Upper Churchill Power – The Unexamined Alternative

The UARB Decision – The Potential Impact to the Newfoundland Rate Payer
A Discussion Paper on Muskrat Falls Volume IX

By: JM
August 2013

The UARB Decision Executive Summary On July 22, 2013, the UARB in Nova Scotia conditionally approved the Maritime Link Project. The approval was dependent upon the guaranteed availability of ‘surplus’ energy representing about 40% of Muskrat Fall’s production, being available at market prices over the 35 year term of the agreement with Nalcor. This condition should not have been a surprise to observers of the Nova Scotia hearings, as it intended to codify what was presented by Emera themselves in their application to the UARB. The UARB demand to guarantee both the quantity and price of surplus energy over the 35 year term is not a minor condition, and should be properly explained to the people of Newfoundland and Labrador. Yet in their July 27 and August 3 Letters to the Telegram, both Ed Martin and Tom Marshall have not provided any commentary regarding the potential consequences of this decision, nor have they offered any insight into how both Nalcor and Emera will proceed. The implementation of the UARB condition will mean that Emera no longer will receive 20% of the power for 20% of the cost. Instead, Nova Scotia will receive 60% of the power, for what amounts to about 30% of the cost. Meeting the UARB condition will have an impact on the final rate to the NL consumer. This paper will attempt to further explain the potential impacts of this decision. Based on the DG2 data provided by Nalcor to the PUB, there is a potential 37% increase in the incremental rates charged to NL ratepayers for Muskrat Falls Energy if the conditions of the UARB are met. This would be reduced to a 10% increase if all export revenue in the early years of the project were used to offset the burden on the NL ratepayer. This is assuming that the Holyrood thermal plant can be decommissioned as per the original plan. If the allocation of additional power to Nova Scotia results in Holyrood’s life being extended beyond 2021, then these rates will potentially further increase.

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The UARB Decision

Part I: Introduction
The decision by the Nova Scotia Utility and Review Board (UARB) to approve the Maritime Link project, with a condition that there must be surplus power available at New England market rates consistent with Figure 4.4 of the Emera application, represents a fundamental departure from the deal that was signed in November 2010. It is perhaps the biggest challenge that the project has faced to date, having the potential to put both additional cost, and risk onto the Newfoundland rate payer.

Figure 1: Blended Rate from Maritime Link Project as Presented by Emera [Ref. 2]

Although the UARB decision will have a major impact on the project, the decision should not have been a surprise to any casual observer of the hearings. It was very clear that the access to surplus power, at much lower market prices, was the gravy that would make the project palatable to the Nova Scotia Ratepayer. Within their application, [Ref. 2] Emera clearly promoted this as the long-term advantage of the Maritime Link. The application to the UARB, which was prepared in co-operation with Nalcor, outlined there would be surplus power available over the 35-year term of the agreement. Although Nalcor would not commit to providing a firm commitment to the power, they certainly did not oppose the concept. The UARB decision document [Ref. 3] stated that the condition imposed on the approval of the Application was consistent with the Proponents messaging during the hearings:

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The UARB Decision “Accordingly, the Board directs as a condition to its approval of the ML Project that NSPML obtain from Nalcor the right to access Nalcor Market-priced Energy (consistent with the assumptions in the Application as noted in NSUARB IR-37 and Figure 4-4) when needed to economically serve NSPI and its ratepayers; or provide some other arrangement to ensure access to Market-priced Energy. In the Board's opinion, such a condition should not create any practical difficulty because it would simply codify what NSPML asserts is the effect of the arrangement in any case. It would also confirm what NSPML already states is Nalcor's view of their future relationship”. Yet the response from Nalcor, Emera, and the Provincial Government of Newfoundland indicates that this decision was clearly not what they expected. Therein lays the great paradox of Muskrat Falls. Why is a potential customer willing to purchase 60% of Muskrat Fall’s power under a long-term contract, and at market rates, such a major issue? This paper will attempt to explain why.

Part II: The Original Plan
Just prior to the decision gate 2 (DG2), in the summer of 2010, Nalcor made the decision to proceed with the Muskrat Falls first option. The messaging from Nalcor has been very consistent. Muskrat Falls is the lowest cost alternative to meet the provinces growing electrical need. Although only 40% of the energy will initially be used for the island demand, the domestic requirement will progressively increase until 100% of the Muskrat Falls output is required in 2052. This was effectively demonstrated within the July 11, 2011 presentation Nalcor made to the Public Utilities Board as shown within Figure 2.

Figure 2: Island – Labrador Electrical Supply Balance [Ref.4]

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The UARB Decision Even though only 40% of the energy will be initially used by the ratepayers of Newfoundland, it was communicated that the rate payer was responsible for paying for 100% of the project costs. Both the provincial government and Nalcor also communicated that any revenue from exports would not be used to lower rates for NL ratepayers. A power purchase agreement (PPA) was proposed between Nalcor and its subsidiary Newfoundland and Labrador Hydro (NLH) where the latter party would sign up to a “take or pay” contract. NLH would be committing to pay for the progressively growing portion of Muskrat Fall’s energy as shown in green within Figure 2. For the information of the reader, the “take or pay” agreement will state that the block of power is provided to Newfoundland Hydro for resell to the island consumer. If the power is not used, it must still be paid for. As part of the 2010 deal, and in exchange of the construction of the Maritime Link, Emera would receive the Nova Scotia Block consisting of 980 GWh energy delivered annually for 35 years. Figure 3 provides an overlap of the NS Block (980 GWh per year for 35 years) superimposed over the “take or pay” commitment between Nalcor and Newfoundland and Labrador Hydro. As is evident from this graph even with the base plan, there was a shortfall in energy in the period from 2038 to 2041. To the knowledge of the Author, Nalcor has never explicitly stated how this shortfall would be met.

Figure 3: Nova Scotia Block Overlapped Over the Labrador Electrical Supply Balance

Within the PUB review, Nalcor did provide a summary of the commercial terms of the proposed take or pay contract (Green Area), as provided within RFI-KPL-27-Rev. 1 [Ref. 6]. The basic output and cost of this power is presented in Table 1 for the DG2 analysis completed by Nalcor. Figure 4 presents a summary of Muskrat Falls Energy based upon RFI-KPL-27 and the data provided by Emera to the UARB (as contained within IR-37). Figure 4 provides a summary of
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The UARB Decision the cost of Muskrat Falls energy for the Newfoundland ratepayer, Nova Scotia ratepayer, and the market rate used for surplus energy. As evident the original plan had Muskrat Fall’s energy initially being sold to NL ratepayers at some 4 times the rates assumed by Emera as being representative of a competitive market .

Figure 4: Muskrat Falls Energy Costs Compared to Market (Ref. 6, 7)

Figure 5: Comparison of 2017 Unit Costs per the Original Muskrat Falls Plan

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The UARB Decision

Part III: The UARB Condition
Figure 1, as submitted by Emera to the UARB, proposes a blended rate to the Nova Scotia ratepayer that is premised upon the availability of surplus power from both Nalcor and New Brunswick. From the period from 2017 to 2041, there is some 1600 GWhr of energy that Emera have assumed that they can purchase from Nalcor at the “market rate”. This 1600 GWhr represents some 35% of Muskrat Fall’s production, post line losses. As shown within Table 2 this amount of power is assumed to be available from Nalcor from the period of 2017 to 2041. Assuming this power comes from Muskrat Falls prior to 2041, the energy supply balance is shown within Figure 6.

Figure 6: Energy Supply Balance Considering UARB Condition

Figure 6 clearly demonstrates that Nalcor are unable to meet the UARB condition without having to add additional power by the end of the decade to meet the predicted domestic demand growth. There is presently ~800 GWhr of Upper Churchill RECALL energy remaining, following the recent commitment to provide Alderon [Ref. 8], but this would effectively only be available in the summer months and other non-peak periods. Therefore, if Nalcor agree to sell Emera the surplus block of energy identified within the UARB hearings then there will be no power for industrial development in Labrador, or even for the predicted growth in load in Newfoundland. Additional sources of energy could be brought onstream, but it is very much in doubt if it could be produced for the market rates used in the development of Figure 1. The issue with the UARB condition is not that we do not have sufficient energy to sell to Nova Scotia. The real issue is that Nalcor must sell it to NL ratepayers over time, at the much higher rates, in order to finance the entire project.
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The UARB Decision As Figure 5 so effectively communicates there will be a revenue shortfall if Nalcor sell the additional surplus power at market rates only. If the Newfoundland ratepayer is still expected to pay for the entire project, and export revenue is not used to offset the costs, meeting the UARB condition will have an impact on our rates. Table 3 provides a summary of the rates when considering the impact of the UARB condition. This is summarized from the period of 2017 to 2040 in Figures 7 and 8. If Nalcor agree to sell the required 1600 GWhr of energy to Emera, at the Market rates as per the UARB condition, there will be an estimated 37% increase in unit rates to Newfoundland rate payers over the life of the project. This is if provincial government maintain their policy of not using export revenue to offset domestic rates. If all export revenue was used to lower domestic rates, there would still be a 10% increase in rates. These numbers are based on the DG2 data provided by Nalcor during the PUB process.

Figure 7: Incremental Cost of MF Energy ($/MWh) to NL Ratepayer With UARB Condition Met

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The UARB Decision

Figure 8: Average Unit Rate for Electricity Paid By Newfoundland Consumers – 2017 to 2041

This is a very simple demonstration of the potential impact of the UARB decision. There are some additional points of consideration: 1) This assumes that the Holyrood plant would still be closed. It is very unlikely that with the allocation of any additional energy to Nova Scotia, that Holyrood could close for reliability reasons. What-ever decision Nalcor make with respect to surplus energy they should confirm the impact on plans regarding the Holyrood thermal station. If any further commitment to Emera means that the Holyrood station must stay open, then the required upgrades will only further increase the rates charged to NL ratepayers. 2) The option of using all export revenue to lower rates to Newfoundlanders is something that Nalcor would not be keen to do. During the 2013 AGM Ed Martin presented an overview of Nalcor’s growth strategy. It was clearly predicated on using revenue from Muskrat Falls to finance future growth in both hydro-electricity and oil and gas.

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The UARB Decision

Part IV: Other Sources of Surplus Energy
Within their application to the UARB Emera clearly promoting a blended rate from 2017 to 2040 which is much lower than the rate for the Nova Scotia Block (980 GWhr) only. This is verified on Page 23 of the Emera application to the UARB:

The original application had this surplus power from both Nalcor or New Brunswick. However the majority of the 2 TWhr referenced above was intended to come from Nalcor, over the 35 years of the agreement. If Nalcor maintain that Muskrat Falls will be developed primarily for the benefit of Newfoundlanders, and they respect the original take or pay concept provided within Figure 2, it is unclear where this additional Nalcor generation will come from? In their own submission to the Newfoundland Public Utilities Board, Nalcor has effectively demonstrated that there is no source of new generation in Newfoundland which can provide that amount of Energy, for anything close to the surplus energy rate quoted in Figure 4.4 of the Emera application. The only source of existing electricity in Newfoundland and Labrador, in both quantity and price, is from the Upper Churchill. Emera seem to acknowledge this as a possible option:

As a Newfoundland ratepayer the Author would be very interested in Emera’s view on the alternate generation, particularly the Upper Churchill. Our own government have been unable and/or unwilling to enter into such an agreement with Hydro Quebec for access to low cost Upper Churchill power prior to 2041. Furthermore, to discount the critics who support waiting until 2041, the government of Newfoundland has argued that access to the Upper Churchill is not absolute upon termination of the infamous 1969 Power Contract [Ref. 9].

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The UARB Decision Yet Upper Churchill power seems to be possible solution to providing market rate power to Emera. It must be remembered that Hydro Quebec are obligated to provide open access to their power for Canadian markets prior to export to the US. Consider the following excerpt from the 1994 decision from the National Energy Board, in granting an export license to Hydro Quebec [Ref. 10]:

In the event that Emera does purchase Upper Churchill Power from Hydro Quebec, would they then have access to transmission rights as a partner within the Labrador Island Link? In the case of dispute resolution, would their 35% ownership in the LIL give them 35% of the transmission capacity? It must also be asked if the Labrador Island Link (LIL) can actually transmit any additional capacity beyond that offered by Recall and Muskrat Falls without significant upgrades? Interestingly, in Figure 1.2 of their application to the UARB Emera has described the Labrador Island Link as having a 900-1200 MW transmission capacity. This is higher than the 900 MW often quoted by Nalcor.

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The UARB Decision

Figure 8: Excerpt from Figure 1.2 of Emera Application to UARB noting 1200 MW capacity of LIL

Emera and Nalcor should clarify if the LIL has a 1200 MW rating. Was there an incremental cost to go from the original 900 MW to the 1200 MW rating? If this additional cost exists, is it being recovered under the Labrador Island Link agreement? Are Newfoundland ratepayers now paying a premium for additional capacity to export extra power to Nova Scotia? If power from the Hydro Quebec system is part of the solution to meeting UARB approval then there should be a tariff applied against the Labrador Island Link used to offset the cost which otherwise would be recovered from the Newfoundland Rate Payer. Within the 13 formal agreements can we even stop fair market access to Hydro Quebec power through the Labrador Island Link? This is a question which should be answered by Nalcor.

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The UARB Decision

Part V:

Conclusion

It has been a month since the UARB decision was tabled, and to date there has been limited public discussion by either Emera or Nalcor. However from Emera’s recent quarterly statement to the market it is very likely that re-negotiated agreement between the parties will again have to be resent to the UARB for approval [Ref. 12]. This will extend the period until Nalcor can be certain that they have a committed partner on the project. It is a precarious position at best. However, the question must now be asked. If the revised deal between Nalcor and Emera has the potential to increase our rates into the future, should the Public Utilities Board also be provided the same opportunity for review to ensure it is in the same long term interest of the Newfoundland and Labrador rate payer? As the expedited PUB review could be completed in parallel with the UARB review it is certainly difficult to understand why this would not be demanded by the tax payers of Newfoundland and Labrador. As a minimum Nalcor and the Government of Newfoundland and Labrador should answer the following simple questions regarding the any revision to the deal with Emera: 1) Is there a potential that it will increase NL rates into the future from what was provided during DG3? 2) In the absence of any additional generation (ie: Gull Island) can Holyrood close if additional energy is committed to Nova Scotia? 3) If energy from “Alternate Sources” is wheeled over the NL grid will Emera have to pay a transmission tariff similar to what Nalcor will pay Emera to wheel power into the US? 4) If Emera are planning to access Upper Churchill power at market rates, why did Nalcor not consider this power purchase when it confirmed Musrkat Falls as the lowest cost option? 5) What is the capacity of the LIL? If it is 1200 MW as quoted by Emera, are NL ratepayers paying for this additional capacity to export energy to Nova Scotia? If it is 900 MW is there sufficient capacity to meet all the demands? 6) Is the AC upgrades on the island system required to support transmission of the additional energy into Nova Scotia. Are the upgrades to the island AC system being included in the island rate base? 7) What are the terms of the power purchase agreement between Nalcor and Newfoundland and Labrador Hydro? Who has priority to the energy and capacity?

Who is making this decision on behalf of the people of Newfoundland and Labrador to proceed with the Maritime Link? Most importantly what are the criteria for establishing what is in the best long term interest of Newfoundland and Labrador.

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The UARB Decision

References
1 2 3 4 5 6 7 8 9 10 11 12 13 http://www.pub.nl.ca/applications/MuskratFalls2011/files/comments/11-JM-2012-02-29-Rev1.pdf http://nsuarb.novascotia.ca/sites/default/files/documents/muskratfalls/m-2.pdf http://nsuarb.novascotia.ca/sites/default/files/decisions/m05419_decision_maritime_link_project.pdf http://www.pub.nl.ca/applications/MuskratFalls2011/files/presentation/Nalcor-ProjectOverview-July1811.pdf http://www.pub.nl.ca/applications/MuskratFalls2011/files/rfi/CA-KPL-Nalcor-177.pdf http://www.pub.nf.ca/applications/muskratfalls2011/files/rfi/CA-KPL-Nalcor-27-Rev1.pdf http://nsuarb.novascotia.ca/sites/default/files/documents/muskratfalls/m-11_revised.pdf http://www.nl.dailybusinessbuzz.ca/Provincial-News/2013-01-10/article-3153832/NL%3A-Nalcor-toprovide-energy-for-Alderon%26rsquo%3Bs-Kami-project/1 http://www.powerinourhands.ca/pdf/UpperChurchill.pdf https://www.neb-one.gc.ca/ll-eng/livelink.exe/fetch/2000/90466/94151/94159/94196/94260/1994-1201_Reasons_for_Decision.pdf?nodeid=94264&vernum=0 http://www.powerinourhands.ca/pdf/Agreement.pdf http://www.emera.com/en/home/mediacentre/recentnews/2013/newsreleasedetails.aspx?SourceParams =reqid-1846769 http://thechronicleherald.ca/novascotia/1144536-dunderdale-link-never-hinged-on-review-board-decision

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The UARB Decision
Table 1: Summary of Take or Pay Contract between Nalcor and Newfoundland Hydro Showing Increased Output from Muskrat Falls. (Source: RFI-KPL-27-Rev. 1)

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The UARB Decision

Exerpt from UARB IR-37 showing how the blended rate was calculated.

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