[Professional Blog] Only One Issue

I’ve been contemplating the Muskrat Falls deal, since it was announced in November, 2010. 

Too many aspects of it made me uneasy. What’s with giving the power to Nova Scotia, with no profit in return? How far will it go over budget, and what impact will that have on power bills? If there really is potential for sales across the gulf, why not build Gull Island, and a transmission line that can handle it?

But the biggest question: why build a project that is worse than the original Churchill Falls deal, from the 1960s?

People scoff when I say this, but it’s true. For all its failures, Churchill Falls is not costing us money out of pocket. It was paid for by investors, and is earning $50 million a year for us. Yeah, that’s chickenfeed, compared to what Hydro Quebec is making, but this is called an opportunity cost. It’s money we should be making, but aren’t. 

Muskrat Falls is very different. It is being financed entirely by the people of Newfoundland and Labrador. If it goes over budget – as it inevitably will – we’re on the hook. Our rates go up. There are no customers for the power outside the province, except Nova Scotia, which gets it free. So we pay for everything, and assume all the risk.

Was I correct in having these reservations? I’m no expert, but all of the information at both Nalcor and the provincial government web sites offer “facts” without substantiation. Frankly, their bland, “trust us” reassurances have not made me feel any better. 

Over the last several months, I have spoken with a handful of well-connected, knowledgeable professionals with experience in resource deals. All are either too close to this project, or the Dunderdale government, to talk on the record. But they gave me enough perspective and opinion, supported in most cases by references, to convince me that Muskrat Falls is a bad deal. Frankly, I think it is lunacy. We need to jam on the brakes and do a complete re-think.

Let’s start with external markets. Muskrat Falls is being touted as a breakthrough because we will have that transmission line to Nova Scotia, which ostensibly opens up new markets for power sales into New England and New York.

Not likely. There is no obvious market in the U.S., where shale gas is coming on strong and is likely to supply the eastern seaboard with cheap power for the next hundred years. Yes, we’ll get the power as far as Nova Scotia by giving it away for free. But where does it go from there? We don’t just plug into the wall at the U.S. border. We need transmission lines, and there are none in New England capable of carrying this power. (Just one 345,000 volt line crossing into New Brunswick, and a high voltage DC line much further east, crossing from New York into Ontario.) A new line needs to be built, and it is extremely difficult to construct large transmission lines across the U.S., where so much valuable land is privately owned. And even if you did, you’d be taking power to a place where they can buy it cheaper than we can sell it at the generating station. 

Then there are the projected power requirements on the island, another key driver of Muskrat Falls. Even Nalcor’s own, earlier documents show power usage on the island has been flat since the 1980s. Newfoundland Hydro has been running around with this load forecast for years now. In 1998, when Brian Tobin was attempting to do his deal, they had the same load forecast then; that power usage was going to grow by up to 50 percent. However, it wasn’t true then – power consumption has been flat or declining ever since – and it isn’t now. 

Then there’s the part about hedging your bets and cutting your losses. If you listen carefully to Prime Minister Stephen Harper’s “commitments” on a loan guarantee, you realize that we will end up carrying all the risk. During the federal election, Harper promised a loan guarantee or “equivalent financial support.” In other words, they might calculate the value of a loan guarantee and write a cheque in that amount, without actually providing the guarantee. “Here’s the money. Good luck with your project!” That’s certainly how it sounds. So the people of this province are left holding the bag if the project defaults. No one is even debating that point right now, and it’s a critical one.

There has been one truly independent review of Muskrat Falls, by the federal-provincial CEAA Panel. The Navigant review is worthless - it begins with the disclaimer, that they accept at face value everything they’ve been told by Nalcor. In other words, if it’s true that you have a huge growth in demand, and no alternatives, then it makes sense to do this. To me, that’s not truly independent – the data they analyzed was spoon-fed by Nalcor. The only independent group to review this project, the CEAA panel, said no.

Which us brings us to the matter of alternative energy sources, a key point made by the CEAA Panel. I am not convinced that the demand forecast will unfold as Nalcor says, but even if it did, there are more viable options than a $6 billion megaproject in Labrador. 

The Navigant report concluded that it wasn’t feasible to bring liquefied natural gas (LNG) to Holyrood. But who said anything about LNG? It’s a red herring. In my research, I’ve been told LNG has nothing to do with this; that natural gas can be brought ashore in a pipeline for much less than Muskrat Falls will cost. A 2005 study, by Dr. Stephen Bruneau, P.Eng, found that there is enough natural gas offshore to fuel a Holyrood-equivalent plant at full capacity, 365 days a year, for more than 100 years. And it could be built for less than $500 million, in 2005 dollars. This is real. It is not pie-in-the-sky. Read the Bruneau study for yourself, by searching for ‘Bruneau natural gas study’. 

The only thing preventing natural gas development is the Government of Newfoundland and Labrador, and its inexplicable failure to develop a natural gas royalty regime, 26 years after the Atlantic Accord was signed. A royalty regime simply sets the price for a thousand cubic feet of natural gas. It is not that difficult to develop – just reverse-engineer the question. Calculate what it costs to remove the gas, and arrive at a rate that makes it feasible. Because I have been told it is very feasible.

Wind power is another alternative not given serious consideration by Nalcor, especially as a component in a grid energy storage system. In a nutshell, wind power is used to fuel a pumping system that lifts water up to a reservoir. The water becomes stored energy, released as necessary during periods of peak demand. This is not pie-in-the-sky either – there are numerous pumped-storage hydroelectric systems in operation around the world, generating a combined total of more than 100 gigawatts of electric power. There is the possibility – subject to an engineering review – that the reservoir at Bay d’Espoir could be expanded, and turbines upgraded, to generate additional power. There may well be no costs for the wind turbine component, since many wind farms are private operators who build at their expense and sell the power to the customer – Nalcor, in this case.

Finally, I have serious concerns about one of Nalcor’s key assumptions, that the price of oil is going to go through the roof. Perhaps it will. It’s probably safe to say it will increase. But the price of oil can be erratic and, as we’ve seen, subject to the whims of global events – especially economic downturns. (Do a search for ‘oil price long term forecast,’ and see if you can find a consensus view on this.) We seem to be rolling over and signing up to a high energy cost environment, while other regimes that compete with us for businesses and residents may well have lower cost energy. If that disparity is a dramatic one, it could spell economic hard times for this province, provoking a gradual drain of businesses and people to other jurisdictions, leaving a shrinking population base to pay a very high electric bill.

Now, it’s not all bad. I spoke to one person, someone I respect highly and whose opinion I value, who said that Muskrat Falls is a necessary deal; that it will provide much needed economic development opportunities, a new source of revenue through power sales to other markets, and a source of energy on the island that will be cost-competitive as energy costs rise globally. I didn’t have an opportunity to probe these questions – it was a brief conversation – but if the project proceeds, I will take some consolation in those words.

But that’s a big “if”. Muskrat Falls is by no means a sure thing, despite the Dunderdale Government’s dogged determination to see it through. The province has already dismissed the CEAA Panel’s criticisms. However, the federal government has to sign off on this project too. And my guess is, they won’t. I have heard that this is by no means a done deal, in the corridors of power in Ottawa.

If the feds stand by the CEAA findings, and refuse to grant environmental approval, it will effectively kill the project. This, of course, will be played to maximum fed-bashing effect by the provincial government, who will cry that Harper is blocking our “legitimate aspirations”. But a lot of people in this province will secretly be wiping their brows in relief.

Among the critics of this project are two PC stalwarts: Dr. John Collins, a former finance minister in the Peckford Government, and Cabot Martin, a well-known Tory with experience in resource developments. Dr. Collins says the project makes no economic sense, and Martin says natural gas is the way to go. They wouldn’t dare slam their own party’s project if they didn’t believe, strongly and sincerely, that Muskrat Falls is a bad deal. 

To summarize, there is no market for Muskrat Falls power in the United States. So why are we giving it to Nova Scotia? There is not sufficient demand on the island for the power and, even if there is, alternatives have not been properly explored. And there is no clear loan guarantee so we, the people of Newfoundland and Labrador, may be assuming all the risk.

There are a lot of issues at play, a lot of noise about who is best suited to lead this province, but there is only one issue that truly deserves our attention in this election: Muskrat Falls.

We should all vote against it.

References

For further reading, I recommend the CEAA independent assessment report, available here: 

http://www.env.gov.nl.ca/env/env_assessment/projects/Y2010/1305/index.html

Note this point, on page 30:

“Island load growth was largely related to the shift to electric baseboard heating, which is inefficient when burning fossil fuels to make electricity. Many regions use explicit policy incentives to discourage electric heating.”

In other words, the load forecast for the island is based on new houses being built with electric heat – we otherwise have a flat demand history.

Also, pay particular attention to pages 34 and 35, where you will find this:

RECOMMENDATION 4.2 Independent analysis of alternatives to meeting domestic demand

The Panel recommends that, before governments make their decision on the Project, the Government of Newfoundland and Labrador and Nalcor commission an independent analysis to address the question “What would be the best way to meet domestic demand under the ‘No Project‘ option, including the possibility of a Labrador-Island interconnection no later than 2041 to access Churchill Falls power at that time, or earlier, based on available recall?” The analysis should address the following considerations:

- why Nalcor’s least cost alternative to meet domestic demand to 2067 does not include Churchill Falls power which would be available in large quantities from 2041, or any recall power in excess of Labrador’s needs prior to that date, especially since both would be available at near zero generation cost (recognizing that there would be transmission costs involved);

- the use of Gull Island power when and if it becomes available since it has a lower per unit generation cost than Muskrat Falls;

- the extent to which Nalcor’s analysis looked only at current technology and systems versus factoring in developing technology;

- a review of Nalcor’s assumptions regarding the price of oil till 2067, since the analysis provided was particularly sensitive to this variable;

- a review of Nalcor’s estimates of domestic demand growth (including the various projections to 2027 in the EIS (2007, 2008, 2009 and the 0.8 percent annual growth to 2067 provided at the hearing);

- Nalcor’s assumptions and analysis with respect to demand management programs (compare Nalcor’s conservative targets to targets and objectives of similar programs in other jurisdictions and consider the specific recommendations, including the use of incentives to curtail electric base board heating, from Helios Corporation, among others);

- the suggestion made by the Helios Corporation that an 800 MW wind farm on the Avalon Peninsula would be equivalent to Muskrat Falls in terms of supplying domestic needs, could be constructed with a capital cost of $2.5 billion, and would have an annual operating cost of $50 million and a levelized cost of power of 7.5 cents per kilowatt-hour;

- whether natural gas could be a lower cost option for Holyrood than oil; and

- potential for renewable energy sources

To summarize, the CEAA report is calling for more independent analysis of potential energy alternatives, among other things. But the Navigant report dismissed natural gas out of hand, and essentially used data supplied by Nalcor at face value to reach its conclusions. And note the question about oil price assumptions, a key variable in Nalcor’s justification of the project.

This is the press release issued by the Liberal Government of Brian Tobin, announcing the tentative hydro deal with Quebec:

http://www.releases.gov.nl.ca/releases/1998/exec/0309n05.htm

It contains this statement, which predicts a huge forecast need for power on the island of Newfoundland. This need hasn’t materialized and demand has been flat for decades:

"Premier Tobin also said that these developments between Newfoundland and Labrador Hydro and Hydro-Québec include the reservation of up to 1000 megawatts to meet the power requirements of Newfoundland and Labrador. This assures that the long term power needs of the province will be met."