Beware of Governments Announcing Bold Expensive Projects
Posted August 28, 2020
Have you had a good look at your electricity bill lately? Some of the power you are paying, for now, will not be received for 35 years.
The Muskrat Falls power project is being built by Nalcor, a provincially owned utility. It is horribly over budget and behind schedule. This should not be a big surprise. Nalcor had never managed a project of that size. Have a care for our friends in Newfoundland and Labrador (NL) who will be paying for the many $billions of overrun there.
Nova Scotia’s involvement through NSPML, an Emera subsidiary, is to provide the necessary transmission from a point in Newfoundland across the Cabot Strait and all the way through Nova Scotia to New Brunswick. Called the Maritime Link, this will serve Nova Scotia and enable the transmission of power to New England markets. The power generated by Muskrat Falls will be more than the Atlantic provinces can use.
The link cost $1.577 billion, plus $.21 billion of borrowing costs during construction. Of this, 70% was borrowed, with a low-interest rate which benefits from a Government of Canada guarantee. The remaining 30% was equity provided by Emera, on which it will earn a 9% return. The payments start at $43 million per year and will gradually reduce as the project cost is amortized.
Maintenance costs for the link are already $18 million per year.
At the time the project was being advocated, it was clear that the Muskrat power was not needed until 2020. Nevertheless, Nalcor insisted that the contract be effective at the end of 2017 and Nova Scotia acquiesced. Emera had the link completed by the end of 2017. The power will not arrive in Nova Scotia before sometime in 2021.
That it would not be used for at least three years costs Emera a penalty each year of $10 million less a small amount for the cost of transmitting power from Nova Scotia to NL. On the other hand, it lengthens the time over which it will receive its 9% return.
The cost to ratepayers so far has been $109.5 million in 2018, $111.5 million in 2019, and $144.5 million in 2020. This is scheduled to increase to 164.4 million in 2021 and $161.9 million in 2022. This year’s cost is more than $150 per Nova Scotian.
If the total delay is three years, the power not received in 2018-2020 will be added on at the end of the 35 years from the starting date. Your grandchildren can thank you.
Readers may wonder how we got in such a mess. There is plenty of blame to go around.
In 2013, the NDP government was persuaded by Emera that the project was both an economic and environmental winner. It was clear from their clumsy efforts to explain it that neither NDP Premier Dexter nor any of his ministers had any understanding of how the contract would work.
It is noteworthy that in NL, the Progressive Conservative government, which also did not understand what they were getting into, chose to bypass their electricity regulator, the one place where they might have received well-informed advice.
Dexter took a different route, choosing instead to put the Utilities and Review Board (UARB), the regulator, in a straitjacket. Its legislation said that:
“The Review Board must approve the Maritime Link Project if, on the evidence and submissions provided, the Review Board is satisfied that the project…represents the lowest long-term cost alternative for electricity for ratepayers in the Province…”
What that meant was that any competing ideas for providing power had to compare against what Muskrat would provide, rather than both comparing against Nova Scotia’s needs.
The NDP were defeated in the 2013 election before the final UARB approval process was completed. The Liberals clearly did not understand the file either and their intervention was shambolic. They had a chance to step us back from the brink and failed to seize it.
The UARB also missed a chance. Notwithstanding the legislated constraints, it could have done a better job of protecting ratepayers from the cost of the entirely predictable delay. They could have required greater delay penalties to NSPML, or through them Nalcor.
Looking forward, there is not much chance of the current Nova Scotia government announcing a big green project that it does not understand.
But worry about Ottawa. Here is what Justin Trudeau had to say about their intentions for the upcoming throne speech: “Around the world, a consensus is emerging that the time has come to think boldly and rebuild even stronger… Countries like Canada that have a strong fiscal position must invest to help people get through this crisis.”
If the Liberals can make a mess of handing out cash to volunteers, it is scary to think about how they will manage bold ideas.
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