The entire project hinged on Nalcor's ability to control water flows on the Churchill River. Nalcor's internal assessments showed that without the ability to control water flows, Nalcor's Lower Churchill project would reliably produce only about 17% of its nameplate capacity. That means that Muskrat Falls would have a firm generating capacity of about 140 megawatts, which is less than the free block of power Nalcor guaranteed Emera and Nova Scotia.
Nalcor gambled on a dubious interpretation of the 1969 power contract and lost.
The impact on Muskrat Falls will be devastating.
Go back to late 2012 and what turned out to be the most popular post at SRBP, ever. "Gil Bennett won't retweet this post" explained the importance of controlling water flows in order to maximise the output from Muskrat Falls. Nalcor had developed a complex scheme that involved sending Muskrat Falls power to Quebec to meet the terms of the 1969 power contract. This would reduce the water needed from Churchill Falls.
Nalcor thought it would use that water to run Muskrat Falls at higher capacity at other times of the year. Crucial to this scheme was Nalcor's claim that the automatic renewal clause fundamentally changed the power contract. Under the deal, Hydro-Quebec gets virtually all the capacity from Churchill Falls. In practical terms, HQ schedules production from Churchill Falls to meet its needs. That's where Nalcor got the 17% figure, using an example of HQ running Churchill Falls flat-out for 20 days a month and then letting it all-but idle for the balance of the month.
By the time Muskrat Falls came along, Nalcor knew that we'd be in the automatic renewal period of the 1969 power contract between Churchill Falls (Labrador) Corporation and Hydro-Quebec. As part of its water management scheme, Nalcor argued that while HQ got virtually all the power from Churchill Falls for the first period of the contract, HQ would only get fixed amounts each month during the 25 years of the renewal. In effect, Nalcor was arguing that they would control water on the river in the renewal period, not Hydro Quebec.
Hydro-Quebec took the issue to court and on Monday, the Quebec Superior Court agreed with Hydro-Quebec's interpretation. After the contract automatically renews on September 1, Hydro-Quebec will continue to get virtually all the power and to schedule its delivery.
As CBC's Peter Cowan noted, Nalcor has been telling local reporters that none of this matters since the public utilities board imposed a water management agreement on CFLCo and Nalcor. Simply put, that's just nonsense. That's nonsense because one of the key clauses in the WMA is that the agreement must respect the existing contracts between CFLCo and Hydro-Quebec. Before anyone goes off on a stupid rant about the crowd in Quebec, just remember that it was Danny Williams, Kathy Dunderdale and - by extension - Ed Martin and Gil Bennett who enshrined HQ's contractual rights in 2007 amendments to the Electrical Power Control Act and the 2009 water management agreement. SRBP laid all of that out in another post in November 2012.
Now those same folks - Williams and the others - all insisted that this decision won't impact on Muskrat Falls but it obviously will adversely affect Nalcor's ability to guarantee generating capacity at the Muskrat Falls plant whenever it is finished. Hydro-electric plants have a big draw-back. They can only make electricity when there is water. Water doesn't run steadily down a river. It peaks in the spring during the melt and it is lower in the winter when precipitation comes not as lquid water but good old snow.
The way to overcome that draw-back is to build your generating plant next to a giant reservoir, like the one at Churchill Falls. There's no big reservoir at Muskrat Falls. There's a small one. That means that if Hydro-Quebec shuts off production at Churchill Falls, there's nothing Nalcor can do about it. The water won't flow through Muskrat Falls and so it will only make a fraction of the electricity it could, if it had water.
The whole financial premise of Muskrat Falls was that we could sell surplus electricity and recover some of our costs. The Quebec Superior Court decision means we won't have power to sell. There is little chance appeals of this decision will produce a different result. The federal government certainly won't be interested in sinking public money into a project that is essentially bankrupt. The provincial government cannot afford to finish the thing on its own.
That's a good question someone needs to ask the Premier very quickly.
And his answer damn well better not be we cannot afford to let this fail.
Muskrat Falls was a complete failure when Danny Williams announced it in 2010.