03 November 2016

Muskrat Math #nlpoli

Stan Marshall told the province Tuesday that the people of Newfoundland and Labrador can never get their money back on this pig of a project called Muskrat Falls.

On Wednesday, people were bending their brains trying to figure out how this happened.  Must be a recent thing.  Blame it on fall in prices.

Well, no.

"Never get our money back" was the entire premise of Muskrat Falls from the day Danny Williams announced it in November 2010.  Amazing how folks missed these details.

October 2010:  Danny Williams tells Nova Scotia Tories he is trying to suck Emera and the Nova Scotia government into a deal on the Lower Churchill.

In a 24 October 2010  SRBP post "Williams announces political exit plan" here's the prediction based on the markets at the time.
It gets better. Weak electricity prices coupled with the front-end loading of capital on Muskrat Falls would likely mean power sent to Nova Scotia, New Brunswick and the United States could only sell at heavily discounted prices. Even Muskrat Falls power at a break even price would likely be too expensive for the markets to bear.   That’s an old and fundamental problem with trying to sell Labrador power so far away from Labrador.
No problem for NALCOR, these days. Thanks to changes made to the Electrical Power Control Act in 2006, the Hydro Corporation Act, the Public Utilities Act,  and government policy, NALCOR wouldn’t suffer any losses. The company can export all the discounted power it wants  knowing that the people of Newfoundland and Labrador will wind up paying for it.
That was before we found out that the deal signed with Emera - signed after a last-minute bargaining session the morning it was announced - included a block of electricity for Emera free of charge for 35 years.  Nalcor will send the electricity and collect no revenue for it.  That's the ultimate subsidy, courtesy of taxpayers in Newfoundland and Labrador.

The bonus for Emera was in that same deal.  They get a piece of the link between the island and Labrador.  As a result, Emera gets a share of revenue from all the electricity shipped to Newfoundland consumers. That part of the deal lasts until 2081.

Lower Churchill electricity was always too expensive for the export market to bear.  New Brunswick balked at the price of $170 a megawatt hour.  So Ed Martin and Danny Williams cooked up a simple scheme:  they'd force domestic taxpayers to cover the entire cost of the dam and transmission lines while using - theoretically -  about 40% of the output, at most.  The federal loan guarantee signed by Kathy Dunderdale in 2012 specified that domestic electricity prices in Newfoundland and Labrador had to cover the entire cost of the project.

Nalcor had to backload some of the capital costs to keep the initial price estimates down but even then they were talking about a cost of $143 per megawatt hour to $165 a megawatt hour (14.3 to 17 cents per kwh) to produce electricity at Muskrat Falls.

Just to make sure that no one misses the point of that, here's the guts of a post from Mark Watton's now defunct nottawa blog from the same time assessing the impact of this Muskrat Falls projects on domestic electricity prices.
One can only assume, given that the non-Maserati drivers among us do not generally use electricity by the megawatt hour, that she was referring to the wholesale cost of electricity. That's the cost of acquiring the power before it is re-sold to consumers at whatever markup and costs the retailer (in most cases Newfoundland and Labrador Power) adds.
To the best of my knowledge, Danny Williams has yet to alter either the rules of mathematics or have the metric system re-named in His honour, so one Megawatt in Newfoundland still equals 1,000 kilowatts. In other words, $165 per MWh equals $0.165 (or 16.5 cents) per kWh.
The average Canadian residential retail cost for electricity in 2009 was 10.82 cents per kWh. Over the past ten years it has fluctuated from 9.77 cents per kWh in 1998 to a low of 9.40 cents per kWh in to 2000, to last year's high. 
You can see this as a graphic by clicking here, or read more from the report which forms the basis of these statistics, available here.
Keep reading. And keep asking questions. Somebody should...
That's right folks.  Double the cost of electricity forecast in 2010 based on contemporary market information and Nalcor's forecasts at the time.  What people now understand is wrong with Muskrat Falls has always been true.   The thing was designed that way.  That's why it never made any sense.

But go back to the idea of how we can't get our money back.  The plan for the Lower Churchill before Danny Williams was that we would build it and export all the power.  We would make money back from the beginning:  other people's money.

Danny Williams cooked up the idea of forcing everyone here to pay and delivering the benefit of discount electricity to other people. Everyone else in the province  - with very few exceptions - went along with it

The deal worked like this. Newfoundlanders and Labradorians would borrow the entire amount. Then, they would pay the loans back plus interest through their electricity rates.  So at the point the loans are all paid back, maybe 35 years or more from now, the locals are still out of pocket the entire cost of construction plus interest.

We may sell some electricity along the way but there are no guaranteed sales at all.  Plus, even on the spot market, the cost of electricity will always be below the cost of Muskrat Falls to domestic consumers.  That's how wildly expensive the thing is.  And frankly how expensive it was from the outset. The best price we might see if 50% of the cost of production.  These days the wholesale cost of electricity in the United States  (without transportation) something like two and a half cents a kilowatt hour or $25 per megawatt hour.

Well, based on the way the project costs have escalated,  that's only about 25% of what the cost is currently to produce electricity. Best case would be something like 33%.  You can see pretty clearly that if you sell electricity for less than it costs to make it, there is no way to ever recover your costs.

As we wander through this part of the tale, though, let's be optimistic.  Let's assume that after we paid off the loans, we actually exported the same amount of electricity the local market used each year to pay off the loans over 35 years.  You would take three or four times as long to earn new money from exports as you did paying it off the first time since you can only get a quarter or a third of the price as you paid for it originally.  Since the plant would be paid off, the annual operating costs are rivial.

You would take between 105 years (3 times 35)  and 140 years (4 times 35) to make your money back,  under those circumstances.  If you sold less electricity every year than you used yourself to pay off the loans you'd take even long at those kinds of prices. But here you'd be, in our little story,  175 years into the future and only now have we actually recovered our initial investment from export sales.  We have not calculated at all the cost of not having invested that money at a modest rate of interest or anything.  We are just talking about how the scheme for Muskrat Falls works, as designed.

Think about that.  Imagine that 175 years in the past, some previous government had cooked up such a scheme.  That means that this year we would celebrate the first profits from a project built in 1841. That assumes, of course, that the 1841 technology still worked and was still viable and profitable.  If we had banked on cornering the market on buggy whips,  you can see that our little scheme might not exactly have worked out as originally planned.  That's the sort of simple analysis you can do to see how Muskrat Falls never made any sense.

Some people get hung up on price.  Well, price doesn't matter. Some people get hung up on the relative shares of output that come to the province and how much goes to export.  Pretty much irrelevant.  The key idea is that you pay full price and everyone else pays some discounted amount. As long as that is going on you will always lose money.  Price enters in only to the extent that the bigger difference between what you pay and what the discounters pay makes more obvious you are the one getting screwed.  And in the end you will be hundreds of years before you theoretically see a real profit.

Screwing the taxpayers of Newfoundland and Labrador was always the idea at the heart of Muskrat Falls.