Muskrat Delays

In mid-April Nalcor President Ed Martin was quoted saying that the costs for building the Muskrat Falls project are going up and the completion date may be pushed back. He was unable to provide further details or indicate when they would be available. The overruns will not be costly to Nova Scotians but the delays could be.

The announcement should come as no surprise. With a series of megaprojects underway the market for skilled labour in Newfoundland, and even more so in Labrador, is seriously overheated. Attempting to drive the project to a fixed date is likely to add to the cost overrun.

The Muskrat Falls proposal approved by the Utilities and Review Board called for first power to be delivered in 2017. That date had nothing to do with Nova Scotia’s needs. In fact NSPI’s existing fleet of generating capacity is very likely adequate to meet Nova Scotian demand until the end of the decade. The requirement that 40% of power come from renewables in 2020 will then cause some coal-burning plants to be prematurely retired or reduced to part-time status.

The 2017 date was based on Nalcor’s need to be selling energy as soon as it is available. One might assume that if there was, say, a two year delay, that the start of 35 year term contract would also be pushed back by two years. That is a better fit to Nova Scotia’s needs and easier for Nalcor to manage.

But it does not serve Emera’s interest. Emera makes money by having as much capital invested as it can persuade the UARB to approve. Delaying investment in the Maritime Link delays the profit boost it anticipates from the project. The contract provides that Nalcor must supply the energy from some other source if the Maritime Link is completed in 2017 but Muskrat Falls is not. Nova Scotia ratepayers could effectively be paying for the Link even if it is not used to provide the energy.

A press conference on Wednesday re-announced the benefits of the federal loan guarantee for the Muskrat Falls and Maritime Link projects.

Emera CEO Chris Huskilson was asked where Nalcor might find the power if the Newfoundland part of the project was late. His reply was remarkably short on detail but mentioned the possibility of other imports, and the fact that Nova Scotia itself will have lots of available generating capacity at that time. In other words he confirmed that we won`t need the power from Muskrat Falls and that Nalcor might end up buying from Nova Scotia some of the power needed to fulfill its obligation.

The operating cost to produce the power from existing coal plants is less than half the implied cost of the fixed block contracted with Nalcor. It would seem rather absurd to have us paying double the cost of power that was produced in Nova Scotia.

Energy Minister Younger has correctly pointed out that the cost overrun problem in Newfoundland and Labrador is entirely Nalcor’s. Even so it is not in the interest of Nova Scotian ratepayers to be complacent. Emera benefits most if it can stick with the original schedule for the Maritime Link. Nova Scotians would be better served if the project implementation was delayed until Muskrat Power is available.

The UARB has established a limit of $1.58 billion on how much the project can cost, of which up to $60 million is potential variance for prudently incurred costs. Those costs do not include financing costs (called AFUDC in regulatory-speak) which accrue as the project is being built. The estimate for those is $230 million, and there is no explicit ceiling.

The board did consider the matter in its ruling:

“However, the risks related to construction delays remain…The Board expects NSPML to prudently manage the ML Project construction timetable in a manner consistent with the construction schedule of the other components of the Nalcor Transactions (including the Muskrat Falls Generation Station) … while remaining mindful of the total impact on costs in order to minimize costs to ratepayers.

Further, the Board approves the accumulation of AFUDC up to and including December 31, 2017 or the in-service date of the Maritime Link, whichever is sooner. At that point, the Board will, applying the test of prudence, review the management of the construction risks by NSPML. The Board will make a decision …whether AFUDC will continue beyond that date based on how NSPML has managed the construction scheduling within the scope of the ML Project and the related phases in NL.”

Until there is much greater clarity from Nalcor it would seem prudent for Emera to cease completing new contract commitments and to do what it can to slow down some of those that have already been signed. The timing of spending decisions should be subjected to heightened scrutiny by the Department of Energy, the UARB, and interveners such as the Consumer and Small Business advocates. That will permit an informed decision on AFDUC at the end of 2017.

Nova Scotia would have been better off with a proposal containing a later start date. If a later start date for Muskrat power occurs we should not be made materially worse off than if the date had been correctly projected in the first place.