Monday, 3 December 2018


PlanetNL21: What the Isolated Island Option Could Have Been

In deciding to proceed with Muskrat Falls, Nalcor and Government could not see the low-cost alternative staring them in the face that was available to eliminate Holyrood and keep electricity rates stable and low.  
First, they could not identify that the Isolated Island System had no load-growth potential.  
Second, they would not recognize that there was great inefficiency in allowing high seasonal electric heating requirements to persist.  
Third, they resisted changing consumer rates to include marginal pricing that would sell Holyrood energy for what it cost to produce.  

Fourth, they refused to develop a full-scale Conservation and Demand Management (CDM) Program that would tackle the core problem of excessive electric resistance heating.

The proponents of Muskrat Falls not only denied these policies were worthwhile, they promoted and continue to do the exact opposite even as their plan is proving disastrous.  
This post shall review the alternative 4-step plan for a trim and efficient Isolated Island alternative that should have been developed.  A 10-year CDM program would have phased out the Holyrood Thermal Generating Station, likely avoided construction of new generation capacity, and delivered consistently low and stable rates with negligible capital risk.  
Related to this Post:

Step 1 – Get the Long Term Energy Forecast Right
This section is very brief given the analysis provided in the last post, PlanetNL20.  From that post, a strong case can be made that the Island peak energy requirements were in the past and the future trend was that of slow and steady decline.  There simply was no future load growth to be met.  The only justifiable goal was to eliminate the demand for Holyrood energy as it is a terribly inefficient plant and a lingering environmental threat. 

Absent local load growth, overly ambitious thoughts of an export-based project via the Maritime route would not have see the light of day.  The false assumption of load growth may be the most critical technical error that enabled Muskrat’s sanction (among many).

Step 2 – Identify and Address the Inefficient Seasonal Energy Problem
Most utilities try to avoid large seasonal swings that cause them to add assets that often sit idle.  When the seasonal demand is met by a high cost fuel, and in the case of Holyrood at half the efficiency of more modern thermal plants, ratepayers are especially poorly served.

While Holyrood delivers barely 20% of total IIS energy, it devours nearly 50% of Hydro’s total required revenue, mostly for fuel.  If demand for Holyrood energy could be carved out, ratepayers could enjoy potentially lower rates.  They’d also use on average 20% less energy, saving on their bills that way too.  
The seasonality problem is easy to see in the chart below, as is the fact that Holyrood thermal energy is strictly a seasonal need. 

The culprit is electric resistance heating which is used as the primary heating source in over 60% of both residential and commercial buildings.  Widespread substitution of more efficient electric options or switching off electric altogether has the potential to eliminate thermal generation from the existing supply mix.
A spreadsheet model was developed using as the primary change factor, a 45% reduction to the seasonal energy requirements (the part above 400 GWh/month); a 10% reduction to non-seasonal energy (the part below 400 GWh) was included as a secondary induced effect.  Hydro’s existing non-thermal supply constraints are incorporated in the redistribution of annual energy shown in the chart below.
 The energy balance shown here will work within the system’s capabilities assuming sufficient load can be abated by consumers.  Historic peak demand issues (having sufficient MW of generation available to meet the highest winter peak load) is an issue presently exacerbated by resistance heating.  Peak loads on the Island spike in the morning and in the afternoon as a lot of residential electric heaters are turned on simultaneously.  Peak demand would be expected to decrease in proportion to the planned energy decrease and perhaps even more, rendering it a non-issue.  The sole policy focus would be widespread abatement of electric resistance heating. 

Step 3 – Implement Consumer Marginal Rates
The strongest policy tool to reduce the use of Holyrood energy would be too price it for what it costs.  Presently, a single blended rate in the vicinity of 10 c/kWh not only hides that the true cost of Holyrood energy is about 20 c/kWh at retail, but it unfairly results in low energy consumers subsidizing high energy consumers.  A fairer method would be to restructure rates by dividing the energy supply to separate out the thermal energy and sell it at a premium price to high energy consumers.
This approach has long been in place in many other jurisdictions and is considered fair and efficient pricing policy.  Applied locally, a low-price base energy quota (700-1000 kWh per month for residential consumers) representing non-thermal energy would ensure all customers have essential energy at the least cost to meet their necessary electricity demands other than heating.  Above the quota threshold, consumers would pay the higher price representing thermal energy use.  The policy would be properly targeted upon electric heat users and directly hold them accountable for the high cost of seasonal thermal energy production.

A 10-year program would phase in the marginal cost increase on thermal supply by small increments (i.e. 1 c/kWh year) to avoid rate shock to high energy users.  Many wouldn’t be long understanding that resistance heating is going to get very expensive and there are better alternatives.  Some consumers with easy access to wood and oil would abandon electric heat altogether; even propane heating is less costly than Holyrood generation. 

For many in the domestic and small commercial sectors, installation of electric heat pumps (mainly for new builds) and mini-splits (for retrofits) that reduce seasonal energy needs by about two-thirds would be very popular.  While energy for these high-efficiency electric heating systems would be mostly incurred at the high seasonal rate, their 3:1 efficiency would be equivalent to using resistance heating at well under 10 c/kWh.  Retaining resistance heat would become very unpopular and the 45% reduction to seasonal energy stands a very strong chance of being realized.

Step 4 – Implement a Serious CDM Program
Switching heating sources can cost many thousands of dollars but the long-term savings opportunity would prove viable for most electric-heat consumers.  Those with good financial resources can act without further incentive but less financially secure ratepayers face substantial financial hurdles that would prevent them from realizing the opportunity.  A formal CDM program offering rebates and arranging extra financial assistance for those who need it would ensure access for all and a very high level of participation.

Other provinces with successful CDM programs (NS, ON, BC) spend 25 cents per kWh of permanent load abatement but in this instance a more generous 33 c/kWh is recommended.  A 10-year program would target 150 GWh annual reductions resulting in annual program costs of $50M.  A cash flow analysis indicates that the declining average cost of generation would yield enough net cash surplus to pay for the CDM program.  The surplus will come from high energy users paying marginal pricing premiums – it is only fair they pay for their own program benefits.
Approximately two-thirds of the funding would flow to the residential sector, yielding an allowance of $2000 per electric-heated household.  Little or none should be spent on non-heating items (appliances, lighting, insulation) as these items offer far less seasonal energy abatement potential.
Not to be forgotten is that CDM programs don’t pay all the costs.  Ratepayers would incur substantial costs after rebates, likely around $1B over a 10-year program.  That cost isn’t strictly dependent on the existence of a CDM program though: with Muskrat set to drive up electricity costs, a wave of ratepayers is already acting to reduce their electricity use without the benefit of incentives.  Without a CDM program though, those who can decrease their electricity costs end up deflecting extra costs onto the poor, severely widening the inequality gap and hardship of many.  A severe energy poverty crisis is looming.

Another Key Benefit – Buying Time
If the CDM program couldn’t fully realize its targets, it could still result in a very positive outcome.  The cost of non-hydro renewable energy technology was always expected to steadily decrease, therefore it could be predicted a point in time would come where new capacity could be added with minimal rate impact.
Had the program commenced in 2013, just halfway through by now, wind and energy storage options are already as low as US 2.1 c/kWh (as quoted in PlanetNL20).  The price in 2023 to put wind and storage on the Avalon Peninsula, where it can most usefully and reliably serve the largest Island load requirement, is going to be even lower.

The next few years may have the potential to reach a point where new generation doesn’t increase rates at all.  Wind with storage delivers firm power that may not only be the least cost new generation alternative, but it could even force Hydro to think about abandoning some existing high cost non-thermal generation sites.  Any small fraction of Holyrood energy that remained in 2023 could be dealt with in similar fashion.

Emergency Backup Power – Nalcor Doesn’t Want to Talk About This
When the Holyrood plant is decommissioned, there will be a backup power concern that especially threatens the Avalon Peninsula.  New fast-response combustion turbines (CT) will be required in both the Muskrat and non-Muskrat alternatives to start up anytime Bay D’Espoir or Muskrat has a hiccup. 

In the case of Muskrat, CT capacity equal to Holyrood is needed.  Don’t be at all surprised when NL Hydro someday soon announces it must spend up to $1B on new standby CTs.  Some critics will argue Nalcor should’ve carried this cost as a part of the Muskrat project but Nalcor will argue it was going to be needed anyway.  What can’t be argued is an additional rate impact of 1-2 c/kWh awaiting ratepayers that is not included in the Muskrat rate forecasts Nalcor and Government have presented to date.  Whenever a lengthy Muskrat failure occurs, a definite possibility, fuel burn will nudge rates even higher as will the Muskrat asset repair costs.
Had CDM reduced seasonal load, a failure event wouldn’t require as much capacity and even less if some wind and storage were built on the Avalon.  In the CDM scenario, the rate impact of the smaller scale CT requirements would be close to zero as the addition of the new CTs would be offset by cost reductions upon closing Holyrood and the simultaneous scaling down of the CDM program.

A Rude Return to Reality
Rather than reducing Holyrood cost to zero, Nalcor chose to build Muskrat as a direct replacement with unfounded dreams of energy growth and export fuelling their ambition.  Even Nalcor should be rudely awakened to the fact that export income will be close to nil and Muskrat will end up costing ratepayers about three times greater than the silly-expensive Holyrood plant it will replace. 

The alternative solution proposed in this post indicates that Nalcor conducted a deceitful charade with their pre-sanction Isolated Island scenario, saddling it with fantastically misguided assumptions to ensure it would end up costlier than Muskrat.  That a realistic Isolated Island scenario could have been offered through only shrewd but fair policy was a professional travesty on the part of the utility’s leadership and callously wilful blindness of the bureaucrats and politicians who shepherded Muskrat to sanction.
Now, unlike Holyrood’s costs that could have been fully mitigated, Nalcor has ratepayers locked into a massive and binding take-or-pay contract.  The whole scheme has become an insurmountable financial mess and an ecological time-bomb besides.

Before the project is even put into service, it is becoming clearer by the day it was 100% an avoidable insanity.