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.
LIS
Background
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.
