Canada’s $43B tab for hydro, nuke projects puts strain on utilities, consumers

Canadian consumers and governments are straining to keep up with the costs of large electricity generating projects being constructed by publicly owned utilities.

By Gene Laverty

This article was originally published by S&P Global Market Intelligence

Read CPI’s full report “How Megaprojects Bankrupt Power Utilities and Leave Regulators in the Dark”

Canadian consumers and governments are straining to keep up with the costs of large electricity generating projects being constructed by publicly owned utilities.

The four biggest projects under construction by government-owned entities have a combined cost of C$43 billion at a time when both consumer demand and prices for electricity are flagging, according to an analysis by the Consumer Policy Institute and Energy Probe. Those projects — hydroelectric dams in British Columbia, Manitoba, and Newfoundland and Labrador, and a nuclear refurbishment in Ontario — could lead to triple-digit rate hikes for power customers and leave taxpayers on the hook for large debt-servicing costs.

The report, titled “How Megaprojects Bankrupt Power Utilities and Leave Regulators in the Dark” and released Sept. 6, comes as British Columbia’s government considers walking away from the under-construction C$8.8 billion Site C hydro project and other provinces seek ways to mitigate the impact of cost overruns. The Consumer Policy Institute, or CPI, claims that governments have consistently ignored the advice of their own regulators in the decisions to proceed with costly projects. CPI and Energy Probe are Toronto-based energy consumer-advocacy organizations.

“Only by pushing aside all of the checks and balances that were put in place to explicitly protect consumers from the cost and environmental fallout of megaprojects do they go ahead,” said Brady Yauch, an economist and author of the report. “Under any reasonable analysis, they aren’t economic or viable.”

Canada’s largest power generators are so-called Crown corporations, which are province-owned entities that are supposed to operate at arm’s length from the government. However, governments appoint executives and board members to the companies, and a recent spate of political changes has brought differing attitudes to the projects. In Newfoundland and Labrador, the recently appointed CEO of Nalcor Energy Corp. called the C$12.7 billion Muskrat Falls project — the most recent cost estimate of which is double the original — a “boondoggle.” British Columbia’s newly appointed energy minister has launched an “urgent” review of the Site C project amid cost and environmental concerns, and provincial officials have termed Manitoba Hydro’s C$8.7 billion Keeyask project and an associated transmission network a threat to the government’s credit rating.

Ontario is paying C$12.3 billion to refurbish province-owned Ontario Power Generation Inc.’s Darlington Nuclear facility as it attempts to curb emissions and backstop intermittent electricity sources like solar and wind after shutting its coal-fired generators. The province has also entered long-term power purchase agreements with private operator Bruce Power LP to upgrade units at its facility. The Darlington upgrade was approved by the government and not subjected to public scrutiny through the province’s utility regulator, CPI said.

British Columbia’s government, which was elected in the spring, has launched an expedited inquiry through its utility regulator to consider the viability of Site C. The government ran on a platform that included discontinuing work on the project in the northeastern part of the province. A comparison of the Muskrat Falls and Site C projects was done by Newfoundland and Labrador economist David Vardy and submitted as part of the process.

“In both cases escalating costs are a major concern, along with estimates of demand that are too high, ignoring the price elasticity of demand. The level of public concern is escalating,” Vardy said in his Aug. 28 submission. “Misgivings have been expressed over the ability of their respective crown corporations to manage the projects effectively and to ensure high quality control standards are enforced.”

Exports to US sold some projects

Megaprojects have some appeal to the public as a source of jobs and promised low-cost electricity, along with other societal benefits, Yauch, who is also executive director of the CPI, said in a Sept. 6 interview. In the case of the Muskrat Falls and Keeyask projects, anticipated exports to U.S. utilities hungry for reliable, low-emitting energy were expected to underpin the large capital costs of the projects. While U.S. companies are still looking for imports, prices have fallen amid aggressive competition. The inability of Crown corporations to deliver projects within budgets means taxpayers and power consumers have no choice but to foot the bills.

“Politicians and their appointees running the country’s largest public utilities have repeatedly underestimated the costs of these mega-projects, exaggerated the benefits and set unrealistic construction schedules,” the CPI report said. “If it weren’t for the implicit — or, in most cases, explicit — backing of the public purse in the form of taxpayer-backed bailouts and debt guarantees, these mega-projects would never have gone ahead given the financial risks they impose both on customers and provincial balance sheets. The amount of debt needed to construct a mega-project has left most public utilities almost fully leveraged, contravening their own financial targets and policies, and jeopardizing provincial finances.”

In the case of Muskrat Falls, Newfoundland and Labrador’s small population relative to British Columbia could have deeper consequences, Vardy said. Canada’s federal government provided debt guarantees for the province, and later stepped in to boost that backstop as the project’s cost soared. Even if the federal government raises its debt-support limit again, the province could still be overwhelmed by the cost.

“The economic and financial burden of Muskrat Falls appears to be beyond the capacity of Newfoundland on its own, even with the federal loan guarantee increased from [C]$5 billion to [C]$7.9 billion,” Vardy said. “The project is likely to add [C]$800 million in incremental costs and Newfoundland ratepayers will not be able to pay. They will substitute other sources of energy as rates increase, driving down the demand for power and making it more difficult to cover the cost of operations. If this happens the project will be stranded and may have to be written off.”

Troubled megaprojects in the utilities sector are not unique to Canada. A pair of South Carolina utility owners stopped construction of two 1,117-MW reactors at the V.C. Summer nuclear plant in July after concluding that completing the project — which was more than US$2 billion over its US$11.4 billion budget — would cost more than US$20 billion and construction would not be finished until 2024. The project’s construction contractor Westinghouse Electric Co. LLC filed for bankruptcy in March, raising questions about the South Carolina project and the Alvin W. Vogtle nuclear facility in Georgia, which is also under construction by Westinghouse.

Ontario’s nuclear plants essentially bankrupted province-owned power company Ontario Hydro in 1998, leading the government to split the company into generating and distribution companies. The split left C$19.5 billion in so-called stranded debt that consumers have been paying down since 2002 through a charge levied on monthly power bills. The government removed the charge from residential power bills in 2016, while commercial users will continue to pay it until 2018. Refurbishment of Ontario’s Pickering A units after the split cost three times more than expected and took two years longer than originally expected to complete, the CPI report said.

In Alberta, where the provincial government has moved up plans to scrap the coal-fired plants that provide a large portion of its power by 2030, private-sector power generator TransAlta Corp. has revived a mid-1960s plan to expand an existing hydro facility by using pumps to replenish the reservoir at its Brazeau facility during times of low demand. CEO Dawn Farrell has made it clear that the company is ready to advance the project, which could cost as much as C$2.5 billion, if it can work out a pricing plan with the government that will allow it to recover its costs. In the past, both TransAlta and Alberta rival ATCO Ltd. have shelved hydro projects due to high costs and expensive regulatory hurdles.

Too late to back out?

In-progress reviews of the Canadian projects have cast some doubt on whether they should have been pursued in the first place. After receiving a report on Keeyask and its related transmission system, Bipole III, that showed cost overruns on both projects, Manitoba Hydro-Electric Board Chair Sanford Riley said it would be too costly to abandon them.

“Rerouting the Bipole III transmission line down the west side of the province was obviously a wrong decision, one forced on [Manitoba] Hydro by the previous government, and has cost Manitobans an additional [C]$900 million,” Riley said. “However, the review concluded that if construction is not completed, Keeyask’s export contracts will not be filled, making the new generating station an asset incapable of generating revenues for many years. The board has been left with no choice but to move forward.”

Still, walking away from a bad project might be a better plan for the long term than hoping for future returns, Vardy told the British Columbia regulator as it ponders the fate of Site C. He applauded the government for at least considering scrapping the project, even as Newfoundland and Labrador presses forward with Muskrat Falls.

“Future costs are the key; sunk costs are not relevant,” Vardy said. “B.C. has accepted the logic of this argument. Sadly, Newfoundland has not.”

Yauch agreed that there may be a case for abandoning Site C, although he acknowledged that it can be politically unpalatable to do so when billions of dollars have already been spent.

“Sometimes it might actually be better” to walk away from a troubled project, Yauch said. “I don’t know if the government will have the courage.”

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