Cabinet will make final decision on market options for Lower Churchill
The province’s energy corporation has laid out a possible development scenario for the Lower Churchill.
© — Photo courtesy Nalcor Energy
The province hopes to develop Muskrat Falls as part of the potential Lower Churchill hydro megaproject.
The information is contained in filings to an environmental panel examining the potential megaproject.
But Nalcor Energy CEO Ed Martin cautions that doesn’t mean a decision has been made on how to best attempt development of the resource.
“There’s nothing in here saying we’re locked down,” Martin told The Telegram in an interview.
“We can’t say this is the most likely scenario … this is a scenario.”
That scenario would see Nalcor focus its long-term power purchase commitment efforts on Canada.
Long-term power deals in the U.S. would not be required for the project to get the green light.
The focus south of the border would instead be on playing the market for short-term sales.
The option would always be there to sign a long-term deal later.
Martin said the environmental panel asked for Nalcor to lay out a scenario proving the viability of the megaproject.
The one chosen is on the conservative side of the scale. It would see a debt-equity ratio of 70-30, and a targeted rate of return on equity of 12 per cent.
The construction cost of Gull Island and Muskrat Falls combined is tagged at $6.5 billion. That figure includes some transmission costs, to hook up with the main grid.
And Nalcor used conservative estimates on the cost of transmitting power to market through Quebec. That includes up to $3 billion in upgrades to the system and transmission tariffs of up to $200 million a year.
That transmission path is in dispute, however, with Newfoundland and Labrador accusing Quebec of obstruction. Quebec dismisses those claims.
Nalcor is currently working through various options — from conservative to risky — for the Lower Churchill, using various routes to market.
Martin said the most conservative would see the power sold at a fixed price to clients, through long-term power purchase agreements (PPAs).
PPAs would be necessary to borrow money from banks to finance the project.
The riskiest — but potentially most lucrative — would be to play the markets, Martin said. That approach could provide much better returns in the long run, but would require the government to front significant cash.
“When we land on a configuration finally — we’re not there yet, but when we do — then we’ll go to the province and say, ‘OK, how much equity is available? How much equity do you want to put into this project? Because the more equity that you put in, the more flexibility we have not to lock down long-term PPAs.’”
Ultimately, it will be cabinet’s decision on what route to take, Martin said.
Nalcor will provide the options, and some recommendations.
“They’ve got to make the call then,” Martin said. “At that point is when I’m going to lock these things down.”
In the scenario laid out for the environmental panel, the case for the Lower Churchill is “robust.”
From a generation perspective, Martin said, the project is better than its competition.
“I will tell you this — if you at the combined Lower Churchill project versus Romaine, Romaine is roughly … 35 to 40 per cent more expensive than the Churchill and Petit Mecatina would be 75 to 80 per cent more expensive. These are rough numbers.”
The Romaine is currently under construction by Hydro-Quebec. Petit Mecatina is next in the development queue. While those projects will compete with the Lower Churchill, Nalcor has identified 14,000 megawatts of installed capacity in four provinces set for shutdown by 2030.
Those provinces — Newfoundland and Labrador, Nova Scotia, New Brunswick and Ontario — are the most likely Canadian clients for new Labrador power.
Nalcor also believes there is an opportunity to displace greenhouse gas-emitting power sources.
Timelines associated with the joint federal-provincial environmental assessment panel have dragged on longer than expected.
The panel said Nalcor’s previous filings were lacking.
“(Nalcor) has failed to justify the project in energy and economic terms and has not provided an assessment of greenhouse gas emission reduction in possible export markets as required,” the panel said.
To bolster its case for the Lower Churchill, Nalcor filed hundreds of pages of documents earlier this month, providing more detailed information.
The panel will now assess those filings before deciding how to proceed.