PlanetNL28: Electrification – Is it Good Business or Political Sleight-of-Hand?
This blog has detailed time and again how electricity costs are set to roughly double once the Muskrat Falls project goes into operation and the potential social harms that will inevitably occur. Rate mitigation tactics are promised by thePremier and his Administration but they are bound to be as delayed and poorly delivered as is the Muskrat Falls project itself. This post examines the Government’s pursuit of converting oil-fired buildings to electric heating. Growth of electricity is supposed to provide relief to existing ratepayers while getting off oil and lowering emissions is an added bonus – who could argue? Those who look at the big picture, that’s who.
Government’s Electrification Plan
In its polished document outlining how it intends to mitigate Muskrat’s coming $725.9M annual cost to ratepayers, Government included a $15M target for new electricity revenue gained from converting oil-fired buildings to electric heat. Useful publicly available information on what Government is up to in this regard is very scarce.
Other than scant details from media reports, a mere single summary sheet (presumably part of a Briefing Note) with some figures regarding 28 buildings across the island was found for this analysis. As the vast majority of Government buildings are already fully electric, the sheet is assumed to be the complete list of buildings that passed initial screening other than the massive Memorial University campus heating plant.
The list of 28 buildings consists mainly of grade schools and post-secondary colleges. Half are on the Avalon. These buildings consume a combined 2.2 million liters of diesel heating fuel annually and their switch to electricity will add 20 GWh to total island electricity usage (0.3% increase overall). Some projects are already underway and most are planned to be complete by the end of next year. Electrical contractors are no doubt happy with the work.
|Minister of Natural Resources, Siobhan Coady|
The difference in the cost of oil vs electricity for heat and hot water in commercial buildings usually favours oil although it’s higher operating and maintenance costs likely offset any useful savings. There is likely to be no operating cost advantage to Government in making these conversions. Either way, Government will spend about $2M on fuel or electricity. Government should be wary of rate mitigation failure though: if electricity rates double, staying with oil could save $2M/year. There is certainly no business case to invest in electrification for expected cost savings – the capital cost has to be written off.
In their document, Government claims they will replace oil-fired systems when they are at end of life. Such a claim would infer there is no net capital cost to electrification as the money would be spent one way or the other. Yet it appears Government is rushing to change out 28 working oil-fired heating systems over just 2 years: the suggestion that all are in need of replacement anyway seems disingenuous.
The total capital budget for these 28 conversions is identified at $20M. 50% is funded by the federal government under a program that expires in two years – this is the key reason Government is rushing into many of these conversions a bit early.
Using basic rules of thumb for project economics, the annual cost hit for depreciation and cost of capital for the Province’s $10M share of the cost of this set of conversions is going to be end up around $1M/year. As the existing oil fired systems would require eventual repair and replacement, halving the cost to $0.5M/year is a reasonable estimate.
To sum up to this stage, Government will incur new annual costs of $0.5M which isn’t much, however, there is a risk of escalating to $2.5M if electricity prices double - not to mention the cost hit on the majority of Government buildings that are already fully electric heated. This is the taxpayer-exposed liability.
The main selling point of this effort for Government is the slight increase to in-province electricity sales which has more value to ratepayers than if that 20 GWh of energy were exported at low spot-market rates. The added value benefit to ratepayers from the 28 electrification projects is assumed about $1.5M/year.
Government’s bottom-line view must be this: the $0.5M annual liability for the project costs is to be looked at alongside the benefits to ratepayers of $1.5M. When the two are married together, the across the board benefit is $1M. This type of social transfer is interesting but it’s a small drop in the bucket against Muskrat’s coming $725.9M hit and while every drop counts, let’s not imagine this is going to materially change anything.
The $1.5M is also well short of the intended $15M target. Yes, MUN is yet to be included in the figure and it happens to be 5 times larger in terms of oil consumed than the entire set of buildings listed above. Simple extrapolation suggests a total maximum ratepayer benefit of $9M. If there are any other buildings to be done besides MUN and the list of 28, the Government needs to be a bit more forthcoming on their plans.
Also by PlanetNL
PlanetNL25: Nalcor CEO – Economic Skills Are Non-Essential to the Position
The Price of Rushing Forward – Increased Ratepayer Costs
The above benefit is only delivered in the post-Muskrat period when hydro power has replaced Holyrood’s expensive oil-fired energy. As the public is aware, there are big problems with the Labrador Island Link transmission line that may require years before Muskrat energy is reliably delivered for a full winter. Meanwhile the Muskrat Falls generating Station is several years late finishing construction and just entering early commissioning, so there is a long way to go before “clean” energy to the island becomes a reality.
In addition, the issue of system reliability without Holyrood in steady winter operation is yet to be properly assessed. This key promise of the entire Muskrat project from day one has a very high probability of turning out to be patently untrue. It’s possible either Holyrood must run continuously every winter as a generating standby source of spinning reserve power or it must be replaced in full by fast-start diesel-fired combustion turbines of approximately the same capacity.
Either choice will see ratepayers hit with a bill likely well in excess of $100M annually or perhaps double that. Had this plausible fact been properly kept on the table, it’s incredulous to think Muskrat would have been promoted and sanctioned. It’s scandalous that this large crucial detail was deliberately misrepresented from project planning. The Public Utilities Board is to commence hearings soon on system reliability and this issue will no doubt be closely examined but when it will be fully understood and resolved may take years, not months, to conclude.
It’s therefore totally irrational that Government is pushing forward with electrification while the very inefficient Holyrood plant remains the principal supply of winter energy demand. This fact isn’t the least bit new either. Government has trumped the regulator for decades now by enforcing an outdated inefficient consumer rate model that buries the fact that Holyrood costs way more to operate than the revenue of the power it produces. With a better rate-design that does not subsidize generating plants, Muskrat would never have been needed and Holyrood would have been used a lot less as well.
Because electricity cost doesn’t reflect the cost of production we have a horribly distorted situation where for every liter of fuel an oil-heated customer burns for winter heat, Holyrood burns three liters to supply an electric-heat customer with the same amount of heating energy to power their ubiquitous electric resistance heaters. The hidden subsidy of Holyrood power has led to excessive implementation of resistance heating and higher average power rates than could have been possible.
The electrification of the 28 public buildings therefore might save 2.2 million liters of fuel from being burned by furnances to heat those buildings but it will result in over 6 million liters of extra fuel being burned at Holyrood. The entire cost of that Holyrood fuel hit, about $4M, will be absorbed by NL Hydro and will become a 100% ratepayer cost inevitably contributing to a rate increase for all power customers. Government clearly did not look at this as an issue in attempting to move forward with these conversions.
Revisiting the analysis from the above section where the post-Muskrat benefit to ratepayers of these electrification projects was anticipated to be $1.5M, we now see that pre-Muskrat, ratepayers will actually pay about $2.5M per year in increased costs. Add in the Government’s project cost of $0.5M/year and these conversions will have a combined cost to ratepayers and taxpayers of $3M annually. Government has fashioned itself a bargain shifting 80% of the cost and risk to ratepayers.
Environmental goals are also going the wrong way too. Carbon emissions will triple in proportion with the higher fuel usage at Holyrood. Other non-carbon pollutants are likely to go up more than 10 times as Holyrood heavy oil is far less clean than light refined diesel heating oil.
Throw in MUN’s central heating plant fuel consumption and ratepayers will be on the hook for about $24M extra fuel being burned at Holyrood. Thankfully the scale of the MUN project demands a larger study and hopefully that buys time to see the picture more clearly over the next couple of years.
Timing is Everything
Without a clear and certain timeline for Muskrat and the LIL going into service, and with Holyrood removed from service, Government and ratepayers – mainly ratepayers – are going to book substantial losses on this electrification plan in the short to medium term at least. These electrification projects have no fundamental economic benefit to begin with and will trigger increased fuel costs at Holyrood large enough to completely outweigh the rather feeble and made-up future benefits of electrification. On a smaller scale, this is like Muskrat all over again. Can we just burn that playbook please?
Government has no evidence to be certain that clean electricity will be delivered to the island in abundance by 2021 as is necessary to validate their electrification plan. As the PUB’s expert consultant, Liberty Consulting, has pointed out repeatedly in the past year, all indications are to the contrary: it will likely take years beyond that to achieve clean energy status.
This electrification plan should have only proceeded when the case for achieving clean energy was assured. Conversion projects not yet started should be put on hold and the MUN study should likewise be dependent on not starting any work until clean energy status is 100% achieved. With several years likely to lapse, all studies will need to be reopened and reworked as many key criteria are sure to significantly change, especially the question of rates. The new rate design using high rates to mitigate electric heating and high time-of-use peak pricing could yet prove to be the order of the day. The design of new heating systems under those conditions may be fundamentally electric but they would be radically different and more efficient.
By rushing forward now on their simple electrification conversions, the Government is blatantly lying and cheating the ratepayers of this province. If they can’t see the big picture on this relatively small endeavour, then how can there be any trust in them to do right within the bigger issues of rate mitigation that lie ahead. It’s hard to believe they could make things worse but they are making an exceptionally strong case for themselves.