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Tuesday, 31 May 2011

Muskrat Falls: Hope or Hype?

When is a Deal not a Deal?
Even though Government keeps talking about the Muskrat Falls development as a done deal it's not quite there just yet. There is a term sheet that has been agreed to, but that document only outlines the bare bones of a possible agreement in the future, and it expires November 30, 2011. Government has posted the highlights here, but if you want to read the whole thing go here, thanks to Labradore.

Who Pays?
From the information that is currently available there are no real markets identified outside of Atlantic Canada and since Nova Scotia and Emera will get free power for 35 years that only leaves the rate payers in NL to pay for it. Emera is investing $1.8 billion. But most of that money is only to cover the link from NL to NS, and they will own the line when it is constructed.

What will it cost?
The total project cost is currently estimated at $6.2 billion, and those numbers were worked up last year and the project won't be completed until 2017. So my guess is that costs are likely to move upwards considerably over that time. The current numbers indicate that the cost of generation and transportation of the power will be around 14 to 17 cents per kilowatt hour. But that's the wholesale price that NL Power will pay. When they add their fee, rates will be essentially double what they are currently. Oh yeah, and the provincial debt will rise to a level higher then we have ever had before.

Why is it being built?
There are two main parts of the argument currently being presented. The first is that we cannot currently meet the demand for electricity that is forecast. The second is that electricity rates are climbing anyway and that the cost of operating the Holyrood Thermal generation station is rising due to skyrocketing fuel costs. So in the long run this is the cheapest option. Both of these arguments have serious holes.

The first one on forecast power needs appears to be based on information that is not available to anyone outside of government. Our population is not forecast to grow substantially and there are no mega-projects on the horizon so many folks are having a hard time seeing where this potential need will come from. The second argument on Holyrood has recently been skewered by a letter in the Telegram that points out the costs of operating at Holyrood have actually gone down because it produces less power each year. That could be because it is, and always was designed as a backup system. Last year it only provided 11% of the power for the province.

Are there alternatives?
The first has been discussed by Ed Hearn, a former Director with NL Hydro. He suggests using the current legislative abilities of government to recall some of the power produced by the Upper Churchill project to use, if we need it. Then there are a couple of smaller proposed hydro projects on the Island, then there's wind power, and eventually maybe natural gas(but we aren't ready for that one just yet). Oh and if the current energy policy wasn't so restrictive there could be the possibility of the development of a smart grid, where if you have solar or wind generating ability at home, and you produce more then you use, it would be sold back to the grid for use by others.

Why does it matter to rural NL?
This matters to everyone in NL. Rural and Urban. It is a project that just doesn't seem to make sense. There doesn't seem to be a real need for the power and the costs are incredibly high. The only investors are Emera, who are buying in because they get free access to power that they can sell for 35 years.

The Rub
And here's the final point. While households in NL will be paying upwards of 20 cents per kilowatt hour, any additional capacity that is sold in Nova Scotia, New Brunswick or anywhere else will sell at market prices of about 7 or 8 cents per kilowatt hour. So we will pay the $4 billion of our share and then sell the power to others at half the cost that we pay in NL. It just doesn't make cents, or sense. Sounds like hype to me.

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