08 October 2020

How much is Churchill Falls worth? #nlpoli

 The public policy advantage of quantifying or estimating what the Government of Newfoundland and Labrador might get in revenue from Churchill Falls 21 years from now is that it takes discussions today from the world of fantasy and make-believe to something closer to reality.

Churchill Falls Generating Station

People talk about Churchill Falls as if it had magical powers.

It doesn’t.

But what’s it worth?

Well, since the subject relates to the recent Innu Nation lawsuit, Muskrat Falls mitigation, and what could be bone-idle curiosity for some people, here’s an answer.

This won’t tell you precisely what Churchill Falls electricity will be worth in 2041 but it will give an idea of what sort of revenue you could get.  If you aren’t comfortable imagining this is 21 years in the future, then imagine it is the numbers today – because that’s what they are – and the 1969 contract did not get renewed automatically in 2016.

All the information used here comes from sources that are publicly available in Canada and the United States.

Here goes.

How much money would each of the shareholders in Churchill Falls (Labrador) Corporation make each year from selling electricity from the plant outside Newfoundland and Labrador?

To get the answer we have to figure out:

How much electricity is involved?

What’s the price per kilowatt how?

What are wheeling (transmission) costs?

What are the operating costs for CF(L)Co?

We are going to use 5300 megawatts as the plant capacity available for export.  The rest gets used in Labrador. We get about 30 terawatt hours of electricity a year.

The price per kilowatt hour will be Hydro-Quebec’s average price from export for the last five years for which we have data (2013-2018).  It’s 4.89 cents per kilowatt hour.

Wheeling costs are what Nalcor has been paying on average to move 265 MW’s worth of electricity ($20 million) multiplied by 20, which is how much 265 goes into 5300.

With those numbers, CF(L)Co would gross $1.467 billion. 

Lop off the $400 million in wheeling costs and about $95 million in operating expenses and that leaves $972 to be divided between Nalcor/Hydro (65.8%) on behalf of the Government of Newfoundland and Labrador as the majority shareholder and HQ (34.2%) as the other shareholder.

Assuming the partners don’t leave that money with the company for any reason, Newfoundland and Labrador would have a dividend of $640 million.  The rest goes to Hydro-Quebec.

The 1969 power contract expires on 31 August 2041.  That’s 21 21 years away. Reliably predicting today what Churchill Falls’ output will fetch in 2042 is a mug’s game. But, blithely viewing September 2041 as if it were the discovery of El Dorado is just a different mug’s game.

The public policy advantage of quantifying or estimating what the Government of Newfoundland and Labrador might get in revenue from Churchill Falls 21 years from now is that it takes discussions today from the world of fantasy and make-believe to something closer to reality.

Let’s take a dose of reality and assume those numbers were the revenues coming this year on a contract that replaced the 1969 one when it expired in 2016.

The net from Churchill Falls from this scenario would be roughly enough to pay for Muskrat Falls each year. That’s what we would have to spend to keep rates from rising.  That’s how grotesquely expensive Muskrat Falls is.  We would have to take all the net revenue from a project that is six and a half times larger just to pay it off.

That would be $640 million we would not have in order to pay down debt or pay for roads, schools, and hospitals as we had hoped.  Any mitigation scheme - like say the one the federal government talked about at one point – that used CF revenue after 2041 to pay for Muskrat Falls now would basically be doing what we’ve just described.

And if you were the Innu Nation promised a percentage of the revenue after 2041, you might get a little nervous if someone else got a claim on that and want some assurance today that the promises will be kept.

Or think of it this way.

The provincial government’s current cash borrowing requirement is about $3.0 billion.  It would take a little over four and a half Churchill Falls-sized sources of income to balance the books.

Make it five CFs just for good measure or six to balance the books and mitigate rates, with a bit left over.

Not easy.

Now, when people start getting excited about getting rid of oil royalties and how magical green energy will supposedly be, ask them to put numbers on their ideas.  When someone says there are pockets of hidden tax cash that will balance the books likety-split, ask them to do the math and show their workings. 

Or when people add yet another “Ottawa must pay!” demand to the pile, ask them to add up the demands right now.

That will show you right away how very unlikely it is that there are any easy answers to our current financial woes.

And it will also show you who isn’t helping us find the answers that are there.


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