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.