Muskrat Falls: increased risk and opportunity

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By Gordon L. Weil
The recent announcement that the cost of Muskrat Falls has increased means ratepayers in Newfoundland and Labrador will face higher power bills.

This latest news about increased cost emphasizes the risks imposed on electric customers in Newfoundland and Labrador. However, it also makes adopting measures to mitigate costs and reduce risks look even more attractive.

Muskrat Falls faced strong resistance at the outset, but there is now little doubt about its ultimate creation. At this point, the priority should be developing strategies to mitigate identifiable risks while assuring potential economic benefits.

As much as Muskrat Falls is a pure Nalcor project, it can offer benefits to Atlantic Canada as well as to the province. This can be a case of a new application of the saying, “a rising tide lifts all boats.”

Connecting Muskrat Falls to the rest of Atlantic Canada in addition to the island of Newfoundland could produce fair electric rates, assured revenues to Nalcor for excess power and increased reliability throughout the region.

That’s the result of the project involving not only a new, renewable generating resource, but also extensive and well-located additions to the regional transmission grid.

If the region were to create a “power pool,” a resource-sharing arrangement in which no utility cedes ownership of its assets, but all participants use the lowest-cost available energy each hour, all can achieve savings for customers.

Unlike an energy market, a power pool uses generators based on their actual energy cost, not on a price set by profit seekers. For the owner of a hydro resource having no energy costs, like Muskrat Falls, an artificial price is set to ensure its steady use. That results in solid rewards for the owner.

What’s more, all participants get to share in a savings fund that reflects the difference between the pool’s operations and the costs that would have existed in its absence.

That sounds a bit complicated, but it works with the support of a small staff. In New England, it was used for more than 30 years before the region went to a market system.

To produce the most useful benefits, the savings need to be passed back to customers. And the system encourages conservation, because savings are reduced as generators with more expensive fuels are put into service.

In a power pool, Muskrat Falls could earn substantial and steady revenues, but they would have to be credited to customer costs if the project’s overall bill were to be kept down.

Does a utility lose in a power pool? No, because it recovers the capital costs of generation and transmission, including a profit margin, from its customers, just as before. And it alone determines what generators to commit to the pool.

With or without a power pool, generators can be used regionally to increase the reliability of all systems. While a single utility can meet requirements for maintaining reliable service, a go-it-alone approach can unnecessarily raise costs.

A reliable electric system results from the availability and deliverability of power from units held in reserve. At a minimum, the reserves have to be sufficient to compensate immediately for the loss of the largest generator.

When systems are interconnected, reserves can be shared on a multi-utility basis, treating all as if they were a single system for reliability purposes. A single control centre makes sure power is moved where it is needed to maintain the reliability of all systems.

Maintaining reliability has a higher priority than economic decisions about the generators to be used at any time. Connected utilities in North America are required to ensure reliability.

With Muskrat Falls on the Newfoundland and Labrador grid, it will contribute to improved service in the province. But it will be a single, large supplier, requiring substantial backup. A regional approach to reliability could both benefit N.L. and allow it to help others.

The N.L. government and regulators could start now working on the development of these methods of improving the economics and operations of the electric system when Muskrat Falls enters into service.

And Nalcor itself could take the initiative to relaunch regional discussions on electricity co-operation that could benefit all players.

Muskrat Falls will be a fact of life in the electric sector. Its greatest value may be in the role it can play in tapping regional benefits for the province and in promoting a regional power management system that will ensure savings for customers and promote systems better able to keep the lights on.

Gordon L. Weil is senior fellow in electricity policy at the Atlantic Institute for Market Studies. A former public advocate and director of the Office of Energy for the State of Maine, he holds a PhD in public law and government from Columbia

University, and lives in Harpswell, Me.

Organizations: Atlantic Institute for Market Studies, Office of Energy

Geographic location: Muskrat Falls, Newfoundland and Labrador, Atlantic Canada Island of Newfoundland New England North America Maine Harpswell, Me.

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Recent comments

  • Nichol
    July 21, 2014 - 08:38

    In Canada, there are several so called power pools. They function in a variety of ways to ensure participating utilities are able to exchange power on a timely and fair basis. In Alberta, for example , the pool functions solely as an exchange, processing bids and takes. The Alberta Energy Systems Operator actually operates the grid. The AESO has some 175 members, who actually compete in the market. It is all controlled by the Alberta Transmissions Administrator, and tariffs must be applied for at the Alberta Electric Utilities Board. Other Jurisdictions like the North West PowerPool has members on both sides of the Canada US border. Some allow feed in tariffs, some do not. In Canada, Ontario allows feed in tariffs as do some other Provinces. Our Provincial Government has legislated that there will be no competition for Nalcor in NL, and as well has legislated that ALL costs of the project with the exception of the Maritime Link are to be paid by the NL ratepayers. The agreement with Emera, the NS participant ensures they will receive power at market prices, which are defined as wholesale prices at the NE US hubs, which are target markets for 40% of MF output. This virtually guarantees subsidized rates for Emera and any export sales (of which there are none known). MF is an isolated, high cost project, which suffers from fundamental flaws in concept and particularly in timing. It would be very difficult to attract other utilities who would participate in a pooling arrangement with Nalcor. The Public Utilities Board of NL has been completely removed from participating in any part of the MF process by the Government. MF rates are to be set by 'Cabinet'. This is a draconian hold on the whole MF project by the strange Government of a tiny population in NL, that focused on little else. With electricity surpluses in Quebec, Ontario and other Provinces, expected to last into 2018, the future does not look bright for MF, a project with a relatively small output of 824MW and such a very high cost (at least $8.5B).There will be no line up at our door for pooling arrangements for MF power....at least that, you can take to the bank.

  • Maggy Carter
    July 19, 2014 - 16:41

    There is no doubt Mr. Weil is a competent authority on electrical power generation and transmission. But as this and previous articles demonstrate, his comments on Muskrat are biased. Weil works for the Atlantic Institute for Market Studies (AIMS), an extreme right wing organization. Ultra conservative think tanks like AIMS can usually be relied upon to rail against fiscal irresponsibility and, more especially, against public sector involvement in areas normally reserved for private investment. But Weil makes an exception for this government's decision to go it alone on Muskrat - one, because it is a Conservative as opposed to a Liberal or NDP government, and two, because although Muskrat is extremely damaging to Newfoundland's fiscal integrity and prejudicial to the interests of its electric consumers, it is quite advantageous to the Maritime provinces. NL's token members on the AIMS board of directors would disagree, but this is really only a Maritime provinces organization. Weil claims that among the benefits of Muskrat and the Maritime Link is that they will 'produce fair electric rates'. Fair for whom? Certainly not the residents of NL who - despite being owners of the resource - will pay vastly higher rates for Muskrat power than will Maritimers. A second benefit according to Weil is that it will provide 'assured revenues to NALCOR for excess power'. It would be more apt to say that it will assure power for the Maritimes at rates ridiculously below the cost of generating it, and it will assure export losses to NALCOR for the next fifty years that the NL consumer will be expected to make up for. Thirdly, Weil sees 'increased reliability throughout the region'. Again, the only jurisdiction that will see an increase in reliability because of Muskrat and the Link will be the Maritimes. A major block of the Island's power that, until now, has been generated right here at the point of consumption (i.e. - the Northeast Avalon) will now be sourced 1700 km further away. By any definition that represents a diminution of reliability. The truth is that while decommissioning of Holyrood was touted as a major benefit offsetting the costs of Muskrat - that will never happen. In the aftermath of DarkNL and the ousting of a premier who shrugged off the importance of electrical reliability, the smoke signals all point to a total refurbishment of Holyrood as backup in the event of a transmission failure from Labrador. (Within that backup arrangement, the needs of the Maritimes will take precedence.) The Isolated Island option and the Labrador Intertie option presented to the PUB and to the Newfoundland public will ultimately be shown to have been a sales gimmick - something more befitting a carnival barker. Instead of those either/or scenarios, the ratepayers of this province will find themselves paying for both. But Weil is not wrong about the benefits to the Maritimes. Soon they will be able to take a refreshing dip in our ‘energy pool’, sit back and relax, and - as Quebecers have been doing since the sixties – bask in the sheer ignorance of the Newfoundlanders who made it all possible.