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.