PlanetNL17:
Exploding NL Transmission Costs A Terrible Blunder
While Muskrat Falls “the dam” is the object of much
well-deserved scorn, the transmission line parts of the project may not be receiving
all the critical attention they deserve.
This post examines cost recovery for the transmission assets on A C/kWh
basis to demonstrate just how uneconomic they are.
Along the way, transmission costs in other jurisdictions are
compared and the economics for importing or exporting energy over the Maritime
Link are examined. The conclusion is
that Muskrat and the Maritime Link will do only thing well: deliver benefits to
Nova Scotia.
Pre-Muskrat
Cost of Transmission
For a long time, the high voltage (66kV and higher)
transmission aspect of NL Hydro has been less than one-tenth of annual overall
costs. That ratio will go way when cost
recovery begins on the Muskrat project transmission assets.
This pre-Muskrat cost is comparable to that of other utilities. Hydro Quebec’s transmission fee is 1.25 c/kWh
while Manitoba’s is under 0.5 c/kWh. In
fact, NL Hydro’s transmission rate was only about 0.4 c/kWh until the recent
completion of TL267, the new 188km transmission line from Bay D’Espoir to the
Western Avalon completed at a capital cost of about $300M in late 2017. TL267 added only a fraction to the existing transmission
system yet it doubled annual Island transmission costs.
The TL267 example highlights the tremendous value delivered
by old legacy assets and the huge rate impact of new projects. This is an effect well understood by virtually
all regulated utility jurisdictions that leads them to approve major new construction
projects often as a last resort. Conservation
and demand management (CDM) programs are typically the first step and best
value for ratepayers in slowing or reducing capacity and energy requirements
and preventing the build of rate-escalating new assets.
Probable
Transmission Costs in 2021
If the $300M TL267 project was a warning sign, then what is
the rate impact of Muskrat transmission assets with capital costs about 20
times greater? We can estimate that
reasonably by examining the two subprojects and adding that to the 2019 cost
projection shown above.
The biggest charge coming is for the 1100km Labrador Island
Link. Nalcor’s 2017 estimate for the LIL
Power Purchase Agreement (PPA) cost is $417M.
The LIL PPA slowly declines in price every year but this will be more
than offset by the next item.
The PPA for the Labrador Transmission Asset, the new 250km transmission
system between Churchill Falls and Muskrat Falls, will initially add $67M. The combined LIL plus LTA costs $484M in 2021 and
will steadily increase (by 2070, combined costs will be over 50% higher). Adding LIL plus LTA costs to the existing
Island transmission costs will total $550M, about a 20-fold increase over what
it was in 2016.
To complete the calculation, 2021 energy requirements must
be estimated. As explained in recent
posts, the anticipated declining two-rate system may result in a mild
elasticity response: a 5-10% reduction from Hydro’s 2019 figure above is
probable. The resulting calculation of
2021 transmission fees is therefore in the range of 8 to 9 c/kWh.
To the average consumer on the Island, this means that about
8 c/kWh of future rate increases is attributable solely to the transmission
costs and not to the Muskrat generating station itself. The Muskrat generation PPA will begin at $325M
in 2021 for a potential rate impact of about 4.5 c/kWh, barely half that of the
transmission side of the project.
Combined the two threaten to more than double electricity costs, notwithstanding Government’s pre-election rate mitigation promises.
Combined the two threaten to more than double electricity costs, notwithstanding Government’s pre-election rate mitigation promises.
The key point most people may not know is that transmission
costs dominate the cost impacts in the early years after cost recovery
commences.
Interconnection
Without Muskrat Generation?
The massive rate escalation of transmission costs puts in a very
dim light any notion that connecting the Island to Churchill Falls without the
Muskrat generating station might have been an attractive option. Additional energy costs would be applicable
given that the available surplus Recapture energy and capacity available fall
far short of Island winter peak heating needs.
Had Nalcor imagined to develop a Conservations and Demand Management program (CDM) as the first measure to
decrease the winter peak requirements, recapture energy might fill the
remaining gap. Further imagination would
have also deduced that far more viable alternatives would exist to fill the
energy and capacity gap than a $7B transmission development.
Setting aside such imagination of CDM actions and
alternative solutions, Nalcor would need to purchase firm energy from Hydro
Quebec for the winter season only, the period when HQ values its energy the
most. The cost might easily have been in
the 4-6 c/kWh range had they bothered to ask.
With all costs in, the
transmission-only project would double Island rates just as the existing
Muskrat project will do.
The only consolation of this very undesirable project
concept is that the ratepayers would be spared the near 6-times growth of
backloaded Muskrat generation cost recovery in the Power Purchase Agreement (PPA).
High
Costs to Import Power via Maritime Link
As part of the GRA hearings, Hydro had to develop a response
to the Consumer Advocate to demonstrate the costs associated with delivering
100MW of energy from the New England NE-ISO market.
In summary, the cost of energy is about 5.5 c/kWh while the transmission
costs (also known as wheeling fees) through New England, New Brunswick and Nova
Scotia add 5 c/kWh. It is simply
inconceivable that Hydro would pay 10.5 c/kWh for externally sourced power when
they anticipate a massive surplus of hydro power available within their own
system.
Besides that, there are known capacity constraints throughout
the network, especially NS-NB transmission, that would make a large import,
such as for emergency to replace Muskrat in winter, virtually impossible to
deliver. Throughout the GRA process, Hydro
has had to admit many times over that they cannot contract firm energy deliveries
via the Maritime Link presumably for this reason.
Would third parties pursue import power? Firstly, all the same transmission constraints
exist plus a third party would have to pay the 8-9 c/kWh Hydro fee. There is also a Maritime Link fee (which
couldn’t be found for this post but is likely to be at least 1-2 c/kWh). For Newfoundland Power or any Industrial Customer
looking at importing from New England, probable costs surpass 20 c/kWh. Hydro will certainly be offering those
customers far lower wholesale pricing.
Import of energy over the ML in any useful quantity at an
economic price will not be possible.
US Export
Via Maritime Link
Using Hydro’s GRA example again, the flow can be reversed to
assess export profit potential: “the gravy” as often said by proponents
including former Nalcor CEO Ed Martin and former Premier Danny Williams as
recently as his testimony before the Commission of Inquiry earlier this month.
The day-ahead market price in NE-ISO averages about 5.5
c/kWh indicates the revenue opportunity but the transmission fees of 5 c/kWh incurred
to get energy into the New England market eat up nearly all the sale. Nalcor’s gross margin would be a mere 0.5
c/kWh. When other selling and
administrative costs are deducted, there would be nothing left.
Will it get better? Likely
worse.
New England-ISO electricity prices have been closely linked to
natural gas, the primary generation fuel in the area. While industry forecasts show gas prices should
rebound slightly in the years ahead, the NE-ISO website clues readers to the
fact that wind energy providers have already started to outcompete gas in setting
a lower market price 15% of the time. We
may surmise that as the wind sector is set to grow substantially in that region,
there will be further downward pressure on electricity prices.
Next, consider what was demonstrated above about the costs
of transmission dramatically increasing as new assets are built or refurbished. Eventually all jurisdictions, including those
on the route to New England, must invest new money for upkeep of their aging
assets. Their transmission fees are sure
to increase.
US exports of Nalcor energy via the ML will be squeezed by
both falling revenues and increasing costs – American gravy won’t be on the
menu.
The
Maritime Link is for Nova Scotia
The technical constraints and economic analysis point to one
conclusion only. The Maritime Link appears
to strictly be a feeder to deliver NL power to Nova Scotia and the Muskrat
generating station is primarily necessary to meet Nova Scotia demand.
Let’s close by revisiting the pre-sanction 20-80 Term Sheet
that was based on Emera and Nova Scotia committing 20% of the cost for 20% of
the power. We already know their cost
share has decreased as Nalcor has had to bear nearly all the Muskrat overruns, but that isn’t the big issue. That one is the energy allocation that the project is likely
to end up with.
The Emera agreements already require Nalcor to offer at
least 2200 GWh annually and as shown in this post, as it is the only practical market
for surplus energy, therefore the number might be significantly higher. Notwithstanding other concerns (water
management, North Spur, general reliability), deliveries exceeding 3000 GWh are
conceivable.
For local Island ratepayers, Muskrat is simply a Holyrood
replacement. While Holyrood has delivered
about 1500 GWh in recent years, after rate impacts are considered, this amount could
easily be cut in half meaning only 750 GWh of Muskrat energy might be used here. Longer-term, it’s hard to think that total
Island demand has anywhere to go but down.
The 20-80 Term Sheet is set to do an embarrassing flip where
Nova Scotia may receive about 80% of the power for less than 20% of the cost. Nova Scotia did a solid job of minimizing
their risks and maximizing their opportunity.
The gravy is theirs.