Monday, 23 July 2012

MUSKRAT FALLS: A MODEST PROPOSAL (Part 3)

Editor’s Note:  Part 3 of Uncle Gnarley’s review of the Muskrat Falls project became more expansive than first expected, as he explains why it is a bad idea right now, and what alternatives the Provincial Government ought to be considering.  Gnarley was not prepared to compromise completeness for brevity; hence, part 4 will be posted Monday, next).

Uncle Gnarley seated himself comfortably in his ‘own’ chair and gave me a look of expectation when his favourite ‘lubricant of the soul’ was not in evidence.  Sensitive to his most egregious habits, I proposed that we try a recent purchase, a 12 year old Balvenie, a personal favourite, aged in portwood and full bodied; the spirits boasted a taste and character that was delicious and smooth.  Producing the evidence, I received no comment on what a friend had thought was a “shrewd” purchase, though the look of surprise and satisfaction, which characterized his discerning smirk, afforded me confidence, that, this evening at least, I would not be reminded of my shortcomings on the water.
Uncle Gnarley was now ready to get on with his review of the Muskrat Falls project. 

“Indulge an old man for another few minutes, Nav, and I will head back down to the Shore, Gnarley began, simply. 
“Last time, I put paid to the Nova Scotia link.  For the reasons I explained, there is little or no power to export, so why give away 20% of the project for free. Though, the point is rather academic, he added.

“More importantly, replacing Holyrood at all, with Muskrat Falls, and at a cost that may well climb to $10 billion or more, is just such an incredibly terrible idea”.
“What about Alderon? I interjected.  The company says it needs power. “Yes, Alderon”! He scratched his head, shaking it a little: “they really should consult IOCC to see how they got their power”, replied Gnarly, dismissively.

“40% of Muskrat, 330 Megawatts (MWs), is thought necessary, by Nalcor, to replace Holyrood; the cost of the whole project will be repaid by levying the Newfoundland taxpayer a rate increase every year for 50 years. 
“That is the basis of the ‘take or pay’ contract they have designed for us, he declared, regardless of whether the power is needed, regardless of changes in technology over that period; regardless if oil prices fall; and, regardless if natural gas overtakes other forms of energy, as we are now seeing in the U.S. with shale gas. 

“Let’s suspend judgement a little further”, suggested the retired economics professor, whose aging aspect belied a keen intellect.  “In order to buy into the Muskrat Falls scheme, you have to ignore the forecast decline in demand by residential users after 2020, which is related to the drop off in mega projects, in this province, as well as an aging population. 

“You have to ignore the fundamental fact that Nalcor’s forecast energy deficit is associated with space heating or, what is commonly referred to as, electric baseboard heating.
“You need to be blind to the fact that Nalcor has over-estimated electrical demand in this Province for last 20 years.

“If people want to stick with Nalcor, Nav, people have to be prepared to stay ignorant of a lot of things!  I am not fond of such wilful ignorance, stated Gnarley, matter of factly.
“I grew up at a time when money was tight, public services were scarce and economic decisions, even when inappropriate or plain wrong, were not of a size to cause long term grief for the whole province.  I fear such decisions are now being made, based upon an oil mentality; in that business, rates of extraction are always expected to overtake increases in capital cost.  NL is not an oil company, Nav, though our leadership may suffer such delusions.

“As I see it, the taxpayer has to consider essentially three issues.  Do we need the power? What will Muskrat power cost?  What is the alternative? These are familiar questions, Nav, but Nalcor’s answers have been formulated to bolster a most uncertain plan.  Mine are far different than are theirs.
“To the first question, even if we accept Nalcor’s highly suspect demand forecasts, the actual energy deficit will not begin until after 2020, the year Holyrood is scheduled to be discontinued. But the actual deficit is far from determined.  Neither the PUB or MHI were impressed with Nalcor’s approach to determining ‘demand’.  In addition, Nalcor’s estimate of domestic demand takes us out to 2067 and not 2041, when Upper Churchill power is available.  There is every reason to believe that any energy gap can be filled on the island during the intervening period with no risk to the treasury of the Province.

“Keep in mind that Nalcor does not recognize the benefits of conservation, new technology or even alternatives available with existing technologies.  Nalcor even assumes continuous increases in the cost of fuel to 2067; don’t forget Nav, continuous increases in the cost of oil, constitute Nalcor’s singular argument for Muskrat.  Yet, the Minister of Finance can’t forecast the price for this fiscal year, let alone for 50 years out!  We have not yet been told what the new deficit numbers are,
Let’s move on to the issue of cost, I suggested to Uncle Gnarley.  Yes, that is an issue that deeply concerns me, too, he stated.  “Based upon the government’s original estimate of $5 billion (plus Emera’s share), it suggests Muskrat power, at Soldier’s Pond, will cost 23.4  cents/KWh; Philip Raphals, a Consultant for Grand River Keeper in Labrador, estimates the cost at 37.2 cents/KWh.  Either number constitutes expensive power, Nav.  Our ratepayers should be prepared for a lot of grief! But remember, too, these estimates were prepared before construction costs edged up, the final number will likely be in the 40-50 cents/KWh range.  Oil for power generation, at Holyrood, now costs 13.5 cents /KWh.  By further comparison, the current blended power rate for the province, including Newfoundland Power’s distribution costs is only 10.4 cents/KWh.    Do these figures frighten you? Well, Nav, they frighten me! Nova Scotia is already complaining that Muskrat power will cost them more than 10 cents/KWh and that government plans to share none of the risks of Muskrat Falls.

“Dunderdale is fond of throwing up her arms and saying, there are no alternatives, we’re going to be left in the dark after 2016, that Muskrat is the ‘lowest cost alternative’.  I don’t believe, for one second, that the Premier understands her brief’, he stated bluntly. She has already failed the Office of the Premier!
“’Lowest cost alternative’ is a nice turn of phrase, but Muskrat Falls is actually very, very expensive power and the ‘inherent risks’ of the project have been positively ignored.  I deeply resent that, Nav.  I really do.  

“Prior to 2041, when the Upper Churchill contract expires, I suggest we cannot afford to build both a power plant and the Labrador/island link.  Not at today’s cost!  To be economic, either the power generation or the transmission link, at least one of them, has to be virtually free, Gnarley declared, with emphasis.  Otherwise, we should not build Muskrat Falls.
“I have concluded, Nav, that we should kill the power generation plant at Muskrat completely. 

“Let’s build only the transmission line now; then Gnarley paused. He was insistent that I understand that, even this proposal, contained a significant qualifier.  The qualifier is this, stated Gnarley: Nalcor must purchase access to 250-350 MWs from Hydro Quebec.  Together with the balance of ‘recall’ power from the Upper Churchill, of about 80MWs, the cost of which is small, might, and I emphasize might, justify such an expensive transmission link to the island.
That idea would certainly reduce the risk of the project and provide power more cheaply than from Muskrat Falls generation, I allowed.  “Exactly”, responded, Uncle Gnarley. “We have to decide whether the goal is to build an edifice or serve the public with lowest cost power”.

“There is a larger dimension to this part of my modest proposal, Nav.  I’m not quite finished.  Perhaps we can have a short re-fill and I promise I will quickly complete this dissertation”.

4 comments:

  1. I think you are on the right track. A more comprehensive, phase-based approach is needed, and perhaps one that excludes the construction of the dams and generation plant at this time. See my recent comment at www.vision2041.com

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  2. Uncle Gnarley

    It is good to see that after your April rebuke of my phased approach to the Labrador Hydro Development, you seem to be warming to the idea.

    Although it may be like Balvenie to the Tea-Tottler, we must consider the option of power purchases from Quebec. The combination of cost growth on Muskrat Falls, with the continued downward trend in United States Electrical rates makes the option of a HQ purchase that much more palatable.

    In 2008 energy rates were 90$ MWhr in New England. Now they are in the 30$ MWhr range. Meanwhile the 6.2 billion dollar estimate is rising for the MF project. A perfect storm as they say.

    My back of the envelop calculations show that the mix of RECALL power and Hydro Quebec power (20 years) at market rates is a very attractive alternative. Assuming HQ energy is available at 54$ MWhr (escalating 2% a yr)and Recall is available at 2$ MWhr then the Cumulative Present Worth is in the range of 1 Billion less than the Muskrat Falls solution. This is an alternative which should at least be offered to the people of the province.

    As part of the phased approach the option to develop MF stands. It can be done when the domestic demand requires it, and/or the rates in the US are high enough to take the exports at a rate which is not subsidized by the Salmon fisherman on the Gander River.

    It is such a sound decision to make.

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  3. Why doesn't The Telegram carry your words od wisdom? And on energy efficient technology for heating and hot water, we are presently wasting about 600 MW of our present generation. It's so efficient at reasonable cost that equivalent cost of heating and hot water becomes about 4 cents instead of 10.4 cents. I think a proper assessment of this would even make the transmission line from Labradoe unnecessary for a long time. But I think you suspect this may be the case- You say the transmission "might " be justified. Winston adams

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  4. Nalcor spent about 160 million on 2 dry holes at Parson's pond. They carried this on their books in 2010 as a asset. I assume it's still there for 2011? If written off there financial statements would not be so rosy. And they were given 40 million intended for Labrador New Dawn Agreement which they collect interest on. Can Uncle Gnarley review their financial statements and enlighten us? WA

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