Final cost of Muskrat Falls will exceed $10B, report reveals

Brian
Brian Jones
Send to a friend

Send this article to a friend.

Nalcor Energy CEO and president Ed Martin doesn’t want to tell the public how much the Muskrat Falls hydroelectric project is over budget. You can’t blame him. The news is not good.

Here’s what Martin and Nalcor don’t want the public to know: the final cost of Muskrat Falls will exceed $10 billion.

The independent engineer’s report of the project, by MWH Americas Inc., was publicly released Tuesday. Most of the financial details are blacked out.

But connecting the dots within the report’s 175 pages allows you to calculate that the 50-year cost of Muskrat Falls will be about $10.66 billion.

At Tuesday’s news conference, Martin said the report endorses Nalcor’s work so far.

On the contrary; consider this zinger from page 167 of the report: “Reviews of Nalcor’s financial planning and projected results of operations are preliminary, conditioned by development of the LCP (Lower Churchill project). The LCP is progressing rapidly but at this juncture the financial information includes a number of unknown features, including the accuracy and degree of precision of estimated costs and cost contingencies.”

In short, Nalcor’s numbers are unreliable.

 

Going up

Nalcor has long said the construction cost of Muskrat Falls — the generating station, transmission lines and subsea cable connecting Labrador and the island — will be $6.2 billion.

(The Maritime Link — the subsea cable connecting Newfoundland and Cape Breton — will be built and paid for by Nova Scotia company Emera.)

The $6.2-billion figure is actually $7.2 billion.

“The (Decision Gate 3) construction cost estimate does not include costs of IDC (interest during construction),” the report states on page 88.

The independent engineer says interest costs during construction will be $1.002 billion.

The report says the estimates on Muskrat Falls costs are within the “recommended range of accuracy” for such a project: “-20% to +30%.”

If Muskrat Falls construction costs go 30 per cent over Nalcor’s estimates, tack another $1.86 billion onto the final price tag.

How much will it cost to run the dam after it’s built?

The independent engineer’s report says (page 104) Nalcor estimates operating and maintenance (O&M) costs of $23 million to $24.5 million per year. Total for the first 50 years: $1.18 billion.

Too low, says the independent engineer.

“We find that annual O&M costs are nearly $8,445,000, approximately 33 per cent more than those derived by Nalcor,” the report says.

Over the course of 50 years, that’s an extra $422 million. Add $1.6 billion for O&M. Not including it in the project’s cost would be like buying a car and assuming you’ll never need gas or a mechanic.

The independent engineer says Nalcor’s operating and maintenance estimates are 33 per cent off. If Nalcor’s construction estimates are similarly off, add $1.86 billion to the project’s cost (30 per cent of $6.2 billion).

So: $6.2 billion, plus $1.86 billion, plus $1 billion (interest payments), plus $1.6 billion (operating and maintenance) equals $10.66 billion.

It gets worse. The bill keeps rising.

“Nalcor advised the (independent engineer) that the financial planning for the projects does not specifically include costs for renewals and replacements in the capital or annual cost estimates.

Their opinion is that with proper design and installation and with regular and prudent maintenance following manufacturers’ recommended scheduled maintenance there should be no need to replace the equipment since its useful life will exceed the bond repayment period,” the report states (page 89).

“The IE is of the opinion, based

on experience, that funds should be provided for major replacements in the 25-30 year period with minor replacement after 10-15 years of service.”

No cost estimates are included. Instead, a table lists what will need to be replaced, and when.

We can only guess, along with Nalcor, whether the total price will push past $11 billion.

 

 Brian Jones is a desk editor at The Telegram. He can be reached at bjones@thetelegram.com

Organizations: MWH Americas, The Telegram

Geographic location: Newfoundland, Cape Breton, Nova Scotia

  • 1
  • 2
  • 3
  • 4
  • 5

Thanks for voting!

Top of page

Comments

Comments

Recent comments

  • Gary
    April 18, 2014 - 20:31

    Including the owner-specified contingency in the so-called "cost" is a favourite trick of opponents of megaprojects. A 30% overrun is the worst-case scenario that can possibly be expected, not a certainty. Including O&M is similarly disingenuous. It's never included in the sticker price for anything. Furthermore, unlike the car in Jones' analogy, a hydro dam will generate revenue for as long as it's in operation, producing a net income over and above O&M. With that in mind, declaring that the final cost will exceed $10 billion isn't only misleading, it's libellous. The Telegram doesn the province no favours by printing polemics like this. Too many people already believe electricity grows on trees.

    • Tony Rockel
      April 19, 2014 - 15:54

      A 30% overrun is the worst case scenario? Not according to a study published this year by team from Oxford University. Their study of hydro projects worldwide revealed an average of NINETY SIX PERCENT for cost overruns in 3 out of every 4 projects. With the mental midgets that are in charge of this program, what are the chances of NALCOR beating those odds? Besides which, we don't even NEED Muskrat Falls.

    • Tony Rockel
      April 19, 2014 - 16:14

      A 30% overrun is the worst case scenario? Not according to a study published this year by team from Oxford University. Their study of hydro projects worldwide revealed an average of NINETY SIX PERCENT for cost overruns in 3 out of every 4 projects. With the mental midgets that are in charge of this program, what are the chances of NALCOR beating those odds? Besides which, we don't even NEED Muskrat Falls.

  • GINN
    April 18, 2014 - 13:46

    In last week's column a succinct observation by Ed Smith summed up this well criticized project in a nutshell. (not an exact quote) " Never has a project of this magnitude spawned such an amount of so called experts whose qualifications and motives are suspect."

  • a business man
    April 18, 2014 - 08:47

    Frankly, the cost could double or triple and I would still support this project. I am a Newfoundland voter and taxpayer, and I use my vote to support Nova Scotia because that province is more important to me (for business). Accordingly, I am okay with Newfoundlanders getting stuck with the huge and ever increasing cost of Muskrat Falls because it will be beneficial for my interests in Nova Scotia. I realize many people will disagree with but nevertheless, that is my view as a taxpayer and voter.

  • jim
    April 18, 2014 - 06:58

    just a question- how much was a Holyrood retrofit going to cost again?

  • ed mercer
    April 18, 2014 - 05:48

    this abuse of tax payers money by incompentant people is one of the reasons i will never vote for this gov. again

    • a business man
      April 20, 2014 - 10:58

      Fair enough Ed. My view is different. I will vote for this government BECUASE they are abusing the taxpayers money in a way that will benefit my interests in Nova Scotia. But by all means, please cast your vote for the candidate that suits your own best interests. I surely will be.

  • jerome bennett
    April 17, 2014 - 21:26

    (Trust us,we know what we're doing.)This is going to make the Upper Churchill look like a fly on the wall.Don't forget this is really Danny's Folly.

  • Corporate Psycho
    April 17, 2014 - 17:37

    Dwight has to stop this.

  • Huck
    April 17, 2014 - 12:53

    Who would have ever thought that our power company would lie to us??

  • Tony Rockel
    April 17, 2014 - 11:39

    Where is John Smith?

    • Nothing New Here - Time to move on
      April 17, 2014 - 11:58

      Not wasting his time responding to the VERY few folks who can't see beyond their noses and regardless of the amount of real information that is available, chose only to listen to each other and pile on the garbage. Speculation! Supposition! Turning someone else's opinions into facts! Incredibly poor understanding of business case analysis! And on and on it goes... Yes I'm referring to the literally dozen or so that almost always are the only ones appearing In this kind of forum. OK, now I've wasted enough of my time too!

    • Tony Rockel
      April 17, 2014 - 23:56

      Ah yes, John, I see you've picked up a new alias. No other than you would be dumb enough to defend this disaster on economic grounds. "business case analysis"? Oh yes, there's a very strong case for this abomination if you happen to be one of the few fat cats who stand to profit from it. The rest of the populace is screwed.

  • Cyril Rogers
    April 17, 2014 - 11:05

    Excellent points, Maggie, and I do not need to repeat your analysis. As a fellow "naysayer", it gives me little comfort to know that you and and I, along with a few others who regularly criticize this project on paper, will be ultimately vindicated. What is most troubling to me at this juncture is that there is ample reason for the Official Opposition to begin a concerted campaign to bring down this project…before it is too late for the province. Mr. Ball, the ball is literally in your court…. and if you are the sincere committed leader that many are now looking at to overcome 10 years of waste and a lack of vision….then it is time to step up and try to halt this project before we waste any more money. Then, sir, do a thorough review once you assume the Premiership and throw this monstrous project on the scrap heap of history….which is where it belongs.

  • Cyril Rogers
    April 17, 2014 - 11:04

    Excellent points, Maggie, and I do not need to repeat your analysis. As a fellow "naysayer", it gives me little comfort to know that you and and I, along with a few others who regularly criticize this project on paper, will be ultimately vindicated. What is most troubling to me at this juncture is that there is ample reason for the Official Opposition to begin a concerted campaign to bring down this project…before it is too late for the province. Mr. Ball, the ball is literally in your court…. and if you are the sincere committed leader that many are now looking at to overcome 10 years of waste and a lack of vision….then it is time to step up and try to halt this project before we waste any more money. Then, sir, do a thorough review once you assume the Premiership and throw this monstrous project on the scrap heap of history….which is where it belongs.

    • Artie
      April 18, 2014 - 22:29

      If you honestly think it is not too late to cancel any and all contracts associated with this project you must be either daft or naive. Fortunately your like is not making economic decisions for my province. Our children will reap the rewards of this project, sorry many pensioners could not of prepared.

  • Tony Rockel
    April 17, 2014 - 10:24

    People have been asking why we don't have a casino in NL. Well, we have one, and it's called NALCOR, and it's full of high rollers with serious gambling addictions. Sadly, we will be stuck with their gambling debts, while they carry on with government's blessing.

  • Tony Rockel
    April 17, 2014 - 10:16

    People have been asking why we don't have a casino in NL. Well, we have one and it's called NALCOR, and it's full of high rollers with serious gambling addictions. Sadly, we will be stuck with their gambling debts, while they carry on with government's blessing.

  • Sunny disposition
    April 17, 2014 - 09:33

    Maggy I agree with you. The final cost for the Muskrat Falls project will far exceed 12 billion it will probably be closer to 20-22 billion. The people that are working on that project on the Nalcor side in General have no experience with what is called Mega Projects and the majority of them are consultants. SNC Lavalin made a killing on the Muskrat Falls Project, the majority of the people who were and/or still on the project for SNC Lavalin are and/or were from out of province, got full Living Out Allowance some in excess of $6,000 per month tax free money over and above their salaries; plus all expenses paid the perks for many of the out of province employees (especially the management) far exceeds what they ever made anywhere else on any other project. The local people hired for this project are paid the minimum they can pay and the few have management roles. The same applies to Nalcor's consultants some of which are from out of province and/or out of country. I have spoken with people that have worked on that project and the common thread seems to be "the working environment is toxic meaning bullying in the workplace, micro-managing , poor decision making skills etc." The Muskrat Falls Project should be stopped it is a bigger scam that Sprung Greenhouse . The people of this province will be paying for this for many generations if this project is to continue the way it is. There has been no proof of the viability of this project, Nova Scotia (Emera ) owns I believe 35 percent of this project yet not putting 35 percent of the money towards the project. There should be a full audit of the project including Nalcor's and SNC Lavlin's books, this audit should be by people that not only know what to look for but that are not affiliated to anyone working on that project.

    • Artie
      April 18, 2014 - 22:03

      Most professionals on the project have worked on mega projects most of their careers. The public would be greater served if all accounting on the project would be made public semi annually. the secrecy of the contracts seem to be the cause of the outcry. The PC'S destroyed themselves due to the secretive nature they operated in. Harper Conservative politics at it.s finest.

  • Maggy Carter
    April 17, 2014 - 08:53

    Like many others I have long questioned the wisdom of proceeding with this development. Based on what we can see - let alone what we suspect lurks below the surface - the financial viability of Muskrat Falls is extremely worrisome. That said, this column does little to advance rational debate. The headline and article both assert that the final cost of the project will be in excess of $10 Billion (actually $10.66 Billion per the third paragraph). Unfortunately the method used to extrapolate this number is seriously flawed. I don't want to be overly critical. Even those experienced in the financing of large industrial projects could find themselves frustrated and confused by the obscure, constantly shifting, and often contradictory facts and figures presented by NALCOR. Nor do I doubt for a minute that the final cost will exceed $10 Billion (My own guess for the office pool is $12 Billion.) But the article does take liberties with the heavily redacted MWH report. While the report asserts that NALCOR's estimates are within the −20% to +30% range of accuracy, that - in and of itself - doesn't entitle us to assume it will be 30%. Frankly I expect it to be even higher, but I will readily admit that - other than by virtue of experience with similar projects in the past - there is no hard evidence to support this notion. The author is right in asserting that interest during construction must be capitalized and added to the total cost, but not so the O&M costs. These are non-capital costs that are properly offset against revenues in the current period - i.e. to produce a net income (or loss) on a year by year basis. Finally, there are the costs for the Maritime Link. The column incorrectly pegs this at $1 Billion. The original estimate was $1.5 Billion and no doubt that figure is already higher. NALCOR likes to exclude it from its capital costs for obvious reasons. While it is being financed separately by EMERA and guaranteed by the federal government, it represents 35% of Muskrat's claimed output. If you're going to exclude the costs, you need to reduce the value of the asset accordingly. Any way you carve it, Muskrat power will be the most expensive ever seen in this country - at least double the latest development on the Romaine by Hydro Quebec. Neither the Nova Scotia deal nor any other foreseeable market for Muskrat power comes remotely close to the cost of production let alone yield a profit to those assuming its enormous risks - the Newfoundland taxpayer. Whatever the final costs, one thing we do know for certain - it will be up to the lowly ratepayer in this province to pay them off. That will make for some horrific utility bills beginning just a few years from now.

  • Charles
    April 17, 2014 - 08:10

    Please Dwight, stand up and say no to this project.

  • Roy
    April 17, 2014 - 07:26

    Jones made an error by including operating costs while ignoring their associated revenues. Big whoop I guess since we are the revenue source. A wise person would get into the business of selling heat pumps, pellet furnaces and oil furnaces. A wiser person would begin looking at ways to reduce their dependency on NL Hydro.

  • Maurice E. Adams
    April 17, 2014 - 07:13

    So much for "least-cost" option for ratepayers. Throw in replacement in the billions for new undersea cables after 25-30 years. We are being taken to the cleaners.