[Newfoundland] Muskrat folly – by Tom Adams (National Post – December 19, 2012)

The National Post is Canada’s second largest national paper.

Tom Adams is a Toronto-based electricity consultant.

Newfoundland pushes project to exact revenge on Quebec

The governments of Newfoundland, Nova Scotia and Canada have teamed up to deliver what may prove to be the worst hydroelectric project ever in Canada — Muskrat Falls.

The plan involves building a dam and generating station on the Churchill River near Goose Bay, plus transmission lines to deliver power from Labrador to the island of Newfoundland and on to Nova Scotia. In 2010, the price tag was pegged at $6.2-billion with a modest contingency. Today, the price has ballooned to $7.7-billion, a figure that would be higher except that the contingency allowance was slashed by $370-million. Neither figure includes interest during construction that will add over a billion more.

To smooth what would otherwise be a drastic rate impact for Newfoundland consumers if conventional utility finance models were applied, the government plans to use a unique financial structure that shifts the main financial burden of the generator portion of the project up to 57 years into the future.

A joint federal-provincial review in 2011 refused to endorse the project.

During hearings conducted by Newfoundland’s Public Utility Board (PUB), also in 2011, Premier Kathy Dunderdale’s government prohibited the PUB from reviewing reasonable alternatives to Muskrat Falls, denied the PUB’s request for an extension to review evidence, and then publicly proclaimed its lack of confidence in the PUB after the regulator failed to endorse the project.

The governments pushing the project justify it with global warming and peak oil theories, short-term employment gains, and nation-building bromides. Economics takes a back seat. Little wonder why. Muskrat Falls benchmarks badly.

Hydro-Québec is constructing a comparable hydroelectric complex on the Romaine River, 350 kilometres closer to southern markets. It will produce about twice as much power, but require a total investment less than the current estimate for Muskrat Falls. Romaine will start up before Muskrat Falls construction can begin in earnest. For all its competitive advantages relative to Muskrat Falls, Romaine will need a massive turnaround in electricity markets to break even.

The costs of getting power underwater from Newfoundland to Cape Breton alone will be prohibitive. Unless new, as yet unidentified, markets for the power are found, the life-cycle cost of the submarine transmission from Newfoundland to Nova Scotia will approximately equal the cost today of power delivered from new natural gas generation.

The only reason the local utility in Nova Scotia — Emera — is considering the project is because the provincial government has ordered the utility to source more supply from renewable generation. This week Emera conditionally approved joining the project.

For the rest of this column, please go to the National Post website: http://opinion.financialpost.com/2012/12/18/muskrat-folly/