Notwithstanding the construction crews now swarming Labrador’s Muskrat Falls power dam site, sunk costs in excess of $1 billion and a federal loan guarantee standing behind the project, the future of the Newfoundland & Labrador (NFLD) government’s pet megaproject suffered two blows Monday so grave that they threaten the entire project.
Muskrat Fall is seen as a Newfoundland’s new destiny project. The project involves building a new 824 MW power dam on the Lower Churchill River near the town of Goose Bay. The power would be transmitted to the island of Newfoundland by means of a transmission line tunnelled under the Strait of Belisle. Another submarine transmission line would link the island of Newfoundland to Nova Scotia’s Cape Breton.
The project’s cost is usually reported as $7.7 billion, a price tag that includes almost no contingency and no interest expense during construction, which could add another $1 billion. The provincial government’s plan is to sell a large portion of the production from Muskrat Falls to Nova Scotia.
But Hydro Quebec on Monday filed a motion with the Quebec Superior Court seeking clarification of its rights under the Quebec’s existing 1969 Churchill Falls Contract. The core of Hydro Quebec’s case is to claim that it has an exclusive right to purchase virtually all of the power and energy produced by Churchill Falls Generating Station until August 31, 2041, and that Hydro Quebec has the right to control the output of Churchill Falls to optimize the operation of its own power needs.
Hydro Quebec’s court application responds to a plan by the NFLD government’s crown utility Nalcor to take a large block of power from Upper Churchill during the winter, replacing that power with excess production from the downstream Muskrat Falls project during the spring run-off.
When I published my concern that Nalcor’s production plan for Muskrat Falls was not going to work almost 2 years ago, Nalcor responded by claiming that they had secret legal and engineering opinions supporting their plan and went on to demand an apology. The government of Newfoundland and Labrador later changed its access to information legislation preserving the secrecy of those studies.
The sad historical truth of NFLD’s current tight spot over water rights is that the province has repeated the mistakes of the past. Back in 1969, Newfoundland didn’t negotiate with its necessary partner — Quebec — for transmission rights through Quebec until after massive sunk costs had been committed. Today, the province has repeated that mistake by not nailing down its needed water rights with Quebec before spending massively on Muskrat Falls.
Meanwhile, Nova Scotia’s Utility and Review Board (NSUARB) on Monday brought down its decision on the Nova Scotia element of the project. The structure of the deal that the regulator reviewed was one where Nova Scotia signed up for a modest-sized firm block of power at a relatively high firm price. But Nova Scotia has the option to buy additional power at market price, which is today very low, reflecting North America’s newfound gas bounty.
The utility serving Nova Scotia, Emera–which will pay for the cost of the submarine link between the island of Newfoundland and Cape Breton–hitched its sales pitch to the theory that the blended cost of power would be attractive. The NSUARB decision also emphasizes that all risks associated with water rights and low rainfall related to the firm block of contracted power rests with Nalcor. Nalcor’s responsibility to delivery energy to Nova Scotia and any shortfalls due to water issues leaves Nalcor financially responsible for replacement power.
As I argued here previously on this page in “Muskrat Folly” last December, the Muskrat Falls project risks fomenting interprovincial conflict. Already and predictably, Newfoundland nationalists have started frothing about Quebec trying to screw Newfoundland. The sober arguments about abiding by the terms of signed contracts are not likely to get much air time in Newfoundland this week.
The good news is that Hydro Quebec’s court initiative and the NSUARB decision have both arrived at a time when the amount of sunk cost, though huge, is still a small fraction of the overall project cost. Until the contractual uncertainties surrounding the project’s production and sales plans are worked out, it would be madness to keep spending money on the project.
Tom Adams is an electricity consultant at www.tomadamsenergy.com