Time For Hard Bargaining
Posted July 26, 2013
It’s crunch time for Emera. On July 22, the Utilities and Review Board (UARB) released its decision on the Maritime Link Application. It concluded that that the proposal was not the lowest cost alternative for Nova Scotians. But it also said that the project and associated financial arrangements could be approved if a couple of minor conditions and one major one were met.
The major condition revolves around the following chart, taken from the proponent’s application:
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 first 25 years of the agreement.
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.
The Blended rate assumes that there is about twice as much Surplus Energy as Maritime Link Energy.
As noted in my article of May 17 the Emera proposal only guaranteed delivery of the expensive Maritime Link part of the electricity.
The UARB has determined that the Maritime Link block by itself is unacceptably expensive but the combination of it and the Surplus Energy, providing the Blended rate, is narrowly better than the alternatives that were studied. Accordingly it has required, as a condition of approval, that the proponents guarantee availability of the full amount of market-priced Surplus Energy.
Each of the reactions to date is telling.
Premier Dexter said ““I think the condition that the board set was a common sense one.” Indeed. One might ask why the Premier did not insist on the condition himself before so enthusiastically supporting the project.
Energy Minister Parker characterized the UARB’s directive as “recommendations” which might hint at the possibility of yet more political interference. Let’s hope not.
To add to the complications Hydro Quebec, in a gesture no doubt timed for maximum impact, commenced a legal action to assert control over the flow of water. If successful this would jeopardize the amount of power that Muskrat Falls can generate.
Meanwhile in Newfoundland and Labrador both Ed Martin, president of Nalcor (the provincially owned utility), and Natural Resources Minister Tom Marshall were adamant that they would not be providing the guarantee required by the UARB. In fact Nalcor’s own projections show the amount of Surplus Energy available for export dwindling to nothing over the first 20 years of the project.
Of course Nalcor’s resources could be supplemented with additional wind or hydro generation, but at the forecast market prices for electricity these are not economic. So Newfoundland and Labrador’s reluctance is understandable, but they are overplaying a weak hand. Without Nova Scotia’s participation the whole Muskrat Falls project is at risk.
Given all this the reaction from Emera has been understandably cautious. Meeting the UARB’s requirement is, in the end, still Emera’s problem to solve.
No doubt they will want to have urgent consultations with Nalcor. The UARB does not require that the solution be entirely provided by Nalcor but in total it must provide the same access to market-priced energy without causing additional cost or risk to ratepayers.
One approach might be to seek additional imports of power from or through New Brunswick. But it will be difficult to show that access to these were incremental benefits of the project. And if that much market-priced energy can be accessed without paying for the expensive Maritime Link block, it calls into question why the Link is being built in the first place. It is hard to see how the UARB’s requirement can be met by other imports.
Emera’s proposed solution will be subject to review by the UARB, including interveners. To satisfy them Emera will have to promise that the Maritime Link will need to always be transmitting electricity in quantities consistent with the chart shown above.
The availability of the Surplus Energy is not the only problem with the original proposal. It still provides the wrong amount of power at the wrong times, and charges Nova Scotians for some costs that should be borne by Nalcor. The UARB’s view of its mandate did not allow them to explore these issues.
But the Board has taken a strong and well-reasoned position on the biggest problem with the proposal. And it has established its willingness to say no if a satisfactory response is not provided. The cost to Nalcor of a no decision would be enormous—loss of the Federal Loan Guarantee worth perhaps $1 billion, loss of export revenue, and most important, loss of the permanent alternative to Quebec for export routing.
To achieve an acceptable response Emera will need to have an adult conversation with Nalcor behind closed doors. In it they will remind Nalcor that they have far more to lose than Emera if the UARB ultimately says no.
Nalcor has stated that they will always do what is in the best interest of its province’s ratepayers. If they recognize what is at stake they will now make it possible for Emera to meet the UARB’s conditions.
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