already owns and certainly for a lot less than Muskrat Falls.

That’s the only way this scheme makes any theoretical sense.

Second,  regular readers of this corner have known about the idea of importing cheaper electricity for some time:  the cheapest alternative to Muskrat Falls would be a line to the mainland that would let Nalcor or Newfoundland Power import cheap electricity to meet the island’s needs.  There’s a post from March 2011 that descries the southern version of the option, using a link to Nova Scotia.  In September 2012,  the analyst JM proposed construction of the line to Labrador so that we could import cheap electricity from Quebec.

The cost of the Maritime link is less than $2.0 billion, compared to the current $7.2 billion cost of Muskrat Falls and the Labrador-Island Link.  The current cost for the Labrador-Island Link is about $3.2 billion.

Third,  you now understand why the provincial government gave Nalcor a monopoly last December.  If they’d left the market open to competition, Newfoundland Power could buy electricity and import it for less than Muskrat Falls.  That would be an unmitigated disaster for Nalcor, but an obvious boon for consumers in the province. Again, regular readers got that explanation  last December.

Fourth,  importing electricity is something the provincial government has talked about before. Nalcor has talked about importing electricity in the event the Labrador line went down in bad weather or something. In March 2012,  Jerome Kennedy made reference in the House of Assembly to importing electricity.  He didn’t say anything beyond the idea we could do it.  Now we know what he was likely talking about.

Fifth,  we can figure out how the accountants at Nalcor work this out in their own heads.  They plan to give local consumers the expensive electricity and sell the cheap stuff into the export market where the prices are dramatically lower than Muskrat Falls.  The difference is dramatic.  Even at $5.0 billion, Muskrat Falls was supposed to produce electricity at about 16 cents per kilowatt hour delivered on the island.  That cost has only gone up since 2010.  Meanwhile, the markets in New England and Ontario are looking at prices of only a quarter of that or less. 

Well, since Bay d’Espoir and the rest of the central Newfoundland complex are already paid for, the cost of production is less than the market price in New England.  On paper, that stuff will make Nalcor a profit, as long as the transportation costs are low.  Overall, local consumers are still screwed because they will be paying top dollar for Muskrat Falls to allow subsidised electricity to go south.

Sixth,  the scheme assumes that Nalcor can control water flows on the Churchill River after 2016. As McLeod puts it, by “2017, Nalcor plans to play the game on a bigger scale, with Churchill Falls, Muskrat Falls and all of the Newfoundland hydro dams co-ordinated.”

If Hydro-Quebec wins its court case against Churchill Falls (Labrador) Corporation, then the whole scheme goes into the crapper.  For one thing, Nalcor can’t count on Muskrat Falls to generate enough electricity to save them water on the island that they can use to make cheap electricity for the Americans or Nova Scotians.

Nalcor boss Ed Martin told CBC’s David Cochrane a couple of weeks ago that the lawsuit wouldn’t matter whether HQ won or not. If HQ runs the Churchill Falls plant like they have, Muskrat Falls will produce plenty of electricity.  Well, as much as that matches the kind of nuttiness Gil Bennett has been getting on with,  that contradicts the argument Nalcor put forward for the water management agreement in the first place. Without some regulation of the water flows, Muskrat Falls could only reliably produce a fraction of what Nalcor claimed.

When Tom Adams first pointed out that Muskrat Falls on its own couldn’t do all the things Nalcor claimed, Martin attacked Adams and his claims.  Then a few months later, Martin explained how Nalcor would cover off Muskrat Falls’ deficiencies with other electricity from other places.

Seventh, you can see a pattern of constantly shifting arguments and details.  Nalcor’s story about Muskrat Falls keeps changing about every aspect of the project.  That’s one of the reasons why people are queasy about the idea.  This latest revelation will only increase public uncertainty about the entire scheme.

In this case we have gone from needing Muskrat Falls because it was the cheapest scheme to a world in which the island actually has all sorts of excess electricity such that we wouldn’t need Muskrat Falls to meet demand.

This is the same sort of shifting argument we have seen all along.  Remember the idea that Nalcor studied the alternatives and found Muskrat Falls was the cheapest way to replace Holyrood and meet the island’s energy needs.  Well, we now know that isn’t true.  Just forget that for a second.  Notice how Nalcor’s story on alternatives changed over time.

When Nalcor vice president Gil Bennett talked to the joint environmental review panel, he told them that Nalcor basically didn’t bother to figure out how to make juice from natural gas. They didn’t bother because the oil companies that have the gas couldn’t figure out how to make money at it.

Nalcor didn’t look at any alternatives to Muskrat Falls in 2010 to meet local needs and replace Holyrood.  The reason is because that wasn’t the project they were talking about at the time.  In 2010, they were talking about building Muskrat Falls first and Gull Island second with the supposed goal of exporting power to other places.

The island demand excuse came up later.  If meeting island needs really was the plan, then  Nalcor should have gone back to Decision Gate 1 for their new project configuration.  Instead, they rationalised moving ahead to DG 2 based on work they’d done in 2006 for a completely different project than the one they had in 2010 or the one they have now. 

In 2011 and 2012 as people started talking about alternatives to Muskrat Falls for local demand, Nalcor never once produced a simple report that showed they’d done the work on alternatives.  The reason is simple:  Nalcor never had any. The provincial government paid people to study something in 2012 but there’s no proof Nalcor ever did the work themselves in 2010 or at any other time recently.  Nalcor only posted a summary of the work on alternatives in 2012, long after the debate on alternatives was raging. But there was nothing in their post to the “leadership blog” that anyone could mistake for proof that Nalcor was quoting actual reports on alternatives to Muskrat Falls for meeting domestic energy needs.

Which is the real rationale for Muskrat Falls?  Based on the most recent revelation, it looks like the cheapest way to meet island demand argument was just sheer crap.

Eight,  this latest revelation really drives home another point SRBP made last year, namely that the public interest and Nalcor’s corporate interest are not one and the same thing.  Provincial politicians confuse the two all along.  But really, they are different. 

To see the difference, just look at the relative cost of electricity from this province’s energy corporation.  The people that theoretically own the company will pay – conservatively five times what Nova Scotians will pay.  Muskrat Falls electricity will be something like 20 cents a kilowatt hour or more when it starts to flow.  Nova Scotians get their electricity for something around the market price in New England:  four to four and a half cents a kilowatt hour.  There’s no forecast that number is likely to go up in the near future.

Ninth,  note the reference to thermal power in the McLeod story as well as the concern about what happens when there isn’t enough rain.  Nalcor relies on Holyrood.and its thermal generating plants.  That isn’t going to vanish.  Nalcor still plans to install a raft of thermal generation, starting next year. They need it to ensure there’s enough reliable electricity to meet provincial needs.

Lastly, let’s remember all the times that Kathy Dunderdale and other Muskrat Falls supporters have claimed that critics have been wrong at every juncture.

They haven’t been.

This latest scheme shows the lengths to which Nalcor has to go to theoretically make a paper profit from selling electricity into out-of-province markets.  None of it involves selling Lower Churchill electricity.  That’s because Muskrat Falls is too expensive.

Price, markets, power output.  You name it, the critics have been proven right time and again.

And each time they’ve been hit with another criticism, the Nalcor crowd have merely shifted their claims to something else, insisting all along that their scheme is brilliant and all the critics are wrong even when they have been obviously right.

it’s like the National Childhood Obesity Offensive all over again.