Guest Post by PlanetNL
PlanetNL32: A Fair Price for Muskrat Energy Is All Ratepayers Can Afford
It is an indisputable fact that Muskrat Falls was an enormous mistake filled with stupid errors and driven by fraudulent assumptions. The biggest miscalculation of all was committed by the Province and the Government of Canada in legislating Island ratepayers to wholly pay for the project. It is high time both levels of Governments face the facts, remove the severely misguided and harmful legislation, and get on with an extensive restructuring of project financing. Island ratepayers can be billed for energy they use but only the same equitable terms as the project’s main customer, Emera, in Nova Scotia.
Muskrat is a national project with two primary markets for energy. The biggest is Emera who are contractually set to take about 50-60% of MF energy for the Nova Scotia market based. NL Hydro will take only about half as much, to offset oil-fired thermal generation at the Holyrood plant. The small balance outstanding may well be consumed within Nova Scotia by Emera to further reduce coal-fired generation, otherwise surplus energy may flow beyond to New Brunswick where generation from fossil fuels also remains significant.
The existing agreements for project costs are grossly inequitable. On the one hand, Emera and Nova Scotia ratepayers will obtain energy at a fair price approved by the Nova Scotia regulatory authority. NL Hydro’s ratepayers, on the other hand, are punitively saddled with the balance of costs, paying near ten times as much on a per KWh basis. The financial restructuring of Muskrat may alleviate nothing unless Hydro ratepayers are cut a straightforward fair deal on access to Muskrat energy.
Nova Scotia Average Cost of Muskrat Energy Sets the Fair Price
Proper regulated utility policies prevailed in Nova Scotia as Emera put forth its own project and its energy supply contracts with Nalcor before the Nova Scotia Utility and Review Board for review and approval. This stands in stark contrast to the complete run around the regulator in this province.
Emera’s primary project is the Maritime Link, built for $1.56B. With NSUARB approval, Emera, through its subsidiary Nova Scotia Power, will have its project paid for on a cost-of-service basis, inclusive of profits. The NSUARB will regularly monitor Emera’s claims and challenge the utility to operate efficiently, exactly how monopoly regulation is intended to work.
During the initial hearing before the NSUARB in 2013, Emera’s project and commercial arrangement for 980 GWh annual energy supplied at no charge from Nalcor, was deemed too high cost and not an acceptable project for NS ratepayers. Despite the free energy, the cost of the project yielded an unacceptably high average energy cost. The project was about to be denied by the NSUARB.
To save the project, a last-minute arrangement contractually committed Nalcor to offer Emera with 1200-1800 GWh of additional annual energy at no higher than New England market rates. The NSUARB observed that the average price of energy was reduced just enough to be an acceptable price and just a bit better than other alternatives. It was not a steal of a deal – it was simply fair.
As New England prices have failed to increase in the last seven years, it is apparent the blended average price of energy achieved by Emera will be about 8 c/KWh. It may even end up lower if New England market rates continue to slip and as there is more surplus energy available than the original contracts predicted thanks to the falsely exaggerated forecast for energy demand in Newfoundland. If Emera uses the entire 70% of export energy, their cost may well average out to less than 8 c/KWh.
NL Hydro Should Pay the Same Rate as Emera
As Emera submitted to a full and rigorous regulatory examination of the Maritime Link project, their average energy cost represents a substantial and valid benchmark. It is very likely the Public Utilities Board in this province may have determined a nearly identical average energy rate as the maximum fair cost for Island ratepayers had it been given the opportunity. The legitimacy of the NSUARB decision and its ultimate determination of an acceptable average price establishes an irrefutable fair price for Muskrat energy: 8 c/KWh.
NL Hydro needs Muskrat energy to replace that produced by the Holyrood Thermal Generating Station. HTGS output has been 1500 GWh or less in recent years. This is barely 30% of Muskrat’s expected 4600 GWh total annual energy output. There is virtually no chance for growth, some chance for holding even at that level, and probably a good chance some decline may happen (leading to the opportunity for greater export and possible use within Nova Scotia, further improving their average price of energy).
PlanetNL31 made the case that Muskrat should become an unregulated Government Business Enterprise (GBE) and that it should sell energy to Hydro at the same price as the project’s main customer, Emera. That post also made clear the precedent: NL Hydro has been purchasing energy from Churchill Falls, a GBE that exists mainly for the purpose of exporting energy. Likewise, the original plans for Gull Island and Muskrat Falls were exactly the same until legislation enacted immediately after the sanction of Muskrat forced a strange irrational exception to a wholly rational practice.
It is entirely appropriate that Hydro, as the secondary customer, should pay the same energy cost as the average price of energy exported to Emera, the primary customer. For this analysis, 8 c/KWh is that presumed average energy cost. Assuming 1500 GWh of energy purchases, the cost to Hydro and their ratepayers will be $120M. This amount is all that should have ever been assumed available from Island ratepayers – a pittance compared to the $730M/yr and growing that Nalcor indicates is needed for Muskrat.
Backup Generation – A New Ratepayer Cost
While Muskrat was originally promised by Nalcor to be a substitute for the HTGS, this was at best a half-truth. For obvious reasons, the long transmission interconnection to the Island simply will not be nearly as reliable as the HTGS located on the doorstep of the primary system load on the Northeast Avalon. The risk of losing Muskrat energy for days or weeks is simply too high to not have a backup plant available.
In an ongoing reliability hearing before the PUB, NL Hydro has submitted a range of alternatives for providing that backup function.
The only option that truly meets all reliability criteria is the addition of Combustion Turbines (CT) as near to the Northeast Avalon as possible. Specifically, they propose 4 CTs of 66MW capacity each, to be used alongside the 121MW CT built on the Holyrood site a few years back. The combined capacity of 385MW is less than the 470MW of the HTGS. Presumably, the downsizing is yet another quiet acknowledgement that there is no load growth expected on the Island.
Hydro’s capital cost estimate for the CT project is $664M but they have yet to provide an analysis of the annual plant costs. There will be substantial financing costs. There will certainly need to be maintenance and operations departments and a variety of supporting service contracts. This new plant must also have enough fuel on hand for a potential major winter outage, fuel that will be burned off each spring regardless, to be replaced with fresh prior to the next winter. For this post, the estimated total annualized cost, including all financing, O&M, and fuel, is expected to be no less than $90M.
By the way, this inevitable requirement for backup generation is completely missing from the wildly optimistic and not to be trusted Liberal and Conservative rate mitigation plans (nice job, guys).
Net Change In NL Hydro Costs – Virtually Nil
The proposed Muskrat energy cost plus the new CT backup will add up to $210M in new annual revenue requirements to NL Hydro. Once these assets are in place, HTGS generation will stop permanently and there will be offsetting cost reductions.
Holyrood fuel costs are highly variable ranging from about $120M to $200M in recent years. The peak oil years may never be repeated, therefore the middle of this range at $160M is a reasonable estimate. Thermal plant operations and maintenance should see a reduction of $40M.
A looming cost, however, is the write-off of plant assets being decommissioned prior to their end of useful life. This depreciation charge, spread over many years rather than as a one-time hit, is likely to be about $10M annually.
Added up, the net reduction of Holyrood thermal plant costs will be about $190M annually.
This is slightly less than the estimate for the new charges for Muskrat energy and the backup CTs and would require a quarter of a cent or more of rate increase. Given the range of possible error involved in these preliminary estimates, it may be best to call it a wash.
Island Rates Will Be Stable
In the Liberal rate mitigation mantra, there is only one point made worth listening to. They advise electricity rates cannot be impacted by Muskrat – they want the changeover to be invisible as far as consumer rates are concerned. Presumably, they did some homework, despite so many glaring indications otherwise, and they understand that this is all ratepayers can afford.
This is the only element of their plan that makes sense. A significant rate hike will simply cause energy sales to decrease making it impossible to achieve higher revenue collection. As rates have gone up by 25% in recent years and energy sales growth has flatlined, there is considerable reason to believe rates are already at their breaking point. In the worst case, a plan to increase rates would trigger a death spiral where rates and revenue move dramatically opposite to each other. This would do irreversible and immense financial damage to ratepayers, the utilities, and the Province.
The last rate adjustment by NL Hydro in July 2020 is barely one-quarter of a cent below the Liberal 13.5 c/KWh target (the fixed monthly billing charge is blended into the actual energy charge to determine the effective overall rate). As NL Hydro will still have regular rate increases every year associated with their constant capital work, the 13.5 c/KWh rate target is likely to be exceeded before the end of this year. By the time Muskrat is on-line and Holyrood decommissioned in 2022 or more likely 2023, rates would be well past 14 c/KWh.
There is simply no margin of error that could see NL Hydro paying appreciably more than the (wholesale) 8 c/KWh recommended here.
The Better Path Not Taken
The proposed rate for Muskrat energy is not the best deal ratepayers could have had. Opportunities for conservation and demand management and variable rate design were the easiest and least cost alternatives available. Those actions would have reduced energy requirements and led to the phasing out of the Holyrood plant with the highly probable outcome of lower average consumer rates. There would have been no Muskrat boondoggle and a sharply reduced requirement for new generation and backup equipment. Nalcor and the Province, with the blessing of the Federal Government, conspired to prevent that far better outcome.
An excellent example of how to implement these programs was not far away either. Nova Scotia – yes, them again – started Efficiency NS as an independent corporation in 2008 and report having achieved $180M in annual energy savings for customers in 2018 alone. That kind of achievement gives confidence to the belief that Holyrood could well have been shut down by now had this path been chosen.
Some regulatory jurisdictions have set a precedent in disallowing project costs where a utility is discovered to have acted imprudently to build a project by withholding information or misconstruing the viability of better alternatives. In those instances, regulators have provided the utility with only the revenue that the best option would have provided, leaving the utility to substantially write-off their asset with reduced profit or substantial losses. The case of Muskrat clearly fits this model of deliberate deception. If only the PUB could freely rule on it!
The problem is that the GNL owns Nalcor and NL Hydro, GNL legislated the PUB completely out of the way, and GNL legislated that Hydro’s Island ratepayers must pay for Muskrat. GNL is totally central to the problem – past, present and future. Since the Liberal party assumed power in 2015, it has had several years to do something constructive yet it has done absolutely nothing other than float rate mitigation as party campaign propaganda in 2019-20. Ominously, no party is even bothering to rehash rate mitigation during the current election campaign so far. It looks more and more likely that about a year from now, the PUB will be compelled to oversee NL Hydro’s calculation to roughly double electricity rates on the Island.
GNL has choices to limit the damage and they begin by reversing the major mistakes of the past. During recent pre-election verbal jousting, Liberal Cabinet Minister Andrew Parsons responded to jabs of corruption from Progressive Conservative party leader Ches Crosbie by referencing Muskrat Falls as “the biggest fraud perpetrated on the people.” This acknowledged fact needs not just be said, it needs to be backed up by legislative action.
Upon election, the next iteration of GNL must strike down the fraudulent legislation that still improperly holds innocent ratepayers responsible for the full project costs. GNL must also strike down corrupt legislation that restricts the full and proper authority of the PUB, otherwise the same disaster could repeat itself. They must also act to make Muskrat an unregulated GBE that will sell energy to NL Hydro at the same fair market price as the main customer, Emera.
Fairness is supposed to be at the heart of politics and its easy to see smart decisions are there for the taking. If the sleepwalking politicians should awake from their slumber before it is too late, will they have the sense to do the right thing? The election campaign so far indicates not a chance. Ratepayers beware.