07 October 2015

Alternatives to the Falls #nlpoli

Since people are wondering if Muskrat Falls really is still the cheapest way to make electricity for local use,  let’s take a look at it.

The tale is actually very simple.

Nalcor argued that Muskrat Falls was cheaper than one alternative:  an island system dependent on thermal generation using some sort of petroleum fuel like the heavy stuff burned at Holyrood.

Now that wasn’t true even in December 2010, as this SRBP post noted at the time. Even if you accept the contrived studies used in 2012 to justify Muskrat Falls,  the massive cost increases for the project have made the Falls more expensive than the alternatives. 

The only advantage Muskrat had over thermal (oil) was fuel and those prices have gone in one direction:  down.  Since you can build a new thermal plant near to the demand source, you wouldn’t need the expensive connections to the mainland.  That all works for oil-fired generation and against Muskrat Falls.

Oil prices have plummeted in recent months and are forecast to stay low,  Muskrat Falls’ only advantage is definitely gone.


Let’s go a step further.

Natural Gas:  a viable alternative still unexplored

Nalcor looked at the cost of a natural gas plant to replace Holyrood in 2008.  That was separate from the Lower Churchill project. The estimated cost was less than $700 million for the new plant.  Nalcor didn’t look at natural gas as an alternative in 2010 because they didn’t want to.  Go back and look at what Ed Martin said in 2010 in the post linked above.

“Our focus right now, no question, is the Lower Churchill,”  Nalcor boss Ed Martin said.  “ … and that’s going to be a five- to six-year construction project. … “We’d have to see if gas was there [at Parson’s Pond], we’d have to run the economics, it would be sometime after that [before they could look at building a plant.]” Nalcor abandoned drilling at Parsons Pond because they found natural gas, not oil.

We know Nalcor never looked at natural gas as an alternative to Muskrat Falls because that’s what Nalcor officials said before it became an issue in 2010.  When Nalcor was talking about building Gull Island for export, they basically blew off the idea of natural gas as “purely hypothetical” because the offshore field operators hadn’t figured out a way to get it ashore profitably.

Other studies concluded that offshore gas was a viable replacement for Holyrood, but since Nalcor has never impartially evaluated it, we still don’t know if it could work.  If we accept the 2005 study as a basis for discussion, the estimated cost at the time was $1.0 billion.  Even if that cost quintupled,  it would still be cheaper than Muskrat Falls.

Just to give you a ballpark idea of the costs we are talking about today, consider that Nalcor installed a new 123 megawatt generator in 2014 at a cost of $119 million. Four or five of those would give as much generating capacity as Muskrat Falls can reliable produce. Roughly $600 million for the generators. Double that for the building to put them in. The only cost beyond that would basically be fuel.

Importing Cheaper from Elsewhere

We know Muskrat Falls wasn’t ever the lowest cost alternative for several other reasons. In December 2013, for example, Nalcor officials said they planned to buy cheaper electricity from outside the province and ship it in.

No joke.

The connection to Nova Scotia is still running around $1.5 billion.  The line to Labrador is running something around $3.0 billion, all up.  Either one or both of those lines plus purchases of cheap electricity from elsewhere would deliver electricity to consumers for something on the order of half the cost of Muskrat Falls itself.  If Nalcor officials had that plan in 2013 when oil prices were far higher than today,  the case for importing electricity cheaply has only climbed.

Incidentally, the threat to Nalcor and Muskrat Falls of competition from cheaper imports is why the provincial government made it illegal to retail electricity in the province unless it came from Nalcor.

In case you missed it…

There is no evidence Nalcor considered any alternatives to Muskrat Falls before they committed to build it in 2010 to meet local demand.

No evidence at all.

Nalcor and its supporters claim Muskrat Falls was the cheapest way but there is no study that shows it, period, full stop end of story.

Nalcor has never produced any comparisons.

The reason is that they never did any.

Nalcor passed Muskrat Falls through approval in November 2010.  Officially, they called it Decision Gate 2 of the Lower Churchill project because – as they all winked at each other – the official claim was they had just decided to build the smaller dam at Muskrat Falls first.

They passed the Lower Churchill project – i.e. Gull Island – through the first Decision Gate in 2006.  Back then, they looked at a series of alternatives for a project to make electricity and sell it into export markets at a profit.

What they approved in 2010 wasn’t the Lower Churchill. It was a different project with a different end goal.  They should have started from scratch but if they’d done that, Nalcor couldn’t have approved something for Danny to retire on with claims that he had fulfilled all his promises.

Hence the winks all ‘round.

When it came time for the provincial government dog and pony show in the House of Assembly, Nalcor didn’t have any comparisons to even quote from. That’s why the provincial government commissioned a series of set-ups  in 2012 to confirm the conclusion they’d already reached.

So when anyone says Muskrat Falls is the lowest cost alternative, was the lowest cost alternative or anything of the sort,  you can just give a classic Danny Williams  “pffft” and carry on. This a recurring theme around these parts, by the way, and regular readers probably know this all by heart.  Still, it bears repeating if only for the chance that some people reading this may have missed the whole story along the way.

Bottom Line

There are plenty of cheaper alternatives to Muskrat Falls. With the delays in Muskrat, Nalcor officials are already talking about demand management techniques they previously ridiculed.  Plus they are talking about importing electricity from other places, including Churchill Falls.

What we should seriously consider at this point is the possibility of halting Muskrat Falls where it is and cutting any further losses from the project.  Price escalation is just one problem.  We still don’t know that Nalcor can actually produce any serious amount of electricity at the Falls.  We may well wind up with a $12.5 billion pile of concrete than cannot reliably produce more than 150 megawatts.  That’s less than the free block of electricity we have to give to Emera.

We can find cheaper ways to deliver electricity to the province than Muskrat Falls.

We always could.