PlanetNL22:
Muskrat Energy Cost – Another Measure of Failure
Several leading electricity industry research organizations compile
annual estimates of utility scale generation options. These reports roll up the expected lifecycle
costs relative to energy output to provide a single energy cost figure known as
a Levelized Cost of Energy (LCOE). LCOE allows alternatives with high capital
cost but low operating cost to be directly compared to options with low capital
cost but high operating cost.
The energy industry consistently selects projects that can
deliver competitively low LCOE numbers, however, Nalcor avoided this technique
in favour of a customized and burdensome Cumulative Present Worth analysis that
avoided illustrating the true economic merit of Muskrat Falls. Although the LCOE metric was front and center
in the Nova Scotia regulatory hearing for the Maritime Link, it was avoided by
Nalcor and Government here. Little
wonder, as Muskrat’s LCOE is nothing to be proud of.
Reference data for this post is sourced from Lazard, an
international consulting firm widely trusted for their annual LCOE
reports. Their full 2018 report is available here.
Hydro projects are not reviewed by Lazard because they are so
rarely an option for utilities. Capital
cost wise, hydro tends to way up with the most expensive category, nuclear power
plants. At sanction, Muskrat was at
Lazard’s low-end of the nuclear cost range but with Muskrat’s updated costs, it
is now at the very high end for nuclear.
This is not a promising beginning but LCOE factors in the capital cost
and all other operating and maintenance costs.
As water flows are considered a free energy source, could Muskrat’s LCOE
look better than nuclear?
Below is the Lazard chart for expected LCOE in $ per MWh for
a variety of generation solutions. Underlying
assumptions include reasonably competitive bidding, ordinary construction
challenges, and conditions that are presumed suitable for the solar and wind renewables.
Onshore wind and utility solar lead the
pack, closely trailed by natural gas combined cycle thermal: unsurprisingly
these are project types most frequently built by utilities in recent years. Lazard probably isn’t being overoptimistic on
their cost projections either: consider both Alberta and Saskatchewan where
recent bids for wind projects achieved costs of only around CDN$30/MWh (3
c/kWh), considerably bettering Lazard’s numbers.
At the PUB Muskrat Review in 2012, Nalcor offered no LCOE
guidance until they were compelled to respond to a request to do so from the
Consumer Advocate. Based on the project’s total capital
estimate of $5.0B at that time and the energy forecast of the day, Ed Martin’s Nalcor
projected Muskrat LCOE to be $208/MWh (20.8 c/kWh).
Reviewing the chart above, Muskrat energy cost is higher
than nuclear and the only possible comparable is the “gas peaking” plant. Such a facility is presumed to utilize
inefficient combustion turbines to meet peak loads during high demand seasons,
likely running just hours per day.
Peaking plants are standby facilities that deliver relatively little
power for their costs: as a result, they are a last resort option within the
utility industry.
Conservation measures to reduce high demand peaks would
normally be mandated before investing in peaking facilities. As shown in PlanetNL21, conservation measures
would have been ideal to address the Island’s highly seasonal winter electric
heating demand.
Nalcor chose to ignore Government’s own Energy Policy objective
to pursue conservation, and instead embraced the volatile seasonal electric heating
needs: Muskrat is a peaker plant. This
is blatantly confirmed in NL Hydro’s new Cost of Service Study submitted to the
Public Utilities Board on November 15, 2018, where the utility has classified Muskrat
as a peaker equivalent.
Recalibrating
Muskrat LCOE Since Pre-Sanction
Nalcor’s one attempt at offering Muskrat’s LCOE needs some
fine-tuning to reflect changes to Nalcor’s failed assumptions.
First, given capital cost escalation from $5.0B to $12.7B, Nalcor’s
LCOE estimate must be scaled up to over $500/MWh (50 c/kWh). This is much worse than Lazard’s estimate for
nuclear or a gas peaker – industry analysts who’ve never heard of Muskrat would
no doubt be shocked at this result for a hydro project.
The next problem is Nalcor’s overly optimistic energy
forecast. Stan Marshall’s Nalcor, in
2016/17, officially slashed the total Island energy forecast, removing most of
the new load growth his predecessor had banked on. If Stan Marshall’s Nalcor were to offer a
revised LCOE estimate it would likely exceed $1000/MWh ($1.00/kWh). That’s nearly 10 times that of a nuclear
plant and at least 5 times that of a gas peaker.
That’s not the last issue though. Marshall’s load forecast remains unrealistically
high as presented in PlanetNL20. Given
the big cost increases about to be hurled on ratepayers, those who can
dramatically cut their seasonal electric heating usage through substitution
will cause a significant drop in total energy sales. Those who can’t afford to go the substitution
route are condemned to energy poverty. This
troubling socio-economic inequality, facilitated by Nalcor and Government’s
refusal to sponsor conservation, creates a scenario where some limited usage of
Muskrat energy could remain necessary.
Should the long term sustained usage of Muskrat energy on
the Island be no more than 750 GWh, the LCOE is likely $2000/MWh ($2.00/kWh) or
$3000/kWh ($3.00/kWh) if requirements fall to 500 GWh.
At next year’s Muskrat rate mitigation hearings at the
Public Utilities Board, Nalcor will presumably be once more asked to formally present
LCOE costs to the public. Despite
efforts to keep such numbers very quiet, it’s apparent that Marshall and
Premier Dwight Ball already understand the situation. They have appealed to ratepayers to not
abandon electric heat and are encouraging more electric heating on the island,
worsening the seasonality problems that spawned Muskrat in the first place. Even in the unlikely chance Marshall’s energy
forecast could be realized, the best-case $1000/MWh supply cost is a disastrous
outcome when other Provinces are expanding their electricity supply at just $30/MWh.
Emera
LCOE – Nova Scotia Regulator Succeeds in Examining LCOE
While Nalcor and the NL Government exempted Muskrat from a
full regulatory review and approval process, Emera was required to have its
Maritime Link project approved by the Nova Scotia Utility and Review Board
(NSUARB). LCOE featured prominently in
the regulatory hearings and initially the project was rejected by the NSUARB
for not being the lowest cost option.
Based on the allotment of 980 GWh of firm supply from
Muskrat, as agreed in the 2010 Term Sheet between Nalcor and Emera, and despite
the energy being supplied by Nalcor at zero cost of energy, the Maritime Link’s
LCOE exceeded $150/MWh (15 c/kWh) and this simply was not competitive enough in
the determination of the Board. The
final decision document from the NSUARB contained the chart below where the
dotted line at the represents the rejected scenario.
The whole Muskrat project was in jeopardy until Nalcor delivered
the Energy Access Agreement, an add-on deal allowing Emera to buy 1200 GWh of
surplus power at no higher than New England wholesale auction rates as
represented by the dashed line. The
expected average LCOE of the two energy contracts, shown as the solid line in
the chart, was then under $100/MWh (10 c/kWh), an improvement that delivered NSUARB
approval.
Since then, two additional factors have lowered Emera’s
likely cost. First, New England energy
prices have fallen considerably thanks to the effect of increased wind
penetration renewables and effective conservation efforts in this key US
market. Second, due to falling demand at
home and diminishing export prospects, Nalcor will have way more surplus energy
to offer. Emera’s LCOE could easily fall
to $80/MWh (8 c/kWh) or less – a level that competes very favourably with
coal-fired plants in NS and will result in rate stability and potential rate reduction
for Nova Scotia ratepayers.
While Emera’s LCOE goes from good to better, the LCOE of
Muskrat energy sold to NL Hydro for Island ratepayers will be at least 10-20
times higher.
What if
the PUB had Been Allowed to Decide on Sanction?
The initial rejection by the NSUARB justifies concerns of
critics who decried Government’s refusal to allow the PUB to do a full and
proper review of Muskrat. Surely the PUB
would have demanded an LCOE analysis and clued in to how uncompetitive and
undesirable Muskrat costs were. If
$150/MWh was too much for the NSUARB, then surely Nalcor’s estimate of $208/MWh
using the preliminary DG2 estimates showed Muskrat to be a rather poor value
project. Had updated DG3 estimates been prepared,
the revised LCOE would have been close to $300/MWh.
The PUB would also compare Holyrood’s marginal cost of
operation to the Muskrat LCOE. In many
jurisdictions, utilities are closing fossil fuel plants because their fuel cost
per unit energy exceeds the all-in LCOE of new generation options. Even in the years of very high oil prices, Holyrood
cost no more than $200/MWh (20 c/kWh).
Now that is a very bad number by itself that deserved action, but the
right action couldn’t possibly be to replace Holyrood with a project that would
cost significantly more.
It is only logical to assume the PUB would have directed
Nalcor to devise a strategy to lower the average cost of energy production, not
increase it. Unfortunately, the PUB was
not allowed an opportunity to do so.
The Muskrat Inquiry called an expert witness in utility
regulatory process, Dr. Guy Holburn, who not surprisingly gave Government and
Nalcor an overwhelmingly negative grade for not allowing best practices in
utility regulation to be followed as seen in the graphic below summarizing his
presentation. Nova Scotia and NSUARB,
however, received an excellent grade.
Had the regulatory review process been allowed to occur,
Muskrat’s LCOE would have been just one of many red flag issues. Independent consultants hired by the PUB
would surely have taken issue with the massively overestimated energy forecast
as well. Exploration of just these two
issues would have shelved Muskrat permanently.
An
Expert Witness in Energy Planning is Needed for the Inquiry
Inquiry expert witnesses have offered exceptional insight
but none have yet been engaged in the energy planning field. The near-expert testimony of Philip Raphals
and Jim Feehan should make the Commission keenly aware that Nalcor’s strictly
internal planning was heavily biased toward justifying Muskrat and impairing
the viability of alternatives. The
Commission needs to go the next step.
In brief, the Commission should engage an independent firm expert
in supporting utilities and regulators in long-range forecasting, conservation
and generation planning with instruction to evaluate the Isolated Island System
and to recommend and rank strategies to achieve reliable least cost supply of
electricity. Secondly, the firm should
be directed to provide a critique of the two-alternative CPW analysis.
Only by having an independently prepared assessment will the
Commission have a baseline to determine the magnitude of Nalcor’s technical
error. While it would have been useful
to have this presented prior to this point in proceedings, it is by no means
too late.
The effort is simultaneously valuable to the Public
Utilities Board and the cost may be more appropriately borne by the PUB. The Board is likewise improperly informed
moving forward without this analysis.
Potentially the Commission and the Board can jointly develop the Terms
of Reference so that it fully meets the need of both.
Government – or any future Government – should also be
keenly interested to obtain clarity on what the issues and opportunities truly
were in 2012. Democracy and governance
will be poorly served if an independent expert technical analysis should never
be completed. Government also needs to
realize it needs a solid backup energy plan as Muskrat hasn’t finished creating havoc yet – not by a longshot.