Monday, 5 July 2021


PlanetNL38: Large Pent-Up Demand For Power in Labrador

An Alternative to Export With Greater Profit

Ready for some eye-popping news?  NL Hydro has received more than enough requests in a relatively short period, to not only sell out all Muskrat Falls energy but they also have enough demand to sell all Churchill Falls energy if they had it available.  Yes, every watt generated would go just to meeting this backlog of power requests and its all in Labrador – potentially nothing would have to flow through Hydro-Quebec.  If only this year was 2041!

This must be great news for rate mitigation then?  Not in the slightest really.  You see, all this demand is focused on solely the Labrador Interconnected System (LIS), home to the cheapest utility rates in North America.  Current rates are set so low, Government would be unwise to allow the connection of any new customer in the area.  There is more money to be made selling the power out of province.

How messed up is that?

A letter sent from NL Hydro to the Public Utilities Board in April regarding “Restriction on Load Additions on the Labrador Interconnected System” indicates that the utility has reams of connection requests from operators in the cryptocurrency industry. 

About Cryptocurrency and Blockchain Mining

Everyone has probably heard of Bitcoin by now but there are over 5000 other cryptocurrency offerings now trading.  Even major financial institutions are getting interested.  Supporting the crypto industry are power-hungry data-processing centers who compete to earn cryptocurrency by processing encrypted transactions in a format known as blockchain.  The process of solving the blockchain and securely recoding the transaction is referred to as mining.

The most successful large-scale blockchain mining companies run thousands of high-power computers in a relatively small building.  These companies are scouring the globe for cheap power and if the location has a cool climate that helps with the immense ventilation and cooling requirements for the building, that helps improve their operating margin.  The Labrador Interconnected System (LIS) ticks both those boxes.

By 2018, NL Hydro had already connected some small mining companies in Labrador and was rapidly getting more requests than it had power available.  They put a freeze on the sector because connecting just a few more of these miners would have used up all spare capacity for any other customer load growth and put overall system reliability at risk.  Hydro-Quebec and other utilities did the same.

NL Hydro’s April 2021 letter indicates that total requests, including both formal applications plus informal requests, now total 6185 MW in Labrador East and 555 MW in Labrador West.  Incredibly there is more than enough demand to fully use up both Churchill Falls and Muskrat Falls just in the Goose Bay area alone! 

NL Hydro is almost completely unable to capitalize on this demand as it presently has only 525MW available to it from Churchill Falls.  Meanwhile the main transmission lines of the LIS, 350 MW to Labrador West and 76 MW to Labrador East, are already near fully utilized serving existing customers.  A 28MW transmission system capacity upgrade to Labrador East will soon be completed using via a tie-in at the Muskrat plant but there are no known plans beyond this that may be economically developed.

What useful information can we make of this strange though interesting news?  Plenty. 

LIS Rates Are Non-Competitively Low

Most jurisdictions in North America are jealous of the rates offered by Hydro Quebec.  In all their different rate classes HQ has typically the lowest electricity prices in North America.  NL Hydro’s LIS, however, undercuts HQ by a wide margin.  For example the LIS residential rate is just 3.2 c/KWh whereas the equivalent rate paid by an HQ customer is 8 c/KWh.

For blockchain miners, HQ has created a new large-scale commercial power rate class for them charging a minimum 5.3 c/KWh (with transmission and distribution demand charges included).  Ignoring the LIS, that is quite competitive.  Prime locations for blockchain miners include Iceland and Sweden where rates are comparable, but the resources are getting thin. 

The comparable rate class in Labrador is just 1.9 c/KWh, undercutting all competitors. 

No wonder cryptocurrency operators are queuing up!   

Exporting is Better Than a New Customer Under Today’s Policy

While Labrador needs nearly all the 525MW to meet peak winter loads, there are many periods where surplus energy is available and sold by Nalcor Energy Marketing through the Hydro-Quebec transmission system.  Overall, about 2/3 of energy is used in Labrador (mostly by iron ore mining in Lab West) and 1/3 is exported.  Nalcor Energy Marketing has typically realized 4 c/KWh on export revenue, and they forecast much the same on surplus Muskrat Falls power when it becomes available. 

The export market returns double the revenue of the large commercial rate the blockchain firms want to take advantage of.  Under the existing policy, Government should prefer for NL Hydro to export all surplus energy and earn the marginal profit of 4 c/KWh.  This would maximize unregulated earnings while keeping regulated LIS costs and rates more than adequately low and stable.

By proceeding with the 28 MW capacity increase project in Labrador East, NL Hydro will not only be taking in half the revenue but they will be reducing the unregulated earnings of export sales that is needed for rate mitigation!  As usual the utility and Government prove themselves adept at making backward decisions. 

Racks of computers used for Bitcoin mining fill a room inside Genesis Mining’s Enigma facility in Iceland. Photo: Lisa Barnard
A Better Opportunity To Maximize Profit in Serving the Blockchain Mining Industry

What Government really needs to do is amend LIS rate policy.  That policy needs to close the opportunity cost relative to competing jurisdictions, namely Hydro-Quebec.  Do that first and then selling to the blockchain sector on the LIS will yield more earnings than export the energy.

Relative to the Hydro-Quebec rate of 5.3 c/KWh, NL Hydro’s present commercial offering of 1.9 c/KWh leaves a clear opportunity cost gap of 3.4 c/KWh.

At a minimum, Government should amend utility legislation to enable NL Hydro to create a specific rate class for blockchain mining that mirrors the HQ rate of 5.3 c/KWh.

But that is not all.  There is a far bigger opportunity to be exploited.  Explaining all this for the sake of 28 MW to earn an extra $8M is not the payoff. 

Build A New Industrial Sector in Labrador

Government should order NL Hydro to promptly deliver a study on the technical feasibility of selling all available Muskrat and Churchill surplus energy at the gate of the Muskrat Falls Generating Station.  At least 2 TWh of energy, both Churchill and Muskrat surplus, would be available for what would likely be the world’s largest blockchain mining center.

With a rate of 5.3 c/KWh, this sector would deliver higher marginal profit than exporting.

Exports not only have a lower price but they incur transmission losses (about 10% of the energy is lost by the time it gets to a far-away paying customer), surrender transmission fees outside the province, and they require the services of the Nalcor Energy Marketing division.  All of these expenses can be made redundant.

Whereas exporting may yield $40M gross profit after expenses, the proposed market strategy for blockchain could net $70M more.

The total surplus power available is only about 5% of the 6740 MW demand indicated in the NL Hydro letter.  While those operators were hoping for the super low price of 1.9 c/KWh, it is highly likely that more than 5% of them are willing to pay 5.3 c/KWh or perhaps even higher.  NL Hydro should organize a bidding auction to lease the available capacity at a minimum price of 5.3 c/KWh.  Offers may come in higher than that.

This concept falls into the category of unregulated utility operations – a Government Business Enterprise as discussed in PlanetNL 31 - and would not directly affect the regulated LIS in any way.  The $110M unregulated earnings would flow to Government as Dividends where they can be used for rate mitigation or deficit reduction. 

FYI - The Emera Energy Access Agreement (EAA) is also expected to generate export revenue of $60M on 1.5 TWh at market energy price and is an additional revenue stream.   The EAA obligation is another example of opportunity cost: Had this energy not been committed to Emera, it might yield $80M if sold for blockchain usage plus deliver other economic benefits.   The Government of the day committed to a strategy to look after the future opportunities of Nova Scotia ahead of those in this province. 

Is Government Capable of Processing This Information?

Government and Nalcor communications to date have focused solely on exporting surplus energy.  It appears they have no practical knowledge of the blockchain mining opportunity and how building a new industrial opportunity increases utility revenues and profits relative to exporting.

The development of a new industry also will deliver construction benefits and long-term economic growth and taxation benefits.  With exporting, all those benefits flow to another jurisdiction, likely Quebec who are trying to accomplish the same thing!  There should be many millions in other benefits that would accrue to Government revenue.  None of this should need a penny of Government subsidy to get going either.

For ratepayers and taxpayers alike, the additional revenues will also lessen the burden of Muskrat Falls complete economic failure and will assist with rate mitigation and deficit reduction.

The blockchain industry surely has risks but that can be dealt with.  If the sector completely fails in a few years time, as many pundits have claimed for years but are continually proven wrong as the industry steadily grows, there is a Plan B.  Return to selling surplus energy via export markets.

The cost of catering to this concept is virtually nothing.  The only new asset to be built would be a terminal station.  Quality proposals from credible operators may well guarantee that cost to prevent it from ever becoming stranded.

Government and NL Hydro should be acting immediately to get proposals from industry participants and determine the viability of the concept.  Those involved in the Muskrat Falls negotiations have a right to know what can be developed and how new revenues can offset some of the enormous losses arising from that project. 

Gaining Leverage With Hydro-Quebec In Advance of 2041

Should the proposed concept for a major blockchain mining industry take off in Labrador, there is yet another tremendous benefit to be realized.

Come 2041, when Hydro-Quebec’s supply contract ends at Churchill Falls, the Province will gain full control of its 65.8% share of the facility and energy production.  The additional energy surplus available in 2041 exceeds 19 TWh.

Until this blockchain opportunity came along, there appeared to be no alternative to negotiating with HQ on their terms.

If Hydro-Quebec is the only customer, they would expect offsets from the market energy price to compensate for their transmission cost, selling fees, and their own profit margin objectives.  Relative to today’s typical market price of 4 c/KWh, HQ might likely have the upper hand to bargain the price down to half that.

Alternatively, with blockchain demand lined up – many existing operators could structure their contracts and leases in other places to expire in 2041 allowing them to move to Labrador.  That market demand forces HQ to pay the same top rate or rely only on their 34.2% of the power available to them.  Heck, if the blockchain market is strong, HQ might even prefer to join in on the plan for a new industrial park at Churchill Falls. 

With blockchain rates at 5.3 c/KWh, NL Hydro’s 19 TWh of surplus energy would yield about $1.0B gross profit in 2021 dollars putting it on par with oil industry royalties with far lesser risks and environmental hazards.  Without the leverage of the blockchain business, profit on sales to a dominant Hydro-Quebec could be less than half that.

Silently ignoring the potential to double the returns on Churchill Falls would be a failure on the same scale as the creation of Muskrat Falls.  It’s time for the crowd at Confederation Building to wise up and show some leadership when a real opportunity presents itself.