Muskrat Falls Electricity: Only the Expensive Part is Guaranteed
Posted May 17, 2013
Nova Scotians could easily end up paying much more than predicted for Muskrat Falls power.
What we pay will be determined by the agreement between an Emera subsidiary (NSPML) and Nalcor, the power utility owned by the government of Newfoundland and Labrador. The Utility and Review Board (UARB) is in the final stages of deciding whether to approve that agreement. Its job is to look out for us as customers.
The electricity to be generated is divided into three parts. The cost of the Maritime Link block is shown in the chart below, taken from the Emera’s application to the UARB.
The $1.55 billion that Nova Scotian ratepayers are charged for the Maritime Link pays for the fixed block, and the possibility of purchasing the Surplus Energy at market rates.
The Maritime Link block represents 20% of the total production at Muskrat Falls. It is expensive, starting around $125 per megawatt-hour (MWh) in 2017 and averaging more than $150 per MWh over the 35 year term of the agreement.
By comparison, Nova Scotia’s recent auction for wind power came in well under $100 per MWh, and will be subject to very small increases.
Our marginal cost per hour to generate electricity from coal-fired plants is about $60. To these need to be added debt repayments on money borrowed to build the plants, but these will be payable whether or not we use them. So $150 per Mwh for the electricity from the Maritime Link is no bargain.
The line called Surplus Energy represents the price that will be paid for power potentially available for transmission to Nova Scotia from Newfoundland. Emera’s projections show it to be attractively priced at about $50 in 2017 growing to $90 over the 35 years. The average price of the Maritime Link power is between two and three times the average price of the Surplus Energy.
Emera’s projections assume that the Surplus Energy will represent 40% of Muskrat Falls generation.
In fact, we may receive much less than that, particularly in the later years. Consider the situation of ratepayers in Newfoundland and Labrador. They own 80% of the power. Emera’s projections of the Blended price (see chart) of electricity assume that we receive half of Newfoundland’s share as inexpensive Surplus Energy.
This is unlikely to happen. Under the agreement between Nalcor and Emera, Nalcor will only transmit electricity over the Link if it suits them to do so. Rather than accept $50 per MWh from Nova Scotia, Nalcor will want to keep some power for itself because the price is lower than its cost to run its thermal plants.
In fact, this is exactly the scenario imagined in the report from Manitoba Hydro that was commissioned by Nalcor to support its proposal in Newfoundland and Labrador. That report argued that Muskrat Falls was viable without the Maritime Link.
Emera has pointed out that electricity through the Maritime Link need not come from Muskrat Falls. It could instead come from Newfoundland-based wind, or the large hydro project envisioned for Gull Island.
These are theoretically possible, but it is not economical to build either at $50 per Mwh. Nalcor is not going to build those projects to meet Nova Scotia’s needs if it means losing money on them.
This is a far different situation than existed two years ago when the Muskrat Falls project was taking shape. Market prices were twice as high in 2010 as they are in 2012. At the 2010, prices new wind and hydro projects might have been viable.
It is very clearly a bad deal for Nova Scotia if much or most of the power we receive is the expensive Maritime Link power. The economic argument for the Link depends on the assumption that the full amount of Surplus Energy will be available to Nova Scotia.
It is entirely possible that much or all of it will ultimately be unavailable, and customers in Newfoundland and Labrador will not care because they will be paying nothing for unused capacity on the Maritime Link.
Meanwhile Nova Scotians could be paying for two or three times as much transmission as we are using. We will get less electricity at a much higher price.
The proposed arrangement is fundamentally flawed. It does not serve or protect Nova Scotian ratepayers.
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