Thursday, 18 February 2016

STABLE RATES: THE ELEVENTH MYTH OF MUSKRAT (Part II)

Guest Post written by JM

Early in the Muskrat Falls debate, an old friend of mine, who worked at Newfoundland Hydro unequivocally stated: “the upfront costs for Hydro are high, but they will come down over time”. This was a conventional argument for Hydro developments, but one not truly applicable to the back-loaded Muskrat Falls model. 

The prospect of long term stable rates was a key argument used to convince the public of the benefits of the Muskrat Falls project. Its very allure may have been instrumental in maintaining popular support for the initiative. 

Conventional wisdom might well suggest hydro power would make sense long term.  Strangely though, in spite of all Nalcor’s claims, the Crown Agency has never provided a comprehensible, consistent or detailed calculation of future electricity rates.  

A Table, showing how the incremental cost of Muskrat Falls power is calculated, should have included the “back-loaded” equity repayment (which Nalcor said it would use to avoid rate shock), operations and management (O&M) costs, depreciation, interest costs and other components.  This incremental cost could then have been adjusted to reflect the other revenue requirements for both NL Hydro and Newfoundland Power to produce a final predicted residential rate.

Despite the refusal to provide such a consistent, clear and correct calculation, Nalcor steadfastly argued rates will decrease over time. One of the first references is contained in the 2011 Navigant report:


These rate projections underscored Navigant’s recommendation that Muskrat Falls provided the lowest cost option.  The reader might want to review the rate predicted back in 2011. 

Even though the figure represents the average wholesale rate to Newfoundland Power, they are still not reconcilable with any published information available today.  It bears repeating decreasing real rates, over time, was a  convincing argument made early in the project.  

In July 2011, Nalcor presented another set of rates to the PUB.  They were the average retail rates, which people could expect to pay. In 2025, the forecast figure was 17 cents per kWh. Nalcor also projected it would be 2050 before rates rose to more than of 20 cents per kWh.  


The PUB requested the calculations to support this graph; Nalcor's response was given in RFI-PUB-NALCOR-5. 

Since those long ago days of the PUB Hearings, the project has been delayed, and costs continue to mount.  Nalcor have updated the rate projections on several occasions.  The exhibit (below) was recently posted by Memorial Professor, Tom Baird, on his Twitter account.  The calculations are no clearer than they ever were.  
Little wonder David Vardy continues to seek information on Nalcor’s revenue requirements for the Muskrat Falls project by filing Access to Information requests under ATIPPA legislation.  In deference to the current government, Nalcor does, at least, answer the requests. But the clarity and detail needed to verify whether the basis of the projections  are complete, is still missing. The public has a right to this information, and Nalcor’s continued obfuscation should not be permitted by either government or the PUB.   


The following table is the product of a recent request, under ATIPPA, which Mr. Vardy filed seeking information with respect to those projected power rates. 

Based upon the information provided, one can conclude that in 2019 the ratepayers of the province will be paying a minimum of $534 million to cover Nalcor’s revenue requirements to meet the costs associated with the new dam, Labrador and Island transmission.  Under the "take or pay" contract, this revenue will be for ~1900 GWh of delivered energy to Soldiers Pond after transmission line losses are accounted for (refer to Schedule 2 of the Power Purchase Agreement).

Simple math confirms, using both the energy delivered and the revenue required in the first year of operation, that Hydro will be paying about 28.1 cents per kWh for Muskrat Falls energy.  Since the project is only 40% complete, it is safe to assume that the delivered cost of energy to Soldiers Pond will be closer to 30 cents per kWh by the time Muskrat is completed. 

The Ball Government is committed to apply profit  from export sales to lower the domestic rate. Accordingly, it seems only fair to include them, when quoting the incremental costs of Muskrat Falls power.

Of the 4900 GWh of annual energy that Muskrat will produce, there is presently 980 GWh which is Emera’s in exchange for building the Maritime Link. The contract will run for 35 years.  240 GWh of supplemental energy will also be provided the Nova Scotia company for the first 5 years of Muskrat production. 

The energy available for export is arrived at with this simple calculation: 4900-980-240-2000 = 1680 GWh.  In addition, an estimated 7% line loss must be applied to the 1680 GWh during transmission to Nova Scotia. Hence, about 1562 GWh of energy is available for sale.  Assuming 6 cents/kWh is obtained from NS Power, the energy will generate revenues of about $94 million a year. Applied for the purpose of reducing the rate to the NL ratepayer, the sum represents about 5 cents per kWh.

In summary, if all export revenue associated with Muskrat Falls supplemental energy is used to lower the rate to the NL rate payer, the incremental costs for Muskrat Falls power will still be 25 cents per kWh. 

Now, let’s give this quite extraordinarily high rate some additional perspective. 25 cents per KWh is about 2 times what we currently pay for energy delivered to my house. 

It is about 4 times more expensive than the going wholesale rate in New England  when adjusted for currency. But, the figure that will unnerve the Newfoundland public, who are taking all the risk and paying most of the cost, is that the rate they will pay for Muskrat power will cost 2.5 times as much for Nova Scotians

The predicted blended rate for Muskrat Falls power to the Nova Scotia grid will be less than 10 cents per kWh.  (Refer to Figure 1 of the UARB paper on the Sir Robert Bond Papers Blog

The UARB process in Nova Scotia also ensured that ratepayers are effectively provided all the upside of the project.  Nova Scotia has access to market priced electricity in perpetuity.       

Final Rate to Consumers

Presently, both Newfoundland Power and Newfoundland Hydro have general rate applications submitted to the PUB.  Based on data provided in these Submissions, I have been able to build a table of consolidated retail rates. 

To understand how the rates are compiled I have built a table of rates which includes both the Newfoundland Hydro and Newfoundland Power  revenue requirements in a single source.  The table is provided below for policy wonks and others interested in the detail of how such calculations are derived. 

The rates shown correspond very well with the final predicted residential rates which Nalcor provided Tom Baird.  By 2020, electricity rates in the province will be approximately 
20 cents per kWh.  The current rates are also consistent with those I predicted nearly 1 year ago




Stable Rates – Another Myth Busted?

The economics of Muskrat Falls was underpinned by the presumption of continuous growth in domestic demand.  Nalcor predicted a 50% increase in energy requirements over the next 50 years. It was this anticipated growth in demand which was ultimately expected to generate sufficient revenues to pay for Muskrat Fall.    

In February 2012, during my initial submission to the PUB, I argued that there was an equal chance of our energy demands would level off, in contrast to Nalcor’s presumption that they could only increase.  With changes to technology (heat pump efficiency), population changes, and the impending rate shock, I stand by that position.    

The variability of demand growth was never properly included in Nalcor’s DG2/DG3 analysis based on which the project was sanctioned. 

Newfoundland Power now acknowledges that the Island may experience a decline in energy demand in the province.  The next Exhibit, contained in the Company’s 2016 rate application to the PUB, is revealing:


The impact of the forthcoming doubling of electricity rates will have a significant impact on consumption.  Anecdotal evidence suggests people are already installing heat pumps, or converting to wood heat, in an attempt to insulate themselves from the impending increased cost.  Newfoundland Power suggests it is possible that conservation, alone, will result in the demand, in 2030, staying at the level it is today. 

Indeed, I suggest there is no better way to impose conservation, than by doubling rates. 

The problem for Newfoundland is that the “take or pay” model proposed by Nalcor, to which the Dunderdale Government secured legislative approval, demands that we pay for Muskrat Falls, whether the energy is needed or not.  

The impact on ratepayers will be profound. For example, even if only the mid point of the “Upper” and “Lower” curve in energy consumption is achieved (as shown in Figure 1) we could see a 10% increase in electricity rates, above those estimated earlier.  This outcome is summarised in the following graph. 


The “take or pay” obligation is a critical issue, as already noted; but most importantly, as cost overruns mount and the total revenue requirement increases, in the absence of demand growth the unit cost of electricity will increase well into the future.  Each year our rates will be dependent upon how much energy is used on the Island.  Essentially the same problem exists today with Holyrood and oil. The only certainty is that the rates will increase. 

Additional costs, arising from reliability issues, are a further concern; the impact on rates if  Holyrood is required for back-up, should the Labrador Island Link fail or the Water Management Agreement is deemed unenforceable, has not even been assessed. 

That said, the most optimistic outcome is that when Muskrat Falls is commissioned power rates will at least double, even when they are offset by revenue from external power sales. Higher cost overruns will diminish even that odious outcome.

In a nutshell, the very notion of low stable future rates is another Muskrat Falls myth.

The current government says it’s too late to halt the project.  That contention needs proof. Likewise, the public deserves to know when Nalcor expects the project to finish. The Company has not provided a schedule completion update on the generating plant since July, 2014 and continues to withhold critical information about the whole project.   

Muskrat Falls is a public policy failure exploding in front of our eyes. 

It is time to open the books on Nalcor in order to understand how big this calamity really is. 

15 comments:

  1. Interesting. Re the gov't allowing export profits let's not forget that Hydro has excess recall from Churchill Falls available and that too should be used to soften MF impact. That cost Hydro 0.2 cents and given the slowdown in iron and mining should help as well.

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  2. This piece, again masterful in an assessment of a tragedy unfolding, of which too few understand, most having concern with just the current low oil prices and government revenue loss. And JM can say `told you so, back in 2012` That energy demand growth going forward may not be as Nalcor predicted. And the danger of this `take and pay` arrangement, meaning customers pay more whether we need the energy or not. Maurice Adams correctly harped on that for a long time on his blog.
    Hope someone from the Telegram reads this piece by JM and alerts the public as to the real consequence of Muskrat Falls, and which issues of reliability and full final cost are yet unknowns.
    Spent time last night reading part of the Nfld Rate Application... it is apparent they seem to appreciate the bind MF will put them in, as they are the retailer, and will suffer the fall out from ratepayers.
    Winston Adams , Logy Bay

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  3. To the first comment. We are already selling the available RECALL power through Quebec. They charge us 19 million annually to wheel 300 MW through Quebec. Shocked to hear that. Well that is another Muskrat Falls myth. We are giving up 1000 TWhr of annual production (60 million a year in revenue) to bypass Quebec, which is charging us 19 million a year to wheel power.

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    1. To 12:47 comment..No not at all surprised at 19. That is called open access and is not and will not be a free ride no matter which way you want to get out of NL or whose transmission system you use. If Hydro has 1.3 TWH available then that is less that 1.5 cents per KWH. Selling for 6 cents that is still $60M nwt and more profitable than MF. Except as MF is take and pay regardless some would argue MF better.

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    2. To 12:47 comment..No not at all surprised at 19. That is called open access and is not and will not be a free ride no matter which way you want to get out of NL or whose transmission system you use. If Hydro has 1.3 TWH available then that is less that 1.5 cents per KWH. Selling for 6 cents that is still $60M net and more profitable than MF. Except as MF is take and pay regardless some would argue MF better.

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  5. Don’t stop the Project, complete the Power Line from Churchill Falls to Soldiers Pond. Send whatever power we require, either Recall power or power we purchase from Hydro Quebec. Stop building the Dam, we don’t need it.
    If the Province continues to put money into the MF dam we are doomed. Electricity rates will probably double to start and increase 2% each year for the next fifty years. If you stop the MF dam fiasco, you can repeal Bills 60 & 61, and allow free enterprise to produce power through wind, solar or other ways, and sell power to the grid.

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  6. The Danger of Efficiency: I have been an advocate for minisplit heatpumps as part of the Isolated Island Option. They reduce heating costs by 60 percent and reduce the heating component of winter peak demand by 50 percent, and save residents about 30 percent on yearly energy bills, and is about one fifth the cost of MF power. But as JM shows on these charts, with low growth for energy on the island , electricity rates would need to go from about 19.5 cents in 2020 to 24 cents per kwh in 2030, almost 150 percent increase from present levels of just over 10 cents. Hence the folly of not investing in Efficiency early on, as low growth is likely what we will have. Going forward it is a vicious circle, that can be moderated somewhat if MF is cancelled with considerable billions of dollars not spent for energy that will not be used nor can be profitably sold. But this explains why the power companies are in denial on the benefits of efficient heating... it is not compatible with high cost mega projects.....high cost Muskrat and reduced energy use is about as bad as it can get..... just wish they would be transparent with that.
    Winston Adams Logy Bay

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  7. There might be revenue from export sales, but there will be no profit on the per-kwh basis. Exports will be sold at going rates in those markets, which are lower than production costs.

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    1. Not the case for the 1 to 1.5 TWH from recall. It it currently bring sold though and so not new money BUT if gov't care to could be directed to current rates which it has never been!

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  8. Ed Hollett, in Sir Robert Bond Papers Blog comments on this JM article. He speculates that the 100 percent increase in power rates, an accurate assessment based on costs, but this may not be passed on to ratepayers. That perhaps half the cost will be added to electricity rates and the other half will be recovered from increased taxes.... but it amounts to the same thing,as ratepayers and residents are one and the same. Hollett is correct, and this may happen this way.
    I suggest it must happen this way. Remember , the higher the rates, the lower the consumption for electricity,which is this `elasticity` thing that economists use, especially Dave Vardy. This is important, and with alternatives such as wood pellet stoves, lower oil and propane costs, and especially minisplit heatpumps, Nfld Power has never before been faced with such alternatives which drive elasticity, and which can drive down electricity consumption. ELASTICITY.... I associate that word with Dave Vardy, but perhaps JM or Dave Vardy can do a article to explain it on Uncle Gnarley. I have done some research which shows elasticity may be more than 0.5 when there are alternatives. This would cripple electricity sales, and perhaps force government to moderate rates to below 50 percent increases....meaning more taxes by other means. And this switch to alternatives is in progress, though rates are still modest. People make decisions for heating systems in anticipation of high electricity costs going forward.
    Winston Adams Logy Bay

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    1. Have viewed numerous single family homes on Vancouver Island in past two month. Units with electric baseboard heating are older, priced accordingly and less marketable. Newer units, of course, have natural gas as option of choice where distribution is available. However, there is a very notable presence and market share of heatpumps as an acceptable and cost effective alternative, both for new market and conversion choices. FW

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    2. GNL/Hydro will find a way to take the cost out of the rate and to hide it elsewhere (tax, asset fire sales, etc.). Otherwise, there will be too strong an economic incentive for consumers to unplug partially/entirely from the grid. It is almost unbelievable that the lower churchill has become a greater disaster than the upper churchill.

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  9. What is the cost of Holyrood produced power ? Does anyone know? Is this what we are replacing with MF?


    ""In summary, if all export revenue associated with Muskrat Falls supplemental energy is used to lower the rate to the NL rate payer, the incremental costs for Muskrat Falls power will still be 25 cents per kWh""

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