Muskrat Falls Math - into the Abyss

I have yet to read an article that attempts to tackle the complete Muskrat Falls "integrated business case", including especially the costs and returns it is designed to provide. So it's time to tackle that head on.

This week VP Gilbert Bennett, Nalcor stated the average production for Muskrat Falls is estimated at 510 megawatts (MW). That should be a big wake up call for people. Up until now Nalcor and the government had been holding fast to the full production capacity of the planned dam - 824 MW. That represents a 38% decrease in expected production from the Muskrat Falls facility. Ordinarily that would kill a project immediately, but the government has other plans. I'll get to that in a bit, but first the actual production costs compared to the returns for our treasury.

Back a year ago our now departed Minister of Natural Resources, Jerome Kennedy, stated in the House of Assembly that the cost of power produced at Muskrat Falls would be $.25 a kilowatt hour (kwh). That was based on production of 824 MW. That was to break even, and before costs associated with transmitting to Nova Scotia were factored in, and without cost over runs. 824 MW of power equals 4.9 terawatt hours, or 4.9 million megawatt hours of energy per year, or 4.9 billion kilowatt hours - for the purposes of this article we will stick with kwh.

So, if Muskrat Falls could produce full power, full time, it would produce 4.9 billion kwh at an annual cost of $1.225 billion - to break even (remember that number). That is to Soldiers Pond. As the energy converts from DC lines to AC lines, travels under the Gulf, and does that process again, it loses about 5% (conservatively) of it's energy on each end. Then there are the transmission fees Nalcor has to pay to Emera to send power across the sub sea line, etc. I'm not even going to factor that in to keep things semi-clean.

So, the annual budget necessary to run Muskrat Falls at a break even point is $1.225 billion. That doesn't change now that the average production, according to Bennett would be 510 MW per year. What it does mean is the cost per kwh goes from $.25 per kwh to $.40 per kwh. That is bad. Very bad. Now that $.40 per kwh has to be blended into Nalcor's already existing energy production (Churchill Falls is not included - explanation later) of 1850 MW or 11 billion kwh. Right now rates differ depending on where you live in the province and whether or not you are business or residential. Based on stated gross electricity sales of $520.7 million for 2012, the average price per kwh for power is 4.7 cents per kwh ($100 million of that $520.7 million is heavily subsidized Labrador and Industrial customers). 

Blending the current rate with the Muskrat Falls rate puts the new average rate at 13 cents per kwh or 300% higher than the current average rate. Of course that number includes industrial and Labrador clients.

Here is the hitch. All the numbers above are based on the Water Management Agreement being legal/constitutional. Without the Water Management Agreement, Nalcor stated in pre-filed evidence with the PUB, that Muskrat Falls could only run at 20% capacity. This issue is before the Court in Quebec - it will be heard on January 20, 2014. It is also before the Court here with yours truly. What happens if/when the obvious happens and the Water Management Agreement is thrown out?

Well, it changes the numbers radically. That takes the average production at Muskrat Falls down to a mind blowing 102 MW - or 607,142,857 kwh. To put that number into focus, the average price per kwh for Muskrat Falls energy would have to be $2.02 per kwh - by far the most expensive power on the planet by a landslide. In 2012 Nalcor generated that $520.7 million in revenue on 1850 MW. Now it's looking to generate an additional 102 - 510 MW for $1.225 billion a year. The math is pretty clear.

Of course Nalcor is, according to the Premier and Gilbert Bennett, planning on taking 1500 MW a year from the Upper Churchill starting in 2016. Seems they have been taking additional power from the Upper Churchill since June 2012 according to Hydro-Quebec (which is apparently why they filed suit). If that plan was actually legal the additional revenue, based on an average of 6 cents per kwh (the average spot price for 2012) would give Nalcor an extra $534,600,000.00. The Government and Nalcor have been spinning the line that Muskrat Falls will make $400 million in revenue. Seems they are depending on taking that "extra" power from Hydro-Quebec. Like I said, if it was legal then it would be great. It just isn't though. Even Nalcor own 2012 Financial Report states all the power, but recall, "generated at the Upper Churchill" belongs to Hydro-Quebec.

Just one last thing. If Muskrat Falls is projected to generate 510 MW Nova Scotia wants about 300 MW of that power at spot market prices, plus the 25% of generation it gets for free. My math has that total commitment to Emera being 427.5 MW for a blended price to them of 4 cents per kwh - about the same price they have promised to Labrador mining companies. Obviously, the government is not building a dam to give all but 82.5 MW to Nova Scotia. They need that Water Management Agreement to take that additional power from Hydro-Quebec or their deal with Emera is finished. All the economics, and therefore the project, rely on the Water Management Agreement. Bad as Muskrat Falls is for the taxpayer/ratepayers of Newfoundland and Labrador, the death of the Water Management Agreement is a step into the abyss if we continue to build...