Will Hydro-Québec save Newfoundland from its Muskrat Falls fiasco?

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When a columnist at Montreal’s La Presse recently suggested Hydro-Québec buy Newfoundland and Labrador Hydro to help extricate the Atlantic province from the Muskrat Falls fiasco, Newfoundlanders responded in no uncertain terms.

Popular the idea was not.

Many residents of Newfoundland harbour deep resentment toward Quebec over the lopsided 1969 contract that allows Hydro-Québec to reap huge profits on power it purchases at risibly low rates from the Churchill Falls dam in Labrador while leaving only crumbs for their province. They never want their province to do business with Hydro-Québec again.

Newfoundland likely has no choice, however. As Premier Andrew Furey scrambles to prevent a near doubling of electricity rates when power from the $13-billion Muskrat Falls generating station starts flowing later this year, federal and provincial officials are exploring options to “monetize” revenue streams from Churchill Falls to offset the financial burden of Muskrat Falls.

However, many experts think any deal would almost inevitably involve Hydro-Québec, which owns 34 per cent of the gigantic 5,400-megawatt Churchill Falls generating station. The Quebec government-owned utility’s power-purchase contract expires in 2041, though Newfoundland has repeatedly called for its immediate renegotiation to reflect prevailing market prices for electricity. Hydro-Québec purchases more than 95 per cent of the power generated by Churchill Falls for about 0.2 cents per kilowatt-hour. The electricity fetches 25 times that amount in export markets.

Newfoundland is now saddled with the debt from the 824MW Muskrat Falls dam, which sits downriver from Churchill Falls on the Churchill River in Labrador. Former premier Danny Williams championed Muskrat Falls as a project that would enrich his province. Instead, the development has pushed Newfoundland toward the precipice.

Mr. Furey said last month that a failure to reach a deal before Muskrat Falls comes online would “trigger a series of fiscal problems for the province.” Newfoundland needs to come up with more than $600-million a year to prevent an increase in its own electricity rates to 24 cents per kwh from 13 cents. Talks with Ottawa on a “rate mitigation” agreement have been under way since last year.

The contours of one possible solution to the Muskrat Falls dilemma emerged last month when an report from the Premier’s Economic Recovery Team led by former Royal Mail chief executive Moya Greene recommended that Newfoundland “package the Churchill River resources as a single investment opportunity, including Muskrat Falls, Gull Island and the upper Churchill contract and seek federal and private sector partners to maximize economic value.”

Gull Island, which sits between Muskrat Falls and Churchill Falls, is the site of a potential 2,200MW dam that has been the subject of on-and-off again discussions between the Newfoundland and Quebec governments for decades. Ms. Greene’s report hinted at a package deal that would combine Newfoundland’s controlling stake in Churchill Falls and future rights to develop Gull Island, along with Muskrat Falls, into a single investment vehicle.

In a May 15 column, La Presse’s Francis Vailles suggested it would be in the interest of both Hydro-Québec and the Newfoundland government to strike a deal that would guarantee the Quebec utility access to Churchill Falls power beyond 2041 in exchange for taking Muskrat Falls off Newfoundland’s hands.

Mr. Vailles noted that the weighted average cost of power from Churchill Falls and Muskrat Falls stands at 3.1 cents per kwh, or about half of the price of recent wind power projects in Quebec. Without Churchill Falls, Hydro-Québec would need to invest in renewable power projects in Quebec in the coming years to satisfy long-term supply deals it has either signed or is negotiating with U.S. customers. A deal with Newfoundland that guarantees Churchill Falls power beyond 2041, as well as rights to develop Gull Island, would be more attractive to Hydro-Québec than other options.

In a blog post following Mr. Vailles’s column, Newfoundland political commentator Ed Hollett played down the possibility of an outright sale of Muskrat Falls, but suggested a revised Churchill Falls contract that sees Hydro-Québec pay a weighted average of 3.1 cents per kwh for power from that dam and Muskrat Falls could raise $682-million annually for Newfoundland – or roughly the amount the province needs to avoid punishing increases in local electricity rates.

“Hydro-Québec is in the best position to make the scheme work,” Mr. Hollett wrote. The federal government, which has guaranteed almost $8-billion in Muskrat Falls debt, “could just be a broker for the deal since it is now legally in between Newfoundland and its creditors.”

Newfoundlanders might cringe at government signing another power agreement with Quebec. But a deal with Hydro-Québec still remains their best bet.

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