Muskrat Falls electricity is here – finally!

Looking back on the Muskrat Falls project, which took 10 years in the making, it seems to have been completed with the final testing of the Labrador-island Link. The Holyrood power plant will be kept open (but not operating) temporarily as a backup source of electricity. Meanwhile, the savings of oil costs for keeping Holyrood plant idle will depend on the price of oil (in US$), the Uscanada exchange rate, and the recent utilization rate at the Holyrood plant.

The main reason for building the Muskrat Falls project was to replace the Holyrood power plant, as the cost of oil was rising to unprecedented prices 10 years ago, reaching a high of over US$190 a barrel. A secondary reason was to sell excess electricity to Nova Scotia.

In 2013, Nalcor stated, “In 2011, burning fuel at the

Holyrood plant cost ratepayers $135 million. Looking ahead to 2017, the annual cost of oil to generate electricity at the plant is projected to be $324 million without Muskrat Falls.”

Using today’s figures, assuming 29 per cent utilization rate (average rate over 11 years), cost of oil US$70, and exchange rate 1.00 US$ = 1.36 Can$. At maximum capacity, the Holyrood plant burns 18,000 barrels of oil per day. The current savings of not using Holyrood plant is Can$181 million annually.

During the last 10 years, the cost of using Holyrood plant has been between $135 million and $453 million annually. Nalcor’s $324 million estimate falls midway between the latter two figures, giving credence to its estimate.

At decision time 10 years ago, cost of capital was about 2.5 per cent. The estimated cost of Muskrat Falls project was $6.2 billion. If financing was fixed at that time, the annual cost would have been $155 million. In addition, the extra capacity of Muskrat Falls is available to Nova Scotia at current prices for electricity. Also, when the Island does not need power from Muskrat Falls (e.g. summer time) it can be sold for other purposes such as generating hydrogen. Clearly, Muskrat Falls project was viable and the decision to go was justified economically.

What got my attention at the time was that an Italian company and a United States company got the major contracts, while long established Canadian companies did not. Apparently, foreign companies can set up subsidiary companies in Canada at short notice, and be classified as Canadian companies for purposes of bidding. One of the successful companies had a share price of over $300 in 1992, declining to about $60 in 2013; not a very good reference for that company, especially as that company had severe problems getting the Labrador to Island Link working, causing lengthy delays.

Also, what got my attention at the time was that the federal government was willing to give a guaranteed line of credit for most of the original cost of the project. Why? Firstly, this province’s credit rating was not high enough given its history and size. Bank loans and bond issues would require high interest rates, without federal support. Secondly, federal government support may not have been forthcoming without its say in what contractors should be involved. In other words, Nalcor was obliged to work within the confines of both federal and provincial authorities. Halfway through the Muskrat Falls project, the provincial government of the day decided to replace the CEO of the project and give new guidance to the project. This would have caused an unnecessary delay, leading to increased costs, possibly as much as $1 billion, whether justified or not.

In general, lengthy projects requiring say 10 years to complete will always go over original budget by as much as 100 per cent. Wages and materials will not stay constant for 10 years!

As the current CEO of Newfoundland and Labrador Hydro said last month, “it can be very hard to come to work when all the folks are subjected to is that negative aspect, when we knew we would get here.”