Final cost of Muskrat Falls will exceed $10B, report reveals

Brian Jones bjones@thetelegram.com
Published on April 17, 2014

Nalcor Energy CEO and president Ed Martin doesn’t want to tell the public how much the Muskrat Falls hydroelectric project is over budget. You can’t blame him. The news is not good.

Here’s what Martin and Nalcor don’t want the public to know: the final cost of Muskrat Falls will exceed $10 billion.

The independent engineer’s report of the project, by MWH Americas Inc., was publicly released Tuesday. Most of the financial details are blacked out.

But connecting the dots within the report’s 175 pages allows you to calculate that the 50-year cost of Muskrat Falls will be about $10.66 billion.

At Tuesday’s news conference, Martin said the report endorses Nalcor’s work so far.

On the contrary; consider this zinger from page 167 of the report: “Reviews of Nalcor’s financial planning and projected results of operations are preliminary, conditioned by development of the LCP (Lower Churchill project). The LCP is progressing rapidly but at this juncture the financial information includes a number of unknown features, including the accuracy and degree of precision of estimated costs and cost contingencies.”

In short, Nalcor’s numbers are unreliable.

 

Going up

Nalcor has long said the construction cost of Muskrat Falls — the generating station, transmission lines and subsea cable connecting Labrador and the island — will be $6.2 billion.

(The Maritime Link — the subsea cable connecting Newfoundland and Cape Breton — will be built and paid for by Nova Scotia company Emera.)

The $6.2-billion figure is actually $7.2 billion.

“The (Decision Gate 3) construction cost estimate does not include costs of IDC (interest during construction),” the report states on page 88.

The independent engineer says interest costs during construction will be $1.002 billion.

The report says the estimates on Muskrat Falls costs are within the “recommended range of accuracy” for such a project: “-20% to +30%.”

If Muskrat Falls construction costs go 30 per cent over Nalcor’s estimates, tack another $1.86 billion onto the final price tag.

How much will it cost to run the dam after it’s built?

The independent engineer’s report says (page 104) Nalcor estimates operating and maintenance (O&M) costs of $23 million to $24.5 million per year. Total for the first 50 years: $1.18 billion.

Too low, says the independent engineer.

“We find that annual O&M costs are nearly $8,445,000, approximately 33 per cent more than those derived by Nalcor,” the report says.

Over the course of 50 years, that’s an extra $422 million. Add $1.6 billion for O&M. Not including it in the project’s cost would be like buying a car and assuming you’ll never need gas or a mechanic.

The independent engineer says Nalcor’s operating and maintenance estimates are 33 per cent off. If Nalcor’s construction estimates are similarly off, add $1.86 billion to the project’s cost (30 per cent of $6.2 billion).

So: $6.2 billion, plus $1.86 billion, plus $1 billion (interest payments), plus $1.6 billion (operating and maintenance) equals $10.66 billion.

It gets worse. The bill keeps rising.

“Nalcor advised the (independent engineer) that the financial planning for the projects does not specifically include costs for renewals and replacements in the capital or annual cost estimates.

Their opinion is that with proper design and installation and with regular and prudent maintenance following manufacturers’ recommended scheduled maintenance there should be no need to replace the equipment since its useful life will exceed the bond repayment period,” the report states (page 89).

“The IE is of the opinion, based

on experience, that funds should be provided for major replacements in the 25-30 year period with minor replacement after 10-15 years of service.”

No cost estimates are included. Instead, a table lists what will need to be replaced, and when.

We can only guess, along with Nalcor, whether the total price will push past $11 billion.

 

 Brian Jones is a desk editor at The Telegram. He can be reached at bjones@thetelegram.com