What's on first?

Some hitherto under-noticed and under-appreciated intelligence concerning possible, significant, changes to the imaginary Lower Churchill Project, by way of environmental documentation filed with the Canadian Environmental Assessment Agency in late September by the Innu Nation. (.pdf link)

Innu Nation is concerned that decisions of the Regie de l’energie, new policies in the potential markets, and evolution of the marketplace since the date of filing of the Project Description in 2006 have changed the development context to such an extent that, if approved, the Project will not be developed in the manner described in the EIS. This likely change involves a change to the development sequence such that Muskrat Falls is constructed before Gull Island.

[p. 2]

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Our review of the response to this JRP focuses on issues related to the potential and implications of developing Muskrat Falls prior to Gull Island.

Considerations Respecting the Timing of Phases and Components of the Project

Nalcor identifies three important considerations respecting the timing of Phases of the Project: market access, sales, and financing.

With respect to market access, Nalcor indicates that “Greater available transmission capacity will favour Gull Island first, and lesser available capacity will favour Muskrat Falls first.” Based on our earlier analysis in relation to JRP.146, it appears that transmission through Quebec, if it is possible at all, will be delayed for some time. This tends to suggest development of Muskrat Falls first.

Regarding sales, the current low prices in the markets suggests slower as opposed to stronger sales, again supporting the development of Muskrat Falls first.

Lastly, considering that financial markets continue to remain tight, this also tends to support development of the smaller Muskrat Falls development first.

Further to our comments above in response to JRP.146, it appears that there is an 1800 MW limit to the capacity that can be developed and transmitted to potential markets at this time. This quantity (even presuming sales contracts of 1800 MW) appears to be too low to permit the development of the Gull Island project, which also suggests that Muskrat Falls would more likely be developed first.

As noted by the Proponent, if Muskrat Falls is developed first, “the cash flows from Muskrat Falls then could be used to help finance the more costly Gull Island phase of the Project.” This is theoretically true, but in practice it seems unlikely that sufficient cash flow could be obtained in the first several years of the production phase for the following reasons:

• the capital cost of Gull Island includes the costs of the 230/735 kV switchyard (est. $130M), communications infrastructure (est. $70M) and other costs associated with construction of the first of the two projects – these costs would need to be borne by Muskrat Falls if it is constructed first;


• cost savings, such as reuse of the construction bridge and construction camps, and staged mobilization from Gull Island will no longer be available to Muskrat Falls and must be added to its capital cost (est. $50M total);


• construction costs at Muskrat Falls could potentially increase for other reasons as a result of Gull Island not being in place during construction, including costs for larger diversion facilities and cofferdams (est. to be determined);


• based on the information in Table 23 of the Supplemental Report, the capital cost of Muskrat Falls is $2682/kW compared to $1902/kW for Gull Island meaning that it has a lower rate of return and will generate less cash flow; adding an estimated $250M to the capital cost of Muskrat Falls results in an estimated capital cost of $2985/kW.

Innu Nation suggests that the lower cash flow resulting from initial development of Muskrat Falls as opposed to Gull Island would contribute to:

• a consecutive development sequence (as opposed to a staged overlap) where Gull Island is not developed for several years following completion of construction at Muskrat Falls;


• temporarily or permanently raising the crest elevation of the Muskrat Falls dam to create a larger reservoir and more head and/or operating the reservoir to take advantage of higher market prices during peak periods;

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