Thursday, 17 July 2014

T.E. BURSEY WRONG ABOUT MUSKRAT SAYS DAVID VARDY

I am writing to take issue with points raised by T.E. Bursey in his article to The Telegram of July 15 (Muskrat Falls is the Right Project for N.L.). Mr. Bursey seems to believe that Muskrat Falls will be the solution to the reliability problems experienced during the past winter.

Nalcor has posited that emergency power will be available from Nova Scotia in the event of a disruption of Muskrat Falls power. We believe that a thermal plant at Holyrood will continue to be needed and that emergency power from Nova Scotia is unlikely to be available when we need it.

The PUB inquiry, particularly phase II, will weigh the evidence on this point but we question the premise that Muskrat power will be more reliable without continued thermal backup on the Avalon.

Mr. Bursey lists experts who provided "supportive reports and comments." Only one of the listed reports was prepared by an independent group, namely the joint federal provincial panel, which was anything but supportive.


In its final report the panel was quite critical of the Muskrat Falls project. The panel concluded that "Nalcor had not demonstrated the justification of the Project as a whole in energy and economic terms… and that Nalcor’s analysis, showing Muskrat Falls to be the best and least-cost way to meet domestic demand requirements, was inadequate." (page13)

Mr. Bursey says that "the cost estimate has now increased to $7 billion, which is some 13 per cent over what was estimated before the detailed planning was completed." The fact is that from 2010 to June of 2014 the cost has increased by 40% (not 13%) and that does not include increased financing costs of $1.330 billion.

Mr. Bursey refers to wind as the alternative and downplays its viability for serving the local market. He discounts natural gas as an option even though the evidence indicates that Grand Banks natural gas can deliver power to Newfoundland consumers at a significantly lower cost than Muskrat Falls, particularly if combined with an LNG facility.

Other options have been overlooked. What about the potential for energy conservation, discouraging electric space heating and encouraging consumers to use heat pumps, solar panels and windmills? What about the Unexplored Alternative (see article by JM on Sir Robert Bond Papers website) of buying power from the Upper Churchill and paying Hydro Quebec the same rate as they are earning in their export markets?

Mr. Bursey bases the case for Muskrat Falls on the flawed concept that this will somehow improve our bargaining position with Quebec. He should understand that the transmission line is sized around Muskrat Falls and much of its capacity of 500 MW will be used to export power to Nova Scotia.

The Maritime Link does not offer an alternative route to sell Gull Island or Upper Churchill power to the Mainland or to the United States. Building 824 MW of high cost power capacity surely weakens the benefit of accessing low cost Upper Churchill power in 2041.

Nalcor admits that development of the Gull Island project will require access to the high voltage transmission lines through Quebec. We do not need the Maritime Link to demonstrate the technical feasibility of an electrical link with Nova Scotia. Mr. Bursey is not alone in rationalizing this project on the basis of the notion that it will somehow give us improved leverage in dealing with Quebec. Indeed we believe that this misguided notion has been a driving force behind this project from the outset.

The amendments to the Electrical Power Control Act (Bill 61) which restrict open access to Nalcor’s transmission lines are in conflict with our historical position that Hydro Quebec should open its lines to carry Labrador power to markets outside the province, without having to sell the power to Quebec as the only buyer. We are telling Quebec: "do as we say, not as we do".

The business case for this project has to be premised on strong and growing demand along with electricity rates that are competitive with those in other jurisdictions. Neither the demand nor the ability to offer consumers rates comparable to those in adjacent provinces and states has been demonstrated.

Mr. Bursey believes it is too late to stop the project. Is it "economic madness" to stop a flawed project? Or is it madness to continue throwing good money after bad. We should not be held hostage to our mistakes.

The large expenditures incurred to date should not blind us to the more cost effective options that have up to now been dismissed, such as energy efficiency and power purchases from Quebec.


David A. Vardy
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David Vardy is an economist who served for close to 30 years in a variety of senior positions, including Secretary to Cabinet (Clerk of the Executive Council), President of the Marine Institute, Deputy Minister of Fisheries and Chair of the Public Utilities Commission.

8 comments:

  1. The project is 85% higher than the original projection as announced at the outset. The initial cost estimate was $5.4 Billion for the whole project including the maritime link. If it was properly prepared for the investors (the public) it should have included interest during construction. The $6.2 Billion figure was the budget allowing for a 15% contingency which both Ed Martin and Gilbert Bennett said was more than enough and it may even come in under the cost estimate.
    The current cost estimate is $6.99 B for the NL portion plus $1.58 B for the Maritime link. Adding interest during construction brings the current cost estimate to $10 B without any contingency for an 85% overrun. Interesting enough, a report out of the UK that studied a number of hydro projects stated that most hydro project go 90% over. This project will be at least 100% over before final commissioning.
    It is time to start planning for other cutbacks to pay for this project because power purchases will never do it for at least a generation.

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  2. I have reviewed studies on the issue of the elasticity of electricity for residential use. Elasticity is the reduction in electricity use when price increases. Example, if the price goes up 50 percent, and elasticity is -0.5, then the sale of electricity goes down 25 percent. So steep price increases counters forecast demand increases, in the short run, and even more so in the long run. Elasticity varies for industrial, commercial or residential use. Residential winter heating is the rationale for the need of Muskrat Falls, so the true elasticity is a key input as to the likely loss of sales of power from a high power rate jump. I have read that Dave Vardy uses the figure of -0.5 for elasticity. I believe another MUN economist (Fehan) used -0.25. I have not seen what Wade Locke would use. My search of studies suggest a elasticity of -0.75 with some saying more than -1.0 is applicable for regions using electricity for space heating. Such figures of -0.5 to -1.0 suggest a substancial decline in energy sales for residential use if we are faced with price increases as Ed Martin suggest. Would appreciate come comments on the appropriate elasticity number for our area for residential power. What has Nalcor used? Winston Adams

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  3. Nalcor has accomdoted elasticity with the economeric equations. However, they were not intended, nor calibrated for price impacts on the order of 40%. Go to sldie 24 of the following slide deck http://www.pub.nl.ca/applications/MuskratFalls2011/files/comments/11-JM-2012-02-29-Rev1.pdf The equation presented by Nalcor had a reduction in energy use of 3% per household following the intial rate shock. This lasted for about 5 years when it would be forgotten, largely due to the nominal price of electricity staying the same. This in my opinion is one of the fundamental flaws in Nalcor's work. There will be more than a 3% reduction in energy consumption per residential user following a 46% rate increase. The 1-2% annual increase cited by Ed Martin 2 weeks ago, will ensure that it will likely not rebound. The average person in this province will not be able to afford electricity. Conversion to heat pumps, wood stoves, or other means will reduce consumption. This in turn will increase rates even further. This is what happens when the proper public review of project economics do not happen -

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  4. One passage of this excellent piece deserves particular attention:

    "Mr. Bursey is not alone in rationalizing this project on the basis of the notion that it will somehow give us improved leverage in dealing with Quebec. Indeed we believe that this misguided notion has been a driving force behind this project from the outset."

    What foolishness could cause anyone to believe that building Muskrat False could aid NL in negotiating with Quebec? Consider that the cost of power from Muskrat will be about double that of Romaine. As Quebec is increasing getting cold feet over Romaine 3/4, it seem quite obvious to that Quebec would never consider Muskrat Madness if it were their project.

    Quebec's litigation against Nalcor's plans to use Upper Churchill resources to make Muskrat functional further suggests that Muskrat is harming NL's negotiating position vis-a-vis Quebec.

    Quebec has excess power. Now is the time to negotiate with them. Instead, NL is building in an already glutting market. It is madness.

    Demagoguery is the very foundation stone of Muskrat False, whether "$200/barrel oil", profiting in the "lucrative New England market", or righting the wrong of Upper Churchill.

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    Replies
    1. nalcor did sign an open deal with tdi in 2011 for export of power via a private hvdc from montreal to NY (champlain-hudson power express), which was a blackstone/ chinese / mulroney deal at the time but is now a gdf suez interest. also of note in that arrangement is fortis who bought the utility which plugs that line into NY (ch hudson). it was their very first US utility buy. so cozy, isn't it?

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  5. Tom... the most logical solution for meeting our power needs was to build the Labrador Island Link, and then buy power from Hydro Quebec at the upper churchill. Less risk, less cost... But it was not politically palatable. Remember we have 1400 GWhr of RECALL energy still remaining, which would have provided over 50% of what we need in terms of energy. The reason that Nalcor did not look at this was that it was only 80 MW of capacity. We should have built the LIL, used RECALL, and bought some capacity and energy from HQ at a rate similar to what they have provided Vermont. Instead we have proceeded with the madness of this elephant. All for 23 years.

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  6. ofcourse the option the public will be presented (and ultimately chose) is a 'firesale' for the transmission rights so emera and fortis and whoever else buys chunks of the transmission system we're building can go into a fixed deregulated atlantic-wide energy market with sky high prices and trapped consumers who cannot sell into the grid (and therefore cannot invest in any big way) or get out of dealing with either fortis or emera for access to, and benefit from what should be their energy resource. DISGUSTING!!

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