The Government of Newfoundland and Labrador and Government of Canada have re-financed the wildly overbudget Muskrat Falls Hydroelectric Project—an essential step to keeping electricity rates manageable in Newfoundland and Labrador. Business and homeowners don’t yet know exactly what their rates will be over the next few years. There are still many uncertainties. However, the near-term picture should start to become clearer with filings being made to the provincial utilities’ regulator between now and the end of summer.

On Thursday, Newfoundland and Labrador Hydro announced the close on additional Muskrat Falls financing, with Hydro securing $1 billion through CIBC. The funds are underwritten through a series of 21 bonds, with an average interest rate of 3.38%. The project has been subject to three loan guarantees and bond issuances to date. The original round of market-based project financing in 2013 involved $5 billion total at an average 3.8%, the second round in 2017 was $2.9 billion at an average 2.87%.

In a statement March 31, following the close, Hydro President and CEO Jennifer Williams said it was “yet another critical step forward” in seeing that power rates do not suddenly double.

 

Feds, province set terms

When the Government of Newfoundland and Labrador first greenlit the Muskrat Falls power development (including 824-MW generation and major transmission), the dam and power-producing infrastructure in Labrador was scheduled to reach full power by the second quarter of 2018. Under the original plans, electricity from the plant would have come after full function of the new Labrador-Island Link transmission line (LIL), scheduled for a year earlier, in the second quarter of 2017. The schedule was blown on both, though the line has lately been the concern. The completion date for the whole project is now officially set for the end of May 2022. That’s even with, by all accounts, no credible forecast for full operation of the LIL controls under permanent software.

The Muskrat Falls Project was estimated at an all-in cost of $7.4 billion at sanction and has reached an estimated $13.1 billion, leading to the additional financing and rate mitigation work.

The latest round of financing was laid out in the term sheets signed by the provincial and federal governments in St. John’s on Feb. 14. Those terms followed a broad-strokes agreement for federal aid announced in July 2021.

The entire agreement covers $5.2 billion of the total project financing. One term sheet signed covers an agreement for a direct investment by the federal government into the LIL (being the first direct, federal investment, drawn down at a maximum $150 million a year, to be repaid over time). The second sets out a new loan guarantee, for the $1 billion in new borrowing backed by the equivalent of Canada’s Aaa credit rating, saving Newfoundland and Labrador on long-term borrowing costs. A final, key piece of the rate mitigation work is the gift of an annual return to the province of the Government of Canada’s “net profit interest” and “incidental net profit interest” from the Hibernia offshore oil project. As reported in the fall, the federal government helped get Hibernia started back in 1997, with a $973 million grant and not quite $2 billion loan guarantee. Since then, to 2020, it had received a total of $3.35 billion in NPI and INPI payments. Looking ahead from there, also based on offshore oil production expectations as of the start of 2022, the agreement-in-principle on the transfer said future returns are estimated at $3.2 billion before the end of the oil project’s life. It will now all go to chipping away at Muskrat Falls Project overruns, for manageable rates.

 

Next up

The new pieces of financing fill important gaps for power planning and rate setting purposes. Newfoundland and Labrador Hydro will have to file to the Board of Commissioners for Public Utilities (PUB), the utilities regulator, proposing electricity rates that incorporate the Muskrat Falls Project costs into Hydro’s rates.

For the majority in the province, Hydro is the bulk power supplier. Retailer Newfoundland Power purchases from Hydro and, in turn, Newfoundland Power deals directly with most customers. In other words, the new rates for Hydro will, in turn, need to be incorporated into Newfoundland Power rates, through a separate application and rate setting process at the PUB.

 

“We can only close Holyrood after we have consistency of supply from Muskrat Falls over a number of years and all the kinks are out of the system, and we are not even into the system yet.”

—Dennis Browne, N.L. Consumer Advocate

 

Muskrat Falls costs are only expected to kick in after full commissioning of the project. There is no set timeline on the rate setting processes. It complicates things that the regulatory system itself is under review by the provincial government.

It is also unclear what will be demanded by the PUB in the context of back-up power sources closer to the island’s Avalon Peninsula. The rate proposal to come from Hydro may or may not cover all the needs for the system longer term, with a better look at the long term to follow from a utility outlook on reliability and resource needs, set to be issued in the summer.

It’s about the cost of back-up power supply and of potential additional supply. After all, the plan with Muskrat Falls had been to shutter the heavy fuel oil-burning power plant at Holyrood as a power producer but experts involved have no agreement on when that kind of a closure can happen, especially given troubles with the line.

“Given all that’s transpired, I would be very surprised if that hope is realized. It seems that we will have Holyrood for some time into the distant future,” said Newfoundland and Labrador Consumer Advocate Dennis Browne, speaking recently with Atlantic Business Magazine. “We can only close Holyrood after we have consistency of supply from Muskrat Falls over a number of years and all the kinks are out of the system, and we are not even into the system yet.”

He said new generation apart from Holyrood and anything planned under the original Muskrat Falls planning has not been ruled out.

The aid from the federal government comes with a government-held goal of residential rates in Newfoundland and Labrador coming in at or below 14.7 cents per kilowatt hour when Muskrat Falls costs are first factored in. The direction from the provincial government for years now is it does not want “rate shock,” or any increase of 10 per cent or more a year in power bills and the new provincial-federal agreement should keep from reaching that level. But an increase in power costs is expected even with the rate mitigation work. And, beyond this year, customers have been told to expect increases of around 2.25 per cent per year over time.

 

Innu Nation interests

The term sheet details and signatures were at one point expected in 2021 but delayed at least in part by a federal election and an intervention by the Innu Nation. The Indigenous government was not at the table when changes to the Muskrat Falls Project financing were being settled.

Fearing losses in returns to the Innu Nation from the Muskrat falls Project, as negotiated under the New Dawn agreements with the province that allowed construction to begin, the Innu took the issue to court in September. An agreement was reached to enter into related talks. More recently, the Innu requested facilitated negotiations. Their issue remains outstanding. There was no Innu Nation representative at the term sheet press conference and, as of last update, it remains unsettled.

Premier Andrew Furey was asked why he would press forward. “Frankly, the uncertainty that exists in the markets right now, we felt a significant degree of urgency to proceed,” he said, confirming interest rates and a possible hike in rates, increasing financing costs, was a concern.

Furey says the term sheets and new steps in covering overruns, “in no way harms the process agreement we have in place” with Innu Nation.

 

Maritime Link 2  and the Loop

Further complicating the rate picture for Newfoundland and Labrador is the outstanding question of what role the province and Innu Nation will or will not play in the urgent business of settling energy transition plans for the Eastern Canadian electricity sector.

 

“Reaching a net-zero economy by 2050 will require a significant expansion of clean electricity supplies…”

—Regional Clean Power Planning Committee, final report

 

In March 2019, the Atlantic provinces and federal government agreed to develop a “roadmap” for a clean power future for the region. An interim report highlighted climate change response and federal greenhouse gas emission reduction targets.

The final report from the regional “clean power planning committee” was delayed but finally released March 11. The key conclusion? The region needs more electricity.

“Reaching a net-zero economy by 2050 will require a significant expansion of clean electricity
supplies before 2050 to transition from approximately 2,000 megawatts of existing baseload fossil fuel generation in the region while at the same time serving a growing demand for electricity,” it stated.

The Maritime Link, built by Emera in connection with the Muskrat Falls Project, commissioned in 2018 and flowing electricity from the island of Newfoundland to Nova Scotia for the first time, has been dubbed the first step in the “Atlantic Loop” electricity development. The Loop is effectively an improved transmission grid, with new and strengthened ties between provinces, to allow for more power that is not fossil fuel-based to flow into Nova Scotia and New Brunswick. The regional committee report states imports would help meet 2030 targets and “avoid some baseload natural gas builds in the 2030s.”

Hydropower imports could come into New Brunswick over Quebec-New Brunswick lines. At the same time, the committee—including power suppliers in the region—have also explored adding a second Maritime Link (or “advanced Maritime Link”) to increase the amount of electricity flowing from Newfoundland and Labrador into the Maritimes.

Perhaps more importantly, in the context of Muskrat Falls financing and criticisms, the regional committee recommended discussions on co-financing of electricity projects, including mention of ongoing discussions with Maritime entities and the Canada Infrastructure Bank.

It has all been marked for urgent decisions. “Given the regulatory assessments, environmental and technical studies still required, investment decisions supported by an appropriate regulatory path on the Atlantic Loop projects are needed in the near term,” the committee states.

The planning committee includes mention of need for social acceptance, but possible Indigenous project leaders and partners were not included in the planning effort, though representatives for the Atlantic Canada Opportunities Agency and Canada Infrastructure Bank were part of the committee. Even Hydro-Québec, currently in a legal battle with the Innu Nation over issues tied to Churchill Falls and the equivalent production of the whole of its power exports, was included with “observer” status. The process hasn’t been a fully public one.

A just under 50-page technical report produced by expert consultants at E3- Energy + Environmental Economics was not proactively released to the public but made available on request following the release of the committee’s final report. It was dated July 2021.

Just days after the clean power planning committee’s final report, the Government of Canada issued a new discussion paper on getting to a net-zero electricity sector. Responses from the public are due by April 15, next Friday. The discussion paper talks about and seeks input on a Clean Electricity Standard, the plan for net-zero electricity by 2035, the use of natural gas, the need for new investment in electricity infrastructure. It highlights the Atlantic Loop project, whatever it might look like once transmission studies are completed and actual projects proposed, as an example of clean power collaboration.

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