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)

Monday, January 2, 2012

Muskrat Falls Green Little Secret

You've heard it before: "the greenest project in North America." You've heard this too: " replacing the dirty power from Holyrood." Yet, you haven't heard this: "Our strategy is to get the US federal government to subsidize Muskrat Falls."

Muskrat Falls has our former Premier Danny Williams written all over it. A project that on its face makes no economic sense. Yet dig a little deeper, and you will see a man playing the angles. A man attempting to build a purse from a sows ear. Mr. Creativity - that is Danny William's strong suit. A great imagination combined with an ability to play the angles. Add in a strong sprinkling of Newfoundland nationalism, and you have the complete picture. We saw it with the offshore royalty war with Ottawa. We saw it with the nationalization of Abitibi assets. We even saw it with the Ice Caps. An ability to take a so so or worse situation, dust it off, repackage it, and most importantly have others pay for it. Don't get me wrong - Danny is a genius at what he does. I didn't call him the "Father of Modern Newfoundland and Labrador" without reason.

Unfortunately, all the wheeling and dealing sometimes leaves big, bad holes. In the case of Abitibi he was able to pass off the initial cost of expropriation to Ottawa ($150 million), because he understood that Abitibi's only legal recourse was through the NAFTA trade agreement and that was a federal responsibility. So Harper grumbled, but paid the bill. Not exactly a patriotic strategy, but Danny's PCs were always about Newfoundland first and "to hell with the rest of the country". Fair enough in the war of fiscal federalism that seems to be our lot. Unfortunately, the environmental clean up bill to clean the Abitibi site up is estimated at $250 million. It is currently in court with the government of Newfoundland and Labrador trying to argue they aren't responsible for the environmental mess. Indeed they argue the company they took the property from is. Long story short - Newfoundland is going to lose this one and hold the tab. A creative , but somewhat reactive strategy maturing to bare its not so nice fruit.

That brings us to the much discussed Muskrat Falls deal. Many analysts have questioned its economic viability. The biggest question of all - how can you make enough money on the 40% of the power generated for export to the maritimes and US to pay for this deal? There would seem to be a common sense cap to the amount you could charge for the first 40% generated that is to be consumed in Newfoundland and Labrador. That certainly can not come anywhere near to paying for the fixed costs of the project. The next 20% is being given to Emera to subsidize its investment in the Maritime Link portion of the project. That leaves only 40% left. Here is the answer: have the US government subsidize the 40% sold in the US.

This is where you say "okay we have a conspiracy theorist on our hands here." In fact, I would not  have discovered this myself if I hadn't been given it a year ago by  - lets just say a highly placed unnamed source. Nalcor's big plan for the 40% going to the US is to sell it on the energy exchanges into the US. That isn't a secret. They've openly admitted that many times. That in itself would not come close to paying for it as US market rates for power are 60% or more below the cost of producing and transmitting the power.

No, the secret to making it all work is something borrowed from Nalcor's arch rival Hydro Quebec. The secret is RECs. Never heard of them? Stands for Renewable Energy Credits. Here's a good link to understand what they are all about . In the nutshell: they provide credits to the seller of energy, not the buyer , which can be sold on exchanges to organizations looking to meet government or self - imposed green targets. The only kicker is this - it has to be from an eligible renewable energy. That is where Hydro Quebec and the ever sharp mind of Danny Williams comes in.

Hydro Quebec has been aggressively pursuing "green renewable" status for its power in the US. It also wants those credits to subsidize its operations and offset its massive debt. It has used the state of Vermont as its proverbial beach head. Having just signed a massive supply agreement to the two largest power suppliers in Vermont (one which the Quebec government owned through the Caisse - Green Mountain Power, and the other which the Caisse just outbid Fortis Group for - Central Vermont Public Service) Quebec effectively controls the power business in that state. It was even instrumental in having the Yankee Nuclear Plant in Vermont closed which just happened to open up a massive new supply contract for them on top of the one just signed. In any case, Hydro Quebec succeeded in being given the coveted "Renewable Energy" label by the state of Vermont.

The problem being that is just a first step. To succeed they must convince the United States government that they should receive that status. Then it will be up to the US if they want to subsidize a foreign national to monopolize their electrical system. This is the piggy back strategy that Nalcor is trying to execute and that has the imagination of Danny Williams written all over it. The question is will it work? The other question is why has it been kept so secret?

Some possible answers are political in nature. It may not be good for the image of a former Premier, who built a career on battling Hydro Quebec publicly, to admit his primary strategy is to follow Quebec. It may not be good for Newfoundland nationalism to admit the same. So there are those angles. Another, and likely more to the point reason is the chance of major hydro dams receiving the "Renewable Energy" label to qualify for the Renewable Energy Credits is almost non-existent.

Listening to Danny Williams on the CBC show On Point this week I heard him use an old familiar phrase: "roll the dice." Nalcor is rolling the dice by banking on Hydro Quebec to succeed in getting renewable status for large hydro. If the gamble fails the people of Newfoundland and Labrador will be losing $900 million a year on the operations of Muskrat Falls. This roll of the dice is the little secret of Muskrat Falls that the PC government don't want you to know, and don't want to talk about. Take heed.

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