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
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.