comments on the proposed justification of the lower ... · displacing hollyrood key to muskrat...

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Comments on the Proposed Justification of the Lower Churchill Project

Presentation to the Joint Review Panel on the

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Presentation to the Joint Review Panel on the Lower Churchill Project

Philip Raphals

For Grand Riverkeeper Labrador Inc.

March 5, 2011

www. centrehelios.org

Introduction� Relevant experience

> Public Review, Great Whale Hydroelectric Project

• EARP Panel and JBNQA Standing Committees

• Deputy scientific coordinator (project justification)

• Outcome: Proponent failed to provide information requiredby Guidelines; project withdrawn by HQ

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by Guidelines; project withdrawn by HQ

> EM1A/Rupert Diversion Hydro Project

• Conformity stage: Consultant to Panel

• Hearing stage: Consultant to chiefs of affectedcommunities

� Adequate information critical to an informedreview


Project justification

� According to the Proponent> “[T]he stated purpose of the Project ... is to develop the

hydroelectric potential of the Churchill River. Construction of a single dam ... in combination with alternative generation resources ... is also inconsistent with the stated purpose of the Project.” (IR#JRP.26S)

� Defining project justification this way …

> excludes analysis of alternatives, cost effectiveness, profitability and risk

• even though economic benefits are claimed

> is circular and tautological

� Recommendation> Define project justification in terms of the benefits claimed,

to allow analysis of proposed Project and alternatives

> Ignore tautological definition of Project Justification 3


Project description and sequencing� Letter of Nov. 12, 2010

> … it has become prudent to advance the planning of Muskrat Falls firstfollowed by Gull Island with an overlap in construction. This Project phasing is considered viable and we are seeking EA approval which includes this sequencing.

� Contradicted by IR#JRP.165 (Jan. 2011), which proposes � Contradicted by IR#JRP.165 (Jan. 2011), which proposes S2 or S3

> Sequence One (S1): Gull Island followed by Muskrat Falls, with an overlap in construction.

> S2: MF followed by GI, with an overlap in construction

> S3: MF followed by GI, with no overlap in construction

� No mention of Scenario 4: Muskrat Falls only> Email from Secretariat: “your S4 is in fact S3”

> S3 includes construction of Gull Island; S4 does not

> No information has been provided concerning Scenario 4 4


Changing nature of project

� EIS describes, in essence, a merchant power plant> No long-term sales commitments

> Power output to be sold in several markets, depending on economic conditions

• Quebec, Ontario, US, Maritimes

� Emera Partnership Agreement changes nature of project

> Scenario 4

> Serve Island loads, and limited export possibilities

> Negative cash flows in early years• No indication of depth or duration of financial cushion required to

cover negative cash flows – ratepayers?

– Nalcor?

– Provincial treasury? 5


Implications of EmeraPartnership Agreement� Description

> 2 TWh/yr (initially) to Island of Newfoundland

> 1 TWh/yr to Emera (Nova Scotia)

> 1.9 TWh/yr (initially) to New England markets• No access to QC/NY/Ontario markets• No access to QC/NY/Ontario markets

� Potential economic implications> Rate impacts on Island

> Profits (losses) from export sales

> Implications for Gull Island project

� “Careful and rigorous review” of Scenario 4 essential to Environmental Assessment of proposed project

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Assessing rate impacts

� Context> Most Island load served by NP

> Most NP power supply from NLH

> Both regulated by PUB under cost-of-service principles

• Regulated rate of return on generation assets

• Cost of purchased power flowed through

� No rate analysis in EIS> Proponent defers to PUB (IR#JRP.25S/26S (b))

> Board not consulted

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Comparative rate analysis

� Rates to almost double 2010-17, under either scenario> No other alternatives compared

� No supporting documentation

> Assumptions re fuel prices etc. unknown> Assumptions re fuel prices etc. unknown

� Media reports: Muskrat Falls to cost 14.3¢/kWh> Assumptions unclear

> Levelized cost or annual cost?

• Stable, or declining over time?

> Includes Transmission-Island Link?

> Provision for cost overruns?

� Inadequate information to understand rate impacts of Muskrat Falls on Newfoundland consumers 9


Alternatives

� Each scenario creates upward pressure on rates> Necessary to compare them rigorously with other alternatives as

well• Cost

• Reliability

• Environmental impacts

> Comparative analysis should be part of EIS> Comparative analysis should be part of EIS

� displacing Hollyrood key to Muskrat Falls justification> Several alternatives identified in EIS

• Additional DSM : 1 TWh/yr potential (JRP.25S (d))

• Wind : 1 TWh/yr from 350 MW installed ($0.5 B, 2006 $) (JRP.25, p. 5)

> Together would displace most Hollyrood fuel use

• still rely on it for balancing and reserves

> Or convert Hollyrood to natural gas

• Capital cost, fuel cost savings not evaluated10


Regulatory uncertainty

� Who will own and operate Muskrat Falls?

� If transferred to NLH once completed ...

> annual costs normally flowed through to purchasers (NP)

> Profits (losses) from export sales taken into account in setting NLH’s rates?setting NLH’s rates?

• If so, Island consumers could benefit from future profits, and have to cover export losses in early years

• If not, parent Nalcor will have to assume profits or losses

� If owned by Nalcor ...> Will it sell power to NLH, or directly to NP?

> Under what regulatory treatment?

• All costs flowed through?

• If not, implicit subsidy to Island consumers

� Uncertainty impedes rigorous analyis 11


Price risk

� EIS: Portfolio sales strategy to mitigate risk> Long, medium and short-term sales

> “Diversification of markets is possible and prudent”• Ontario

• Quebec

• New York• New York

• New England

• Maritimes

� Under Emera Agreement and S4> Portfolio strategy largely inoperative

> No access to Ontario, Quebec or NY markets

> Therefore much greater exposure to market price risk for export component

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EIS market price forecasts (PIRA)

� Average price approaching $85/MWh(2009$) by 2030 0.1

0.12

0.14

PIRA forecasts

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0

0.02

0.04

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cen

ts/k

Wh

average (nominal)

average (2009$)


PIRA vs Synapse forecasts

$0.06

$0.07

$0.08

$0.09

$0.102

00

9 c

en

ts p

er

kW

h

14

$0.00

$0.01

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PIRA average (2009$)


AESC Consortium (Synapse)

� Summer peak prices to reach $100/MWh by 2029

� Average prices under $90/MWh

$0.06

$0.08

$0.10

$0.12

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under $90/MWhin 2030

$0.00

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Synapse Summer Summer Peak

Synapse Winter Winter Peak

Synapse Annual Average

Synapse Summer Off-Peak

Synapse Winter Off-Peak


Muskrat Falls - Annual cash flow

� No financial model provided

� Back-of-envelope analysis

> Hypotheses• annual costs start at 14.3¢/kWh, then decline as debt • annual costs start at 14.3¢/kWh, then decline as debt

paid off

• 40% of output sold at market rates

• Unclear if full costs of NP supply to be passed on to ratepayers

> Preliminary conclusions

• Cushion required to support negative cashflows

• Magnitude and duration unknown

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Unit costs* vs. NE forecasts

$0.08

$0.10

$0.12

$0.14

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$0.00

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Muskrat Falls unit costs (est.)

PIRA average

Synapse average

* excluding transmission costs in Maritimes and New England


Unit costs vs. NE price forecasts

$0.08

$0.10

$0.12

$0.14

20

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pe

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Wh

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$0.00

$0.02

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Muskrat Falls unit costs (est.)

PIRA average (2009$)

Synapse average

alternate forecast (average)


Summer peak prices in NE

$60

$80

$100

$120

U

S

$

(

2

0

0

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On Peak Monthly Price Forecasts� New England

price peaks occur in July and August

� Reduced production during

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$0

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production during these months would signifi-cantly reduce average revenues


Daily flows at Muskrat Falls

� Highest flows at Muskrat Falls are in May and June

� July and August flows seem to be below annual

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below annual average


Price risk in export markets

� Based on forecast prices, export revenues may not cover Muskrat Falls unit costs until 2025-30 or later> even without taking into account transmission costs in

Maritimes/New England Maritimes/New England

> or further deterioration in exchange rates

� Significant losses to be expected in export markets for first 15-20 years of operation

� Who will cover these revenue shortfalls?> Island ratepayers (if Muskrat Falls owned by NLH)?

> Nalcor or provincial treasury (if Muskrat Falls owned by Nalcor)

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Implications for Gull Island Project� Transmission options

> 740 MW queued valid application with HQT

> Rejection of 1100 to 2824 MW application under appeal• Rejection on procedural grounds only

• Substantive issues not addressed in decision• Substantive issues not addressed in decision

> Except for that appeal, no active transmission options sufficient for Gull Island

� Unit cost for transmission

> Any Quebec option for Gull could probably also transmit Muskrat power at low marginal cost

> So proceeding with Island/Maritime Links would almost inevitably increase total transmission costs, if Gull were to go ahead

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Conclusions

� The scenario where development is limited to Muskrat Falls only is not addressed in the EIS> At this time, there is no reason to think Gull Island will go

ahead

� Project justification must explicitly take into � Project justification must explicitly take into account the anticipated benefits> Avoiding future rate increases and GHG emissions

resulting from continued operation of Hollyrood

> Profits from export markets

� To date, no convincing analysis has been presented supporting either aspect of the project justification

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Conclusions (cont.)

� Only after these benefits are properly evaluated, taking into account both costs and risks, can they be weighed against the environmental and social costs of the proposed Project

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comments on the proposed justification of the lower ... · displacing hollyrood key to muskrat...

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