PlanetNL8: Labrador Interconnected System (LIS) Under Threat of Huge Rate Increases
The largest regulated zone in Labrador is the Labrador Interconnected System (LIS) powered by Churchill Falls with transmission lines running to Labrador West and East. These are all relatively old assets that have provided exceptionally economical service and the lowest rates in North America and possibly the entire western world.
Government policy for this unique regulated rate zone, however, is about to prove the old adage of having too much of a good thing could prove to be not good for you. Low rates have attracted new demand that will lead to expensive new transmission line construction resulting in major rate increases for everyone in the LIS. There’s also a long shadow cast by Muskrat Falls as well.
Government has the authority to select a different course but as demonstrated by Muskrat Falls, doing the right thing for ratepayers is probably not on the agenda.
|Photo Credit: Great Northern Data|
Most of the details gathered for this post come out of documents filed on the PUB website related to NL Hydro’s 2017 General Rate Application (GRA). There are hundreds of pieces of information that have been added to the site in the past few months and, finally, hearings commence next week.
Powered by a 525 MW reserve allocation from Churchill Falls, the western transmission line powers Labrador City – Wabush including the Iron Ore Company (IOC) mining operation while the eastern transmission line delivers energy to Happy Valley and surrounding communities.
IOC uses approximately 60% of total LIS energy for their massive mining complex near Labrador City. Expansion activities at the mine since 2010 have added about 35 MW to their requirements, now up to 245 MW. The remainder of Labrador West demand peaks at about 80 MW.
The exact capacity of the Labrador West transmission line could not be found in researching for this post but it is thought to be about 400 MW. The Labrador East transmission line has a maximum capacity of 77 MW. Both lines are nearing maximum capacity.
The LIS is sustained by $20M revenue from domestic and commercial customers and just over $4M from IOC. NL Hydro’s energy cost from Churchill is the same miniscule 0.2 c/KWh paid by Hydro Quebec until 2041 while the legacy transmission infrastructure costs demand low return on capital. Operations and maintenance costs make up a significant part of the cost because all other costs are so low.
On a per capita basis, the LIS zone ($24M revenue, 21,000 residents) costs 20% less to operate than the Island ratepayer zone ($700M, 500,000 residents). Interestingly, if the high-cost Holyrood plant could be removed (mainly fuel costs), the Island zone would cost about the same as the LIS. The Island was in a pretty good situation until bad policy created Muskrat and now it threatens the LIS.
Careless Policy: When the Many Pay For the Needs of the Few
It’s well known among utility people that small incremental additions to meet load growth are often many times more expensive to ratepayers than the cost of running entire legacy systems. There is no better example than Muskrat Falls where a new project to replace the 470 MW Holyrood thermal plant with the 824 MW Muskrat system: total Island system capacity increases by only 15% but ratepayer revenue requirements more than double.
New projects are known to be the love of privately held utilities who profit from massive ratebase growth and guaranteed long-term returns. Responsible Governments and responsible utilities, particularly Government-owned utilities, should strive in the other direction to try everything possible to live economically within the means of their existing infrastructure.
|Natural Resources Minister, Siobhan Coady|
If load growth can’t be avoided, then policy options are available to assign the new costs to the new customer demand thus protecting regular ratepayers from paying for costly assets they won’t utilize or benefit from. Without such care in allocation, existing ratepayers end up subsidizing the servicing of new customer demands through widespread rate increases.
Only Quebec and British Columbia, arguably the most progressive Canadian provinces, have enacted what is generally known as heritage power pools to ensure legacy assets are used efficiently and that new customer demands receive scrutiny, and costs allocated primarily to those who need and benefit directly from the new infrastructure. It’s not to say those jurisdictions do it perfectly but the policies are legislated and the principles understood. Not only is such policy lacking in this province but the desire to follow the spirit and better practices of such wisdom are completely absent.
As a result, NL Hydro says it is simply doing what it is legislated by the Government: to satisfy all service requests without consideration of the cost and to allocate that cost to all customers indiscriminately. Avoid questions of long-term impacts, just build and then raise rates by whatever is necessary.
Now that the Island system has been dealt with so masterfully, the LIS is next.
Lab West Third Transmission Line – Major Rate Impact
Several developments will soon trigger the necessity of a third transmission line into Labrador West. This project was actually started and abruptly cancelled in 2014. Primarily it was intended to supply 100-120 MW needed for the proposed Kami mine site and secondary development related to growth in the iron ore industry. Kami remains on hold but the owner is still actively seeking financing to start the project.
Meanwhile, several other substantial power demands have developed. IOC’s expansion since 2010 has added 35 MW. Wabush Mines closed freeing up some capacity but a new operator intends to reopen it within a year needing 50 MW, and a new data center industry has known service requests in for another 50 MW as of mid 2017 and potentially as much again since then.
The third transmission line would resemble the recently completed TL267 on the Island from Bay D’Espoir to the Western Avalon. TL267 cost $330M and the Labrador West line will be no less. A recent General Rate Application (GRA) clarification revealed that TL267 adds $25M to annual required revenues from Island ratepayers. At that price, adding the Lab West third transmission line will more than double LIS revenue requirements from $24M to almost $50M.
Using simple math, LIS rates must double to pay for this one upgrade project. It will be a little worse than that, however, as IOC is sure to resist paying anything for upgrades that bring power to other customers. IOC’s hardball play with a soft Government would shift the total burden to LIS domestic and commercial customers only, raising rates by 120%. This includes Labrador East customers who get no benefit from whatever industrial development is happening in Labrador West.
Lab East Transmission Line Upgrade – A Sticky Situation
NL Hydro forecasts power requirements in the Happy Valley area to nearly double in the coming decades. Rather than install a very costly new transmission line all the way between Churchill Falls and Happy Valley, Hydro has developed a convenient low-cost workaround solution tying into Muskrat Falls. Power to Labrador East would then be transmitted via the new $900M Churchill Falls to Muskrat Falls transmission line, aka the Labrador Transmission Asset (LTA).
Hydro’s Capital Budget Proposal indicates only a $20M construction cost to execute a tie-in. This by itself might impact LIS rates by only 5%. The question must be asked, however, what might the LIS owe on its usage of the Muskrat Falls assets?
Government legislated in 2013 that only Island ratepayers are responsible to pay entirely for Muskrat including the LTA. At the time this legislation was passed, no one had foreseen the surge in Labrador power needs or the need for a tie-in to the Muskrat project. The basis of the original legislation would therefore prove to be illegitimate: Government would be compelled to recognize that the whole LIS ratepayer group must be held responsible to pay their share.
Labrador ratepayers may have taken great comfort in their exclusion from Muskrat costs but this connection changes everything. Furthermore, if Island ratepayers turn out to need zero Muskrat power due to energy use reductions resulting from massive price increases, then LIS ratepayers would be the only group using the assets for in-province power consumption. As the exclusive beneficiary, the fair price and the rate impact on the LIS may be enormous.
LIS ratepayers might also anticipate that when Island ratepayers are overwhelmed by rate increases and the Government is scratching for a penny everywhere, it’s simply a matter of time before they are fully exposed to Muskrat costs. The planned connection to Muskrat will hasten the amendment of flawed legislation. A resulting fully interconnected Island-Labrador grid could reasonably lead to one single regulated zone with the same punishing high rates for all domestic and commercial customers.
Bitcoin Data Centers
Two years ago, the emerging Bitcoin “mining” phenomenon discovered cheap Labrador power. Active operators are only up to about 10 MW of usage so far but the known and rumoured new builds may total 100 MW – this is a key driver of demand in both Labrador West and East.
These operators thrive only on the spread between low-price Labrador power and that in other competing jurisdictions. Take that advantage away and their business model demands they relocate to wherever power is cheapest. That happens to be just one province away where Hydro Quebec (HQ) is aggressively pursuing data center industries.
|Photo Credit: Great Northern Data|
HQ has a massive energy surplus, ironically due in large part to having title to nearly 5000MW of Churchill Falls power until 2041. HQ data center rate offers are only about 50% higher than the LIS today. The HQ rates are likely to remain long-term stable but the LIS rates teeter on the brink of major escalation once infrastructure growth is triggered.
If low Labrador prices were theoretically sustainable, Bitcoin mining would continue to expand in Labrador unabated. These operators are about to eat their own lunch. Bitcoin demand will be a key factor in transmission line upgrading throughout the LIS and when the cost of those upgrades push LIS rates way above Hydro Quebec’s, these operators will quickly decide to cut their losses and leave.
AFB 5 Wing Goose Bay Electric Boiler Conversion – Federal Opportunism
GRA submissions reveal that DND is contemplating converting their oil-fired heating plant to 12.5 MW electric heating in 2020. This demand will only be possible using the proposed Muskrat LTA tie-in.
The optics of this scenario are most disconcerting. The Federal Government played a huge role in facilitating Muskrat and demanded the Province ensure Island ratepayers pay for it. Now they are wishing to take advantage of cheap Labrador power which was conspicuously excluded from the Muskrat cost impact. Yet, their action to demand this power could play a decisive role in destroying favourable electricity economics in the LIS forever.
Conclusion: Ratepayers Will Be Left Responsible For the Damage
Several high risk threats exist to blow up rates in the LIS zone. Unnecessary infrastructure could be built because of the dual failure of a wilfully blind utility, who abscond responsibility as a result of absurd Government policy while Government has little or no concern for the costs potentially incurred by the utility. When it comes to good energy planning, there’s nobody in the driver’s seat.
Costly transmission infrastructure and Muskrat interconnection rate impacts will surely kill the Bitcoin sector and any other businesses dependent on super low rates. Government and the utility should have been ahead of this issue and ready to cut it off but instead they are ready to instigate another major energy management blunder.
The end result of massive rate hikes would be LIS ratepayers cutting their consumption dramatically, further ensuring the redundancy of any new infrastructure. Declining energy sales would cause rates to rise further. The LIS may be wrecked worse than the Island system – something that was completely inconceivable a few short years ago.
It would be in the interest of all present LIS ratepayers – including iron ore mining interests, corporate and labour alike – to pressure Government to implement a LIS heritage pool policy framework to ensure effective and economical utilization of this resource until 2041. The window of opportunity is rapidly closing – Labrador’s real leaders must act quickly.