Guest Post by PlanetNL
PlanetNL.4 - Mothball Muskrat NowPrevious PlanetNL instalments have detailed how the uneconomic Muskrat project threatens to destroy NL Hydro and ratepayers or, if the subsidy route is chosen, Government and taxpayers. The painful third alternative is to choose to stop the project and have the Premier call on Ottawa to act fully and promptly on the murky Federal Loan Guarantees of $7.9B.
Even with the federally guaranteed debt removed, serious issues remain. Ratepayers still face large rate increases and the Provincial Government must record a total loss of equity. Emera would suffer contractual losses and demand compensation. Ottawa would be divided on whether to act as many other provinces will not support the bailout. A substantial and raucous debate is sure to erupt whenever Ottawa publicly considers this request.
How Weak is the Muskrat Business Case?
The decision to stop the project is simple. Due to inevitable rate increases already set into motion before Muskrat completion, electricity demand on the island of Newfoundland is sure to fall to levels that make Muskrat power completely unnecessary within the province (along with the Holyrood thermal plant Muskrat was intended to replace). There is no longer an in-province energy justification for the project – it will be completely surplus to local needs. Nalcor and Government simply never factored in demand elasticity or accurate demographics and remain in denial of these fundamental laws of economics.
Export of power outside NL provides the only true and direct revenue opportunity from Muskrat. Nalcor forecasts export revenue of about $50M annually as shown in their October 3, 2017 RFI response reviewed in detail in PlanetNL3. As developed in that last post, Government will find itself having to inject a $500M subsidy into Hydro to enable Nalcor to earn the $50M revenue on power exports. That’s an exceptionally bad business model that threatens to be repeated for 50 consecutive years.Digging deeper into that RFI response, issues of subsidy aside, Nalcor’s forecast of Operations and Maintenance (O&M) costs alone are found to begin at over $120M in 2021 and grows steadily from there. Here lies the other core flaw of the business case – one that always proves fatal.
Private sector businesses that can’t cover their O&M costs and see little or no chance of market turnaround will quickly decide to stop operations rather than continue to lose money. They will either scrap their assets for salvage or just walk away. Whether the project is paid-off or still in construction is immaterial. Equity is written off and remaining debt becomes a pure liability without asset-backing, poisoning the balance sheet.Everything that can’t be sold or moved for use elsewhere is a sunk cost.
The Newfoundland and Labrador landscape is littered with defunct mines, paper mills, and fish processors that have made exactly those decisions when boom times go bust. Canada as a whole has a long history of the same. The Provincial and Federal Governments have participated in many business busts in the past and the decision to stop Muskrat should be as obvious as any example before it.
Mothballing the Project: A Brief Scope and BudgetThe massive structures at the Muskrat Falls generation site will be too costly to demolish.
Neither ratepayers nor taxpayers could afford the probable billions for a removal project. In the short-term, the structures and site must be tidied up, powered, lit, heated in places and steadily maintained to prevent them from decaying into public safety and environmental hazards. A large fence must be built around the site, the grounds kept up, and 24-hour security provided – our province’s very own Chernobyl-lite.Consultants would perform routine inspections to certify structural stability and recommend any modifications and maintenance. A guesstimate annual budget to maintain the site is $30M, likely to be covered by NL Hydro ratepayers. Longer-term, this cost threatens to grow as the site ages therefore a remediation project to permanently stabilize the structures and reduce public safety hazards would be sought at a probable cost of up to $0.5B if it can substantially eliminate the annual costs.
There are significant hazards posed by 1450kms of transmission lines that if not maintained will eventually collapse or be the target of vandalism and metal-scavengers. Removal of the wires and towers will be a practical and urgent necessity. There may also be reasons to take up the Strait of Belle Isle subsea cable, remove the terminal stations at the Straits Crossing and downsize or eliminate the Soldier’s Pond substation. A budget of $1.0B is a reasonable first guesstimate.
If the project continues to advance and an eventual mothball decision made later, more new capital will be required, entirely on the Province’s tab. Continuation of construction also includes substantial risk of new overruns. Continuation also ensures more equipment is installed at the facility, resulting in increased remediation scope and reduction in the salvage value of materials that could have been diverted before delivery. These additional costs in the billions cannot be justifiably incurred to complete a project that will bleed money in perpetuity. The time to stop now.
Federal Loan Guarantees and Political IssuesWithout a federal bailout of the $7.9B loan guarantees, the self-destruction of the Province is destined to end up a costlier national problem. Ottawa must ultimately decide whether calling in the Muskrat loan guarantee is a necessary preventative measure against more serious financial peril.
Most of the country would grieve a decision by Ottawa to bail out the Newfoundland project. Quebec had definite misgivings of a competing project being de-risked by Ottawa when they received no such direct benefit on their latest hydro projects. Ontario, which earlier this year executed a $20B+ electricity rate reduction financing scheme of its own, might demand its share of relief from Ottawa. Then there are dubious ongoing hydro projects in British Columbia and Manitoba where their Governments may seize an opportunity for Federal backing on abandonment of their projects with less harm to their ratepayers and taxpayers.Nova Scotia and Emera will be faced with significant direct losses. Ottawa will have to pick up the Federal Loan Guarantee of $1.3B made to Emera on the Maritime Link project: they will scornfully look east to Newfoundland for compensation on their balance of lost capital costs. Besides that, Nova Scotia’s plan to close their coal burning thermal generation plants will be delayed by years and they must go back to the drawing board for another solution.
The Province must be wary that Ottawa and other provinces may be seeking to extract other pounds of flesh. Threats may arise to expropriate offshore oil equity holdings and royalties, the recall block of Upper Churchill, possibly the Province’s entire Upper Churchill holdings, and possibly NL Hydro itself. None of these should make sense to Ottawa as the worsening of the already precarious Newfoundland economy would accelerate the Province toward insolvency and an even more costly general economic bailout would follow.Comparison to Other Provinces with Failing Hydro Projects
As mentioned above, other provinces are simultaneously building major hydro projects that, like Muskrat, have a high probability of being completely redundant for in-province energy demand and loss-leaders for export revenues. However, they differ hugely when measured by their risk to ratepayers and society.
The British Columbia Site C project if fully built to no useful purpose might raise BC rates by about 1c/kwh, keeping their rates close to the average Canadian price. Manitoba might not incur much higher an increase if its projects fail yet they would still have below average price electricity. Hydro Quebec could swallow their pride on their latest projects, raise their rates by only a fraction of a cent and still have the lowest rates in the country. The ratepayers and taxpayers of those provinces won’t be nearly as seriously affected by their price of failure as in Newfoundland.Newfoundland’s comparatively small size cannot absorb the blow of a publicly funded megaproject disaster. Even after the Federal Loan Guarantees are called upon, the Province’s responsibility for lost equity, interest expenses, and mothballing expenses will take a heavy toll. Electricity rates are virtually certain to become the highest in the country causing considerable personal hardship for many. NL taxpayers will further bear the burden of at least $4B of additional net public debt, widening annual deficits and decreasing quality of essential government services.
The Newfoundland and Labrador Government must show wise leadership in demonstrating to Ottawa and other provinces that these high-risk projects are not all equal and that the peril and folly of Muskrat is entirely unique in its severe and long-lasting socio-economic impact. The Muskrat bailout is imperative and does not imply that any other province should receive the same consideration.
The Premier is directly responsible for communicating to the Prime Minister the urgency and peril of the situation and there is no evidence that he has yet done so. This inaction makes him directly responsible for the ongoing potential billions in additional losses that will accrue solely to the Province’s debt. The Premier must appeal to the Prime Minister to make this matter an urgent priority, so the project can be stopped at the soonest possible date.While the Premier’s public message has consistently been to finish the project, we can hope he is rational enough to consider the cancellation alternative proposed here. According to data found in a just-released Oversight Committee quarterly report, there is $2.5B left unspent as of the end of September. A substantial part of this could presumably be saved to fund the post-cancellation requirements. Completion will exhaust those funds and needlessly waste billions more.
Several alternative operational scenarios will be presented to demonstrate why full abandonment is the best option; the Provincial issue of power backup is reviewed, not additional power supply plus some closing comments on the tangle with Emera and Nova Scotia.
Sources and Recommend Reading
Nalcor RFI responses: https://nalcorenergy.com/about/transparency-accountability/atippa/responses/
- Select PB-651 for the Oct.3, 2017 response with detailed PPA costs 2021-2070
- Select PB-555 for the Aug.31, 2017 response with detailed Dividend projections 2021-2070
Muskrat Falls Project Oversight Committee – Quarterly ReportEnding Sept.30, 2017 – publicly posted (est.) Nov.3, 2017:
Annual Reports of Emera, Hydro Quebec, Ontario Hydro, Manitoba Hydro and BC Hydro were reviewed to assess rate impacts and trends (hyperlinks not included)
The BCUC report on evaluation of Site C, released November 1, 2017 can be found here. Numerous submissions to the Inquiry were also examined (hyperlinks not included)
Brand Command, Alex Marland (2016) – Anyone from the Province pitching the Muskrat problem to Ottawa should be sure to have read this book: Brand Politics: Canadian Politics and Democracy in the age of Message Control by Alex Marland.
Frustrated by the continuing lack of honest and credible information from Nalcor and Government, PlanetNL, having a suitable analytical background, is presenting independent research and calculations. This is a spare time activity outside of regular professional commitments. All key information used to develop the views and analysis are publicly available. The analysis cannot avoid entering public policy space: if Government or Nalcor wish to refute the analysis, they are welcome to present an open and honest rebuttal.