Monday, 15 February 2016

TOP TEN MUSKRAT MYTHS: PART I

Guest Post Written by "JM"

The arguments for Muskrat Falls were always more qualitative than quantitative; they appealed to the common sense aspect of peoples' decision-making and thought processes. 

Who has not heard claims of "green energy", "stable rates", "power for industrial expansion in Labrador", "lowest cost option", "export revenues", and "we need the power"? 

It is natural for people to embrace assurances that are of the “motherhood” variety especially if they trust the one making the promise; however, ill-advised.  

Indeed, the promise of Muskrat never seemed huge enough. And when it didn't, there was always former Premier Tom Marshall to up the ante with this mother of all promises: "the project won’t contribute to our net debt".   

They were arguments difficult to counter without detailed insight. As a result, many people considered the project a proverbial "no brainer". 

The arguments were often sufficient to win over people too busy, or not interested enough, to review the project in detail. It was a strategy employed by Nalcor to take advantage of a general apathy in the public discourse.  A complex project was reduced to simple sound bights. That’s essentially how it got sanctioned. 

Over the past four years each of these arguments has been undermined.  They have been systematically shown to have earned the aphorism “Muskrat Myth”.  A summary of my Top 10 Muskrat Myths include:

1)      “Green Energy”:  Methyl-mercury concerns has challenged the “green” label of the project. The issue gained traction only after the project was sanctioned.  Nalcor was not successful facing down a Harvard University team of researchers whose conclusions were unequivocal.

2)      “We Need the Power”:  Initially Nalcor argued that the go forward 0.8% annual growth in energy demand used to underwrite the economics of Muskrat Falls, was a   conservative estimate based on 40-years of historical demand, and an increase averaging 2.3% annually.  Maurice Adams, one of the original opponents of Muskrat and a frequent writer to The Telegram, has been relentless in dismissing this demand forecast.  Mr. Adams correctly noted that 98% of the increase occurred in the first 20 years, of this 40 year reference period.  It was concluded that in the most recent 20 years (1990-2010) the annual demand increase was only 0.1%. 

Considering the economic outlook for the province, does anyone expect demand growth in the absence of population growth?

Recently, in addressing their 2016 General Rate Application, Newfoundland Power questioned the impact that rate shock, associated with the high cost of Muskrat Falls, will have on demand growth in the province.  Unlike Nalcor CEO Ed Martin,  our privately owned utility understands the impact of rates on consumption.  In fact, in Volume 1 of the 2016 Rate Application, Newfoundland Power concluded that with aggressive management, the demand could actually decrease over the next 20 years, as shown in Figure 1.     

It is clear that we need capacity in winter, and we need some modest growth in annual energy.  But few would argue that we will need 50% more energy over the next 50 years.  The impact on rates will be considerable, which will be the subject of Part II of this post.  


3)      “Muskrat Falls will meet our Winter Demand”:    When Muskrat Falls was presented to the PUB the impact of the Emera deal was not included.  When determining the lowest cost alternative, Nalcor excluded the 167 MW which must be delivered to Emera in exchange for building the Maritime Link.  When line losses are included, and the Water Management Agreement (WMA) is assumed to be fully effective; the maximum capacity that Muskrat Falls will deliver is ~640 MW at Soldiers Pond.  This is a net increase in island capacity of only about 145 MW.

Back in 2012, Nalcor advised the PUB that new generation will not be required until 2036, once Muskrat Falls was built.  

Nalcor now advises the PUB that additional capacity will be required on the island by 2025, even with Muskrat Falls. 

Muskrat Falls will generate lots of energy, but just not when we need it.  On those cold winter days, when we need the generation, it remains 1200 km away.  If Hydro Quebec wins the ongoing court case, dealing with the interpretation of the 1969 Power Contract, we will need even more capacity in winter, irrespective of our demand growth. 
  
4)      “We Need the Power for Labrador Mines”:  It is clear that Muskrat could not provide cheap, consistent power to iron ore mines in Labrador, and still meet our winter demand.  It would require additional thermal capacity additions.  Muskrat would have provided energy to the mines in Labrador, but it was never going to be cheap.  The commitments would simply have required new generation to feed the island.  


5)      “We Need the Power for Industrial Growth”:  Presently Muskrat Falls will generate on average 4900 GWhr per year.  Emera gets 20% under the “Nova Scotia Block”. 40% of the power will be used to replace Holyrood initially, growing to 80% by 2040.  However, as a result of the UARB process in Nova Scotia, Nalcor has committed an additional 1200 GWhr (25%) on average annually to Nova Scotia over the next 35 years (2200 GWhr total).  This was a major capitulation by Nalcor to secure the Federal Loan Guarantee. The award also eliminated cheap power for industrial development in Newfoundland and Labrador. 


6)      “It will generate Export Revenue”:  Initial export sales of 2,000 GWhr (40% of MF output) will generate about $80 million annual revenue, based upon current market pricing.  To put that figure into perspective, interest on the ~$8 billion (the final figure may be much higher) which will have to be borrowed for this project will cost about $320 million a year.  Muskrat Falls will not be a significant revenue generator for the province until it is paid off in 2067.   

7)      “Muskrat Falls Will Not Contribute to Net Debt”.  There is certainly no one in government arguing that Muskrat Falls will not make a significant contribution to the province’s net debt.  NL will borrow nearly $3 billion directly for the project. Another $1 billion of debt could have been avoided if dividends from Nalcor had been paid over the last decade.  $3 billion in direct debt by the province, will result in about $120 million a year in debt servicing costs.  This $120 million must be expensed in the given calendar year.  It is included in the annual deficit and net debt calculations.  Tom Marshall was wrong. Muskrat Falls will most certainly contribute to the Net Debt of the province.  It will nearly double the public debt!

8)      “Muskrat Falls was the Lowest Cost Option”:  This was always the rallying call for the supporters of Muskrat Falls.  In September 2012, I presented an option for building the Labrador Island Link only, and accessing the remaining Upper Churchill recall power.  At the time I authored the paper, this option was $4 billion cheaper than Muskrat Falls.   This initial paper was followed in December 2012 with two additional alternatives to the Interconnected Option which relied on a combination of wind, RECALL, and thermal.  All three options are currently believed to be considerably cheaper than Muskrat Falls, considering the project over-runs, and the collapse in the oil price. 

"Lowest cost option" was, in my opinion, a clear misrepresentation sowed by the project proponents. 

9)      “We Will Meet the Schedule”:  It is worth reading some of the language used by Nalcor during the 2012 PUB Hearings to explain their confidence in the project schedule (then a 2017 completion). 

“Nalcor has directed considerable effort over the past five years on activities that have a direct influence on capital predictability and ensure the company’s cost and schedule expectations are realistic and achievable. An extended focus on front-end loading and defining the project during the planning phase (pre-DG3) is also key to addressing potential risks and avoiding cost overruns. The process provides the critical information needed to make decisions towards project sanction (DG3).”

Now, 3 years after project sanction, the schedule is not nearly as certain.  During the project update in September 2015, Nalcor would not even offer the public any completion date!  The project schedule is a considerable challenge. It is a source of great worry given the precarious fiscal condition of the Province.

10)      “We Have Confidence in the Project Costs”:  Again it is worth revisiting some of  the Nalcor language used during the PUB Hearings in February 2012

“At DG3, project definition will be well advanced and the project cost estimate will include firm contract costs from suppliers and contractors. This, in combination with the advanced engineering and field work, favourable site conditions and a clear understanding and respect of the risks that remain will enable accurate project outturn cost predictability. The degree of project definition at DG3 will place the accuracy of the capital cost estimate within the AACE Class 3 range, closer to the narrower range of accuracy according to that standard.” Jason Kean explained that the narrower range of accuracy for an AACE Class 3 cost estimate is ±10%.”


The project estimate is now $7.65 billion ($9.05 billion including interest during construction).  This is 23% more than the DG3 estimate.  It is 50% more than the project budget presented to the PUB. 

These ‘Muskrat Myths’ were allowed to be propagated by a very strong communications strategy from Nalcor (Dawn Dalley is extremely effective in her job), a weak and disjointed opposition to the project, and a public review process; one ring-fenced by the government. 

Of course, there were a group of ‘Nay-Sayers’ to the project.  One of the first, and most effective, was Dave Vardy.  He should be commended for the work he has done to educate the public on the Muskrat Falls project.  A true non-partisan, Mr. Vardy is driven purely by a deep concern for the province.  He is a ‘Muskrat Myth-Buster’. 

David Vardy continues to seek information on the Muskrat Falls project, and has recently completed a number of access to information requests in an attempt to remove the current obscurity from the rate structure consumers will face in the future.  Stable electricity prices remains one of the few arguments for Muskrat Falls. Ostensibly, this is a matter easily quantified. Strangely though, in spite of all their claims, Nalcor has never provided a clear and consistent calculation of future electricity rates.

In Part II of this post, I will report on my investigation into this issue and offer an analysis of the results. “Long term stable electricity rates”: 

if this Muskrat Myth is busted, are there any left? 

8 comments:

  1. I first came across the initials JM in PUB posted submissions on Muskrat Falls. I wondered who it was. My initial thought was Jim Morgan, a vocal opponent to the project. But as I read some of the material, I realized it was too professional and detailed to be Jim Morgan, otherwise known as `Jigger Jim`. So detailed was JM`s submission, that I had to read it in intervals, and was amazed as to the amount of work that went into his analysis. And I have followed his pieces over recent years that shows continued in depth analysis. I wonder if he is a government employee, who must keep his identity secret or suffer consequences.
    On this piece, he refers to the general apathy of why there were so few who opposed this project. And also that so few had the interest to study this project in detail. While this is true,the project and alternatives are complex issues, and I suggest, rather too complex for most people without technical training. JM, Dave Vardy,and also Maurice Adams has technical or professional training. Nevertheless, there are many many with such training that chose to stay silent.
    As to the Myths, Myth 2 and 3 listed here deals with the issue of `Do we need the power` and `our winter demand`
    Power, including the chart of now showing a possible reduced demand going forward, refers to energy to be used, in GWH(gigawatt hours). The other aspect of power is our `peak demand` which is what is the maximum mega capacity needed during these cold snaps for our baseboard heater use.
    There is the acknowledgement by power companies that efficient heat pump heating will lower power consumed for heating by 50 percent or more. But they continue the myth that the minisplit heatpumps may not reduce peak demand. This myth needs to be shattered. When properly sized,and installed, and models used suitable for our climate that operate at our cold snap conditions, they absolutely reduce the heating component of our peak load by 50 percent. At a reduction of 3 kilowatts per average house for heating, simple arithmetic shows a reduction of 450 megawattts during winter peak demand for 150,000 house. And there are additional reductions if heatpumps are applied for hot water heating, and also transmission loss reductions.
    I say this is absolutely correct from evidence based on observations I have done on a few installations I have monitored. And it is in accordance with independent published data by manufacturers and other agencies.
    I had proposed an aggressive conversion to these systems, at the rate of about 13,000 house conversions per year. I felt this was a high number, until recently finding out that Nova Scotia was converting at the rate of 20,000 houses per year, as of the year 2011.
    It is both necessary to reduce energy demand and winter peak demand. It is the peak demand reduction that reduces the need for over capacity in new generation and transmission infrastructure.
    Would love for JM to address Myth 11: peak demand reduction with Efficiency, primarily minisplit heatpumps, and the modest cost of this approach, and the long term saving to ratpayers.

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  2. And the biggest myth of all “Danny Williams broke the Quebec lock on Labrador power”. Even John Crosbie fell for that one in his letter to the Telegram endorsing Muskrat Falls.

    The arithmetic proves otherwise. The link to Nova Scotia is 500 MW and the link from NS to NB is 300 MW further reduced by 50 MW when the wind is blowing to accommodate the windmills on the Isthmus between NS and NB for a net export ability to the US of 250 MW. The combined upper and lower Churchill capacities when completed are 8,500 MW so he succeeded in diverting 6% of the power to the mainland of which only 3% can reach Quebec’s market in the US and NB. The percentages are even lower if one includes the planned 3,000 MW of wind for the Smallwood Reservoir.

    Further, the Province’s position will be greatly weakened if we lose the Water Management Agreement court case. Quebec will control when 80% of Muskrat Falls power is produced. They will also control the “Energy Warehouse” in both production and its transmission except for a few percentage points.

    The timing of Muskrat production can lead to serious financial problems in honouring the firm power commitment to Nova Scotia and securing enough electric heat energy to keep Holyrood from burning oil. For the past ten years the Upper Churchill has produced full power in winter which would allow water for Muskrat but Quebec’s power market could be changing as the electric heat market is changing. Natural gas is becoming the more economical choice for heat and advances in heat pumps have made them much more efficient for heat and also more affordable for both new builds and even heating system replacements. Progressive Utilities such as NB Power are providing economical financing so that homeowners can install heat pumps and start saving immediately. The payment is less than the power savings resulting in more money remaining in the homeowner’s pocket right from the start.

    The Upper Churchill produces nine times more power from the same water than the “run of the river” Muskrat so it makes little sense for Quebec to release full water when they do not have a market for all of the power. It would be better for them to release partial water and sell what is needed to NL rather than waste energy so Muskrat can be at full power. This will require negotiations and Quebec will be in control. The WMA court case is much more serious for this Province than anything in the past. A loss will mean that Danny strengthened Quebec's lock on Labrador power.

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  3. Another great Muskrat Myth was that the court case currently going on in Quebec has nothing to do about the Water Management Agreement, or Muskrat Falls. hogwash!. This court case is all about the interpretation of the 1969 Power Contract. If the Recapture Allowance is limited to 300 MW, or the continious energy definition is interpreted a certain way it may preclude Nalcor from "sharing" energy between the assets. This means that Muskrat can only produce energy when the water is flowing. As the previous comment suggest this will have a huge impact on what was intended with the Muskrat Falls project.

    The government and Nalcor have been silent on the status of the court case. They have not told the public the true risk to their pocketbooks. They have again tried to simplify it. Gilbert Bennett has said he is not worried about it. Bullshit!

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  4. The NL government has been doing nothing to implement electrical demand reduction on the Avalon an I wonder if it is intentional. There are 800 public buildings and many of the larger, older structures are heated with oil boilers. It is very common to demolish the old oil heating system, spend a million on an electrical upgrade, and then implement electric baseboard heating. Take Holy Heart high school as a recent example - the steam boiler is being replaced with two electric boilers with 1 megawatt total capacity. That is a new megawatt on the gird for no good reason. It is absurd to be burning oil to make steam in Holyrood to generate electricity for electric resistance heat (perhaps 35% efficient) when you could have burned oil directly in a furnace at perhaps 80% or better efficiency.

    We do nothing to discourage electric baseboard heating in new residential subdivisions. We don't rebate heat pumps, pellet stoves, discourage baseboard heating or consider new electrical demand when retrofitting government buildings.

    Is this by design? An attempt to increase demand, and thwart efforts to reduce demand, all to justify expenditures at Muskrat Falls? Or is it just incompetence and lack of planning.

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    Replies
    1. Electric boilers are very efficient (98%) vs oil fired boilers that typically range from 80-85%. The reason why these conversions are occurring particularly in schools is that the school board pays for maintenance of their systems. Electric boilers have virtually no maintenance costs (perhaps a heating element burning out every few years) compared to oil fired equipment which must be serviced at least annually. The dept of education pays the energy costs so it is an advantage for the school board to reduce their operational costs related to maintenance.

      And up until the recent (last 18 months) decrease in oil prices, electricity was the cheaper fuel here in the province so converting made good sense.

      In home installations there is nothing cheaper to install than electric baseboard heat. Even the high end homes typically have it unless the owner is willing to pay thousands more for oil fired or heat pump technology.

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    2. To suggest electric boilers are very efficient (98 percent) is rather silly, although true. Given that in winter the electricity must come from Holyrood which is burning oil, actually means the efficiency is more like 35 percent than 98 percent. It is robbing Peter to pay Paul approach. If the Dept of Education saves money while the ratepayers are dinged for the extra oil at Holyrood, or to try and create a extra energy load to justify Muskrat, it is a continuation of a policy that increases winter time peak load, that has already forced power outages here.. stupid, stupid, stupid. We have what must be the worst winter peak load versus summer load in Canada, and caused by electric heat. Sure there is nothing cheaper to install than baseboard heaters or electric furnaces, but not cheaper in the long run. The long run... is about 6 years, when the more efficient technology is paid for and it is then saving substancial money. So it is that some countries make it illegal to install baseboard heaters or electric furnaces. This is 100 year old technology that anyone with common sense would agree should be abandoned. Winston Adams

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  5. As to above comments, last week Nfld Power`s conservation engineer, Wayne Upshall was on CBC call in radio. He admitted that heatpumps reduce heating energy use by about 2 thirds on yearly average... but they offer no rebates, just loans on which they make considerable profits. He discussed nothing on the ability of minisplit heatpumps to reduce winter peak demand,BUT IN FACT, New Brunswick Power offers a rebate of 500.00, for just this reason: that it reduces winter peak demand. And if one checks the winter temperature of Moncton NB, to St John`s , we have milder temperatures, which assures the same units used here will reduce peak demand here even more.... it is just the way it works. Surely Wayne Upshall, an engineer cannot deny that fact! Winston Adams

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  6. As to minisplit heatpumps for saving on heating costs for residential, here are some interesting figures:
    Nova Scotia gave rebates for a while at 1500 dollars. About 2011 installations there reached 20,000 a year, that is 30 million dollars to help homeowners.
    New Brunswick now rebates at 500 dollars, as they want to reduce their winter peak demand. If 10,000 per year are installed, this is a 5 million dollar rebate to homeowners.
    There is a new policy proposed by Nfld Power in the present rate application filed with the PUB. It deals with this minisplit heatpumps for residential. It proposed to educate Nflders on the benefits of these units.
    For 2016 it will spend 114 thousand dollars.
    For 2017 it will spend 95 thousand dollars.
    Typically that is about 30 cents per household. But even that is not a 30 cent rebate. There is no rebate. The 30 cents will cover the cost of a flyer with your bill letting you know that this is a technology that works and is effective to lower heating costs. And they will do this some 30 years after such systems first came to market!. What would we do without them looking out for us! World class, hey!
    And the 30 cents per household, that is not a Nfld Power gift to us, from Fortis shareholders.... it is a cost of business, to be approved by the PUB, and tacked on our bill. Call it business as usual. This has been filed now for months, but not yet approved. Will there be thousands at the PUB hearings to protest this..... guess not. After all, they show a 85 percent customer approval rating.... who can complain with that!

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