FACT: Oil prices were forecasted out 56 years into the future, not just 50, as part of the Muskrat Falls project review.
The assessments of an “isolated” island option for power versus an “interconnected” (Muskrat Falls power) option for Newfoundland and Labrador — a major decision for public investment — in large part considered what option was expected to be less expensive.
In comparing the two options in the long run, the price of oil played an important role.
Oil price was more significant for the “isolated” case, under which Newfoundland and Labrador would continue to rely heavily on thermal power (mailouts to every home in the province noted the figure of as much as “18,000 barrels a day” used at the Holyrood plant), in addition to hydro power and incremental additions of wind power.
In November 2012, the Department of Natural Resources issued a background document on the Holyrood thermal plant. “In 2011, burning fuel at the Holyrood plant cost ratepayers $135 million. Looking ahead to 2017, the annual cost of oil to generate electricity at the plant is projected to be $324 million without Muskrat Falls,” it stated.
The fuel cost is based on both the oil price and fuel usage.
The mention of the 2011 fuel cost didn’t fairly reflect the ups and downs over the years for oil at Holyrood. As The Telegram reported, the fuel cost was $135 million in 2011 but only $100 million in 2010. It was $123 million in 2008, but just $64 million in 2006. It’s up and down one year to the next, but with a trend over many years of rising costs.
The real issue with sticking to large amounts of thermal power was the unpredictability, and fear of sudden spikes in cost and related uncertainty in power rates.
The fuel costs are considered unpredictable, but in order to estimate the total costs of power options and understand each of the two development plans over the long term, oil prices were still forecasted out 56 years (it covered the period of planned construction for Muskrat Falls and 50 years of operation).
The long-term forecast
As described at the Muskrat Falls Inquiry, to get to 56 years, a 20-year forecast from the PIRA Energy Group was taken and extended out by analysts at Newfoundland and Labrador Hydro (a Nalcor Energy subsidiary).
“Our fuel forecasts were both for the Holyrood generating plant and for the furnace oil price price forecast that we use in our load forecast models were all linked to PIRA energy forecasts. PIRA was provided the long-term forecast or 20-year price — I believe it was a 20-year price forecast for Bunker C fuels, typical of the ones used at Holyrood and for furnace oil. And we would take the PIRA forecast and extrapolate them to Canadian dollars and for our region,” explained Paul Stratton, senior analyst with Hydro, testifying on Sept. 26.
Stratton said in order to extrapolate, the utility essentially held the oil price steady after 20 years, adjusting only up two per cent each year for inflation.
There are differing opinions on the approach, and there have been questions as to how much faith you can put into estimates extending that far out in time.
“Forecasts, even 10-year forecasts, are exceedingly uncertain,” said consultant Philip Raphals, making the point during his inquiry testimony on Oct. 11.
“There’s so much of today’s world that wasn’t knowable in 1968,” he said, highlighting what 50 years can mean.
Why use the long-term projection?
The argument on the other side is: how else would you cost out and compare your options?
“We needed the 50-year period projection to use. All we can do is find the best assumptions we can find. PIRA was the best assumption we could find. We could bring it out as far as we could using PIRA and then we’d just have to make an assumption that looked reasonable over a long period of time, which is basically just to build in cost of living increase of two per cent, I think it was, and then run that out,” said former Nalcor Energy board member Gerry Shortall on Oct. 15. “But that’s all we could do. I mean, you just make the best assumptions you can and use them.”
Economist Wade Locke said forecasting is an uncertain business, and oil prices will be expected to move off your forecast the farther out you look. At the same time, he said, the use of PIRA forecasts in discussing the future is a fair one.
“When you invest today in anything, whether it’s hydroelectricity or oil, you have to have some understanding of not only the cost and the prices today, but what they will be when you sell your output. And it is necessary in terms of - it’s risky, no doubt about it,” he said, saying the estimate will never be exact. “You’re investing money now in order to extract revenue later. In order to know what revenue you might expect later, you have to project prices. That’s true for oil and gas projects. It’s true for electricity projects."
In comparing the isolated and interconnected power options, the Crown corporation considered variations on its cost estimates in “sensitivity analyses,” looking at what might happen if, for example, oil prices changed significantly and unexpectedly over the forecast period.
At what point would it really start to show in your either/or calculations on the two power options?
The finding was, assuming all other things remained the same, fuel prices would need to drop by 44 per cent for the gap in price between the isolated and interconnected options to close into a financial dead heat.
Any rise in oil prices would raise the cost of the isolated power option more than it would the Muskrat Falls option.
While the Muskrat Falls project is expected to mean less reliance on oil for the province, the province is not entirely free of using oil for electrical energy when it comes online. Newfoundland and Labrador still has diesel-powered power generators serving small, isolated communities.
Hydro has said it is continuing to explore options for those communities, but has recently refurbished many small, diesel plants to maintain their reliability.
