Former PUB chair lays out warnings on Muskrat Falls

Kevin Curley, The Packet
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Economist David Vardy says province must assess the cost of stopping, as well as the cost of continuing with hydro project

By Kevin Curley and Barbara Dean-Simmons
If the Muskrat Falls hydroelectric project continues to completion, the debt for the province will equate to about $20,000 for every man, woman and child in Newfoundland and Labrador.



That’s the reality laid out by David Vardy, economist and former chairman and chief executive officer of the Newfoundland Public Utilities Board, in a speech to the Clarenville Rotary Club earlier this week.

A day after his address to Rotary, Vardy sat down with The Packet to provide more detail of his concerns about Muskrat Falls.

He said the massive project, first announced by the Danny Williams government in 2010, was promised to be a huge pay off for the province, bringing in revenues from the sale of energy to Eastern U.S. markets.

Those were the days of high oil prices, when the provincial coffers were awash with oil royalties to help fund other megaprojects.

That scenario is now on shaky ground.

Oil prices have plummeted and the province’s fiscal position is drastically weaker, so much so, said Vardy, that the province is at the point where it cannot borrow under long-term loan agreements.

Instead, said Vardy, the province is only able to borrow short-term from lending agencies, because its financial rating has taken a hit.

He said that means the province may not even be able to borrow the money to cover the costs of completing the Muskrat Falls project.

Vardy, and others, have been concerned about the feasibility of Muskrat Falls from the start and over time his worry has grown.

When the project was unveiled to great fanfare, in a news conference at the Sheraton Hotel in 2010, the original estimated cost was $7.75 billion, including the $1.55 billion cost of the Maritime Link, he noted.

At that time, the province said it would put up $0.7 billion, the Nova Scotia government had committee to $0.5 billion and Ottawa was providing a loan guarantee to help finance the project.

Since then, the costs on the project have risen, the Nova Scotia part of the deal has changed and the province, through Nalcor, has already borrowed the full $5 billion using long-term bonds.

Originally, for agreeing to be partners in the project — essentially financing the cost of the Maritime Link — the Nova Scotia government would get 20 per cent of Muskrat’s power, Newfoundland and Labrador would use 40 per cent, leaving 40 per cent for surplus sales.

However, Vardy said, when Nova Scotia’s Utilities and Review Board assessed the project, it rejected the original deal and renegotiated it.

The revised deal will see Nova Scotia getting from 44-56 per cent of the power generated by Muskrat Falls, for 21 years.

That leaves less than 10 per cent of the power from Muskrat for this province to sell to other markets.

 “The current government has inherited a big mess and they need to deal with it,” Vardy said.

He said it’s not too late to pull back, to stop the project, if necessary.

So far, construction has cost about $4 billion, he said, and will probably reach $6 billion before the year is over.

However, based on how costs have risen since the first estimates, and other factors that came into play, Vardy said the final costs could be $12-15 billion if it continues.

Ernst and Young, a financial services and accounting firm, is reviewing project costs, scheduling and risks involved to complete the project.

However, Vardy said the other thing the province must assess is how much it would cost to stop the project.

While he won’t go as far as to say the project should definitely be abandoned, Vardy said he’d like to have more facts, including the report from Ernst and Young. He does think the government should weigh the cost and benefits of continuing, against the cost and benefits of stopping.

If stopping isn’t an option, he said, the province would need to attempt to renegotiate the deal with Nova Scotia and look to the federal government for some more cash.

Meanwhile, Vardy said, when it comes to the demand for energy from consumers in this province, the answer may lie in the Upper Churchill — the project of the government of former premier Joe Smallwood that went down in infamy as being one of the worst deals in Canadian history.

Despite that bad deal, said Vardy, this province still gets 300 megawatts of power from the Upper Churchill. Half of that is committed for use in Labrador. The other half could come to the island, he said.

Ironically, thanks to the Muskrat Falls project, a transmission link across the Labrador Straits makes it possible to feed Upper Churchill power to the island.

“We could be using it on the island, so that could be a huge help,” he said,

To those who say Muskrat Falls can’t be stopped because it’s an important job creator, Vardy has a quick answer.

“When I look at the monthly reports from NALCOR and I look at how much money they spent in the month of November. They spent $205 million. Then I looked at how much they were spending per person. It worked out to $480,000 per person, per year,” Vardy said.

 “To say we are going to keep this project going — as a make work project — when it is costing us half a million dollars per person — you have to be kidding.”

Vardy said the next pivotal point will be the Ernst Young report.

 “It may well be that when they do the analysis, maybe they’re right. I don’t know. It might come to the conclusion that we can’t stop it, but at least we’ve looked at it,” Vardy said.

However, if the province chooses to continue the project, Vardy said it must determine how to pay the bill.

“It will have to come from the province, unless we can go to the federal government and ask them to put in more money,” he said.

Vardy said he was suspicious of the Muskrat Falls project since the beginning, and is anxiously awaiting the Ernst and Young report in the next few weeks.

With that report, he said, the Liberal government of Dwight Ball has to be ready to make some key decisions.

Organizations: Newfoundland Public Utilities Board, Clarenville Rotary Club, The Packet Ernst and Young Maritime Link Sheraton Hotel Utilities and Review Board

Geographic location: Muskrat, Nova Scotia, Eastern U.S. Newfoundland and Labrador Ottawa

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Recent comments

  • H Jefford
    April 10, 2016 - 20:15

    The Muskrat Falls Must be built with A transmission lines capable of adding on extra lines that could also carry the Upper Churchill Falls power after the year 2041 When the one sided Contract now in place expires! A contract that has PAID QUEBEC , $100. BILLION, for it's share of the sale of power! To NFLD share of only $1. BILLION ! The NFLD party that flew up to Quebec to sign this one sided contract died in the crash leaving Quebec the only copy of the signed so Called contract!

    • Winston
      April 14, 2016 - 06:05

      Mr Jefford, since these towers are already manufactured and delivered, and sized in strength for only this MF lines, do you now propose we scrap them and design new ones. Genius ideas like yours are rare and perhaps should hire you as a consultant.

  • Angus Gillingham
    March 22, 2016 - 11:41

    I've also been against this deal since it's inception because of common sense of the cost versus return and the concern that my children and down will inherit a large problem and expense even if every part of the puzzle played out perfectly. You would never see Williams or the other con artists of this project invest their own monies in this mess of a deal. I will now know the persons to trust in public affairs as they speak out against this white elephant of a deal. Please put the pressure on and end this madness.

  • Just sayin
    March 21, 2016 - 16:40

    Juan, as to your statement that Muskrat Falls will produce around 900MW, how accurate is that. Maximum production is 824Mw and the most that can get to St. John`s is is about 740 MW, due to transmission losses, so that is 160 MW less than 900. At about 1.3 billion dollars cost per 100 MW delivered, that is about 13 times the rate of the new gas turbine cost. And as average production can only be about 550 MW from Muskrat Falls, not 900,( as this is all the water flow allows), we are pushing close to 2 billion dollars cost per each 100 MW. But since cost to you is not a factor, even if it bankrupts us, I guess you know better than Mr Vardy. I say move along Juan, move along.

    • Juan
      March 24, 2016 - 15:02

      Just sayin: The LIL has a capacity of 900MW; 824MW from MF + 300 MW UC recall energy = gives you all the energy you can handle As per your cost for MW, the math voodoo is nonsense. Try using that formula for whatever power option you want (wind, gas, oil, coal) with lifespans ranging from 25-50 years... Hydro dam lasts at least 100. Then you talk about Gas? Where is all that gas coming from? Are you proposing an LNG or CNG plant here on the island now as well? How many $billions would that be? Or is it a Gas Pipeline through Iceberg alley that you are suggesting? A genius you are: arguments built on half-truths and poor math. You focus on the problems, but you are never interested in solutions. Go back to calling into open-line!

  • Winston Adams
    March 21, 2016 - 11:26

    John Smith, you ask where do we look for new sources of power generation, if not Muskrat Falls. You forget, or avoid this fact: that the lowest cost kwh is the one that is not wasted through inefficiency. We need electric power for heating our homes, now being done by the very inefficient baseboard heaters. With heatpumps run by electricity, they use less than half the power. For the average Nfld house with 6 kw of baseboard heaters, these would need only 3kw of heatpump load, a saving of 3kw per house on the winter peak demand. Now simple multipication: 3kw times 150,000 houses = 450 megawatts.... there goes the need for Holyrood for firm generation. In 2011 Nova Scotia was installing these at the rate of 20,000 units per year. For 150,000 houses here, the cost is about 1.8 billion, less than one fifth MF cost and reduces household energy bills by 35percent yearly. But this is thinking outside the box, and it seems certain you are not capable of this. By the way, my background is as a power engineer, and also mechanical systems. My heatpump heats my 1000 sq ft cottage for 260.00 per year electrical energy, with the temperature never below 73F. Now operating flawlessly since 2010, it is now paid off in energy savings . So this is NOT imaginary. And these units are seeing an increasing uptake, which dooms Nalcor`s forecast projection, already acknowledged by Nfld Power, showing severely reduces numbers for 2016 and 2017. Sorry to see you have locked yourself into a box, with tunnel vision. The result being double the energy bills going forward and then will have the highest by far electricity cost in Canada.

  • Juan
    March 20, 2016 - 06:01

    When is Mr. Vardy going to be called out for misrepresenting the facts? We all know that the Holyrood facility should have been closed 5 years ago. Muskrat Falls can replace this broken down pollution machine and it will last 100 years. That's twice the lifespan of any other generation type. Muskrat Falls will produce around 900MW of energy. We need 40% for our own use, Nova Scotia gets 20% for building an undersea link to our system and the remaining 40% of energy can be sold by us, based on the New England energy market price. If Mr. Vardy was more interested in the actual facts in front of him and not in his personal agenda to prove that he was right from the start, he might have more credibility. Muskrats Falls is being built.....move along Mr. Vardy! Have the costs risen, unfortunately yes, but our new government has already hired someone (not group 2041) to look into all of that....move along Mr. Vardy! 40% of MF energy is surplus to our current needs and can be sold, along with other surplus energy we currently have, based on New England market prices to help pay for this. Just read the agreement between Emera and Nalcor...... Move along Mr. Vardy The deal is done, the money has been spent, there is no turning back on Muskrats Falls. Yes, some of the way this has been managed could have been done better, but 40 years from now I really do think that my grandkids will benefit from this. If Mr. Vardy is going to continue to misrepresent the facts and not offer some thoughtful solutions on other, much more significant, problems this province faces then he should go back to quietly drawing on his provincially funded pension and enjoy his retirement with his family. Go find happiness!!! But...... Move along Mr. Vardy, move along!

  • John Smith
    March 19, 2016 - 11:16

    so...if we do stop it, and incur the hundreds of millions in penalties, and fines, and lawsuits from broken contracts...and mothball the only viable source of employment for an entire region of the province....forgetting all that for a moment...where do we look for new sources of power generation? We barely got through this winter with Holyrood, the 40 year old, past its useful life, smoke belching facility that they don't even make parts for anymore. What do we do next winter if that place finally gives up? The whole impetus behind Muskrat Falls was to provide a clean, renewable source of power for the province that would last us well into the next century. We need a new major, multi-billion dollar source of electricity....and no one can dispute that. We had Navigant, MHI, and other, reputable players in the industry scrutinize the project, and they gave it the thumbs up. Anyone who brings the Nova Scotia part of the deal into the picture is completely missing the point....we could have built the project, and never even entertained the link to NS...and Muskrat would still have been completely viable...but we would have had to let water spill into the sea...now we have gained a valuable link to the national power grid, allowing us to sell power from any source, to help pay for the project, and hence lower our cost per KWH. Of course we could just stand by and wait till Holyrood falls down around our ears and hope for the best,like Mr Vardy suggests we do, but there are others who can see that we do need new sources of generation, and that MF is by far the best choice. We could have spent a billion here, and a billion there, and a few more billion trying to eke out a few more years from Holyrood....only to be left in the end where we are today...only a lot poorer...why does anyone listen to the Cabot Martins and Dave Vardys of the world? They have no experience in electrical generation, building large projects, or anything else pertaining to this issue...yet many think these people have something of worth to say...when they do not...stick to what you know 2041 group...and let those who actually know what they are talking about deal with large scale hydro dams...

    • Jerome
      March 19, 2016 - 14:33

      Why would anyone listen to the John Smith's of the world. Our population is getting older , using less electricity and our population is not growing. Technology is changing , new power sources are being developed, one out of MIT in the US, is to change the glass office towers into hydro generators, one among many. Build wind turbines like on the southern shore, doesn't cost us anything and is added to our power grid. Yes wind doesn't always blow, but if enough of these wind turbines were strategically placed around the island, if no wind in one area there would be in another. Private enterprise would build these with no cost to us the taxpayer. How many more like me will be installing solar panels on our roofs to offset the high cost of electricity from MF. Further downgrading the viability of MF. John think outside the MF boxes and be open to the expanding world around you. The USA will convert to abundant natural gas before purchasing our high priced hydro. Kill MF before we all go broke.

    • John Smith
      March 20, 2016 - 06:06

      Jerome you are wrong....our energy usage is going up...not down...we had several alerts already this winter...we have 300,000 of our 500,000 people living between Clarenville and St. John's...and most of them have large house with electric heat. Wind cannot be used on it's own, and cannot be used unless we are connected to the grid...which is yet another benefit of MF. Solar panels in NL....LOL get real....The power we sell from Muskrat will never make it out of the Atlantic provinces...but the markets in the US are huge...and they still have dozens of coal fired and nuclear plants which will be shut down over the next 20 years, requiring them to import even more power. Oh, and unlike Vardy and Martin etc. I don't pollute every media with drivel, espousing that I some sort of expert...I am not....but they are not either...they are lawyers and city managers not experts in the field of electrical generation...and so they should stick to what they know....

    • Dolf
      March 22, 2016 - 10:18

      'the only viable source of employment'. There's the jobs thing again just like the fish farming in Placentia Bay. Enough of the irresponsible and overly costly projects already.

  • OTP
    March 19, 2016 - 10:16

    St. Peter don't you call me cause I can't go............ I owe my soul to the Muskrat Falls Flow.

  • Maurice E. Adams
    March 19, 2016 - 08:50

    That should have read http://www.vision2041.com/

  • Maurice E. Adams
    March 19, 2016 - 07:55

    To get a quick look at the island's so-called growth in peak demand, go to www.vison2041.com. The more that demand is less than forecast, the higher rates will have to be (all thanks to Nalcor's Muskrat Falls 50-year 'take or pay' contract).

  • Ev
    March 19, 2016 - 07:14

    Sounds like another colossal Newfie joke. Who doesn't sit down and figure the cost of building anything lest he run out of money before it is half built and look foolish for doing so.

  • gord
    March 18, 2016 - 23:13

    Muskrat Falls was NEVER the LOWEST COST OPTION. It was the ONLY option looked at. It would have been cheaper to buy power from Hydro Quebec and only build the transmission lines and the link from Labrador. Of course. Danny and Ed wouldn't look at that as an option. No legacy project there, eh?