The Kamloops article suggests British Columbians already believe that they pay too much for electrical power. Wentworth adds that, “the negative revenue impact of these various resource projects may increase (B.C.’s power costs) even further. So the impact on residential ratepayers will be very substantial if the current rate structure for mining projects, such as Ajax, is not amended”.
The issue is important to NL not just because our power rates are going up substantially too, but because of the parallels with the B. C. issue for power subsidies to Alderon and to other mines in Labrador.
I thought it time to put some numbers to the issue of electrical subsidy; we should decide if the cost should concern us in NL as it concerns some residents of B.C.
Alderon is the most advanced of the mine proposals; it can help us define some of the parameters for our calculation.
What rates should we compare?
Our object is to calculate the subsidy that island ratepayers will incur relative to the price a mine might pay (similar to Alderon’s Kami Mine) for Muskrat Falls power, not at Soldier’s Pond but prior to transmission. All the information required, is currently in the public domain.
The arithmetic is actually fairly simple. I am using Nalcor’s estimated cost of MF power, based upon the “Power Purchase Agreement” (PPA) rather than the higher “Cost of Service” (COS) rate. You should know something about those two schemes.
Essentially the difference is that the PPA involves a 50 year payback period in which the depreciation is written off much later than under the COS approach and according to David Vardy and Ron Penney involves a cash shortfall which will have to be made up by Nalcor or the Government, constituting, in essence, a subsidy.
Under the PPA, Nalcor opts for a scheme “…which brings lower rates, in the early years, which are intended to be offset in later years” (Vardy/Penney, page 60, PUB Review). Hence, in the early years, the users of the electricity essentially get the power rate “subsidized”. That’s the PPA. And that ‘subsidized rate’ is estimated to be 8.7 cents per KWh in 2017 (ref. page 59, PUB Review). It is that lower PPA rate that I am using to calculate the mining subsidy.
That said, a strong case can be made for using the higher Cost of Service (COS) rate. The COS approach follows standard business terms, for writing off depreciation and capturing a rate of return. It is the scheme that Emera negotiated for its participation in the financing of the Labrador Island Link (LIL). Unlike Nalcor, it is forced to operate on the business principles that both its lenders and investors demand. The cost to you of MF power, if the COS method of financing were employed, is 21.4 cents per KWh (this figure, again, does not include transmission costs to the island).Before I do the math, let’s bring Alderon Iron Ore into the picture.
Alderon Iron Ore, on its web site, informs us of “Good access to low cost (~4 cents per KWh) electricity produced at Churchill Falls”. Given that the Province has used Alderon and other potential mines in Labrador to justify building Muskrat Falls, we are left to assume that it is prepared to compete with that price and offer it as an “industrial rate”.
Hence, we will use 4 cents per KWh in our calculation. In order to suggest a range of subsidy, we will also do the arithmetic using an “industrial rate” of 6 cents per KWh; though it is not a likely scenario given utterances from the Government.
How much power does a mine need?
Power requirements will depend upon the size of the mine and whether it is a simple extraction process or whether, in the case of an iron ore mine, it also ‘pelletizes’ or turns into ‘concentrate’ the mined ore. On page 12 of the document recently released by the Province, entitled “Labrador mining and power: how much and from where?” Alderon’s Kami Mine is said to have a preliminary requirement of 58.3 MW and an additional 80 MW, if pelletizing takes place. These numbers give us basis on which to calculate how much power a mine, of the Alderon type, will use.
Let’s assume that our mine and pellet plant will have an electricity requirement of, say 138 MW.
Megawatt (MW) is a Unit of power that defines the ‘capacity’ of a system and tells us how much power a system can carry at peak demand. A megawatt hour (MWh), on the other hand, is a unit of one million watts of power applied over a period of one hour.
Mines, after start up, use power at a fairly constant rate; we shall use 80% of capacity as a reasonable estimate. Next, we must convert Megawatt hours (MWH) to Kilowatt hours (KWh), which is the Unit (1000 watts per kilowatt) used to calculate your own power bills.
Hence, 80% of 138 MWs times 8,760 (number of hours in a year), converts to 967,104 megawatt hours. Converted to kilowatt hours (KWh); that’s 967,104,000 KWh.
Finally, using the benchmark industrial rate of 4 cents per KWh against the PPA rate of 8.7 cents per KWh, let’s do the math:
In summary, using "industrial rate" of 4 cents per KWh and the rate customers on the island will pay for Muskrat Falls generation only, the subsidy to our mine is $56.36 million.
(If the Province were to set an unlikely rate of 6.0 cents per KWh, as the “industrial rate”, the subsidy (based on DG-3) would still be $32,378,641 annually).
And, the subsidy does not reflect the liklihood of cost overruns.
I suggest you also need to calculate the subsidy based upon the more conventional COS calculation at 21.4 cents per KWh (plus 24% for DG-3). If you try this at home, please use your calculator sitting down!
Russell Wangersky of The Telegram wrote an excellent Editorial on November 3, 2012 entitled "Let's call this what it really is - a tax" . Wangersky's views are summed up in the Editorial's headline and in many ways they mirror the views of Jim Wentworth at the Kamloops Daily News.
(Note: Wangersky is using 7.6 cents per KWh which is the 2010 PPA cost of MF power, I am using Nalcor’s 2017 numbers (reflecting an annual increase for inflation of 2%), when MF comes on stream; no mine is expected to need the power before then).
I wonder if Mr. Wangersky read the investor information on Alderon’s Web Site. He might have noted, as did I, that Alderon's forecast Internal Rate of Return (IRR) is estimated at 40.2%. The payback period for its Kami Mine is 2.5-2.8 years.
If our theoretical mine has any similarity with Alderon’s Kami Mine, we ought to ask this question among others: this the picture of a mining company in need of a subsidy?
We know what Premier Dunderdale would say. Please tell me what you think. See the "Comments" section below. And, while you are doing that, you may wish to leave your answer, having calculated the subsidy based upon the Cost of Service (COS) power rate and an "industrial rate of 4 cents per KWH.