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.
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.
Related:
THIS MUSKRAT PLAN WON'T CAUSE MAXIMUM ECONOMIC DESTRUCTION
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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!
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.
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.