Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Thursday, June 2, 2011

Muskrat Math

The proposed Lower Churchill hydro project is all about the math. Part of the problem we have all faced is getting the proper information to do the math and see if this deal is really needed, and if so does it make financial sense. According to Nalcor's Generation Planning Issues 2010 July  the Muskrat Falls project is not necessary.The following graphs are taken from the report:

You will notice firstly that power consumption in the province is on the decline, and is now approximately what it was in 1992. You will also notice that the future forecast for power appears to take off like a rocket with no apparent reasoning. All Nalcor's, and the government's, arguments for increased production appear to be centered around this unexplained rise in consumption.  Nalcor uses this rise to explain that in 2019 we will experience a power deficit, because our demand for power will exceed the amount of power being produced. You can see in the first graph that the HVDC link (Lower Churchill power) causes a massive jump in available power, and that excess drops when Holyrood is scheduled to go offline in 2021.

The second graph shows plan "B" whereby Holyrood would be upgraded with state of the art scrubbers, and expanded onto. There are also a number of smaller on Island projects added to it, and the result is a surplus of power - just much smaller. The real eye opener is the first graph which tells us that essentially all the power produced by the Lower Churchill will be excess power. That is a very worrisome discovery on several fronts.

There is the math which tells the real truth. Its the old saying: "People lie, the evidence does not." The Lower Churchill is scheduled to produce 4.9 terrawatts of power - or 4,900,000,000 kwh (kilowatt hours) per year. It is that number that the government bases its price projection of 14.3 cents per kwh as a breakeven point - the cost of production. From that 4,900,000,000 kwh we have to subtract a few numbers. Firstly, the loss of power by underwater sea transmission needs to be recognized. Experts suggest the average loss of power from either the line itself, or the conversion process to adapt the power to the DC lines is 7%. In our case the power goes through this process twice - once to get to the Island from Labrador, and once to leave the Island for Nova Scotia.  I therefore rounded that loss  up to 10% or 490,000,000 kwh (allowing benefit of the doubt). That comes right off the top, because Emera is entitled to 20% of the power produced not the 20% that arrives.

Then we have to take Emera's 20% of the power from the grand total. So you can subtract a further 888,200,000 kwh that leaves Nalcor with 3,552,800,000 kwh of power to sell. It also means their 14.3 cents to breakeven has changed to 20 cents per kwh due to a lesser amount of power available to recover that money from.

Next we have to add on the cost overruns of the dam, which at this time are unk nown, but which commonly reach between 25-56% according to the World Report on Dams. That would add at least 5 cents per kwh bringing the new total to 25 cents per kwh. Another cost that will be associated with the project is the subsea cable cost overruns. These projects are famous for their overruns - especially in rough waters. Potential issues there include bad weather and rough seas affecting the actual laying of the cable. Problems that can occur include breaking of the cables and even placement. It is interesting to note that even though Emera will pay for the subsea link to Nova Scotia, Nalcor will be responsible for cost overruns on the link. At this time it is impossible to say how much this will add to the cost of business, but it is certain to add to it.

Then there is the guaranteed return to Emera, Nalcor and Fortis of 8.3% on investment. Hard to say where that will end up until we know the final costs of the project - but it will add. Currently Fortis has a 3.5 cent markup on the 9.54 cent per kwh we pay to them for power. What that would look like on a 25 cent per kwh bill is unthinkable.

One last math deduction. As stated earlier, and according to Nalcor's own graphs, all the power from the Lower Churchill will be excess. In other words, we will have to sell it all, and not just a portion. The question is who will we sell it to? It won't be Emera, because they get their free 20% already. They also get a transmission fee on all power we send over the link - likely around 1.5 to 2 cents per kwh. No, it is far more likely that we will have to try and sell that power on the open US market. The problem with that is Hydro Quebec is already there and selling to them at roughly 6 cents per kwh. Take the 25 cents or so it will cost to produce this power, and then sell it for 6 cents. That leave us a loss of 19 cents per kwh. That would be bad if it were only a small excess of power being sold, but as shown earlier it looks to be all the Lower Churchill power. That would leave the Province and Nalcor with a staggering $931 million dollar loss year after year - for 35 years!

The problem with building a project of this size is in the detail. The small details and the large. We aren't the first to build such projects, and there is plenty of evidence in Canada and around the world of how these projects incur these "unforeseen" costs. We need to wake up folks. I don't care if this is Danny's Project, Dunderdale's project or Harper's project. It is a financial disaster for the people of Newfoundland and Labrador. It should be a strong signal to all that our homegrown Fortis group just this week signed a deal to purchase a Vermont company that just signed a 35 year supply deal with Hydro Quebec. They have apparently decided where their best interests lay. We need the press of this province and country to seriously scrutinize the financial details of the project before it's too late. If you think my facts and figures are overinflated then please do your own research - there is plenty out there on this subject. Look at the optimum figures the government gives out for the amount of power possible and the cost to produce it. Then start subtracting all the commitments along the way. You will find out that this project is a disaster for our province - it's only Muskrat Math. 

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