or How to Impoverish Newfoundland while Making a Fortune Selling Electricity to New York

Guest blog by S. A. Shelley: A few weeks ago, at a speech in Washington D.C the Premier of the Canadian province of Alberta, Jason Kenney, promulgated the idea of a North American Energy Alliance.

By 2024, the completion of the Trans Mountain pipeline expansion project to British Columbia will give Canada even more capacity to ship oil to the US, Kenney said in an interview on Bloomberg Television. “My point is, let’s be visionary about this. Let’s have a North American energy alliance, and let’s get another major pipeline done because we’ve got the third-largest reserves on Earth up in Alberta,” he said.

It is funny, how when over a year before that speech in Washington, OWOE editorial staff first formulated a North American Energy Alliance, in a slightly more complete form, no news organizations picked up on our idea. 

The OWOE energy policy combines several key elements, including: firm commitment to dramatically reduce dependence on fossil fuels in a planned and rational manner, sustainable investment in renewable technologies, and establishment of a North American Energy Alliance (NAEA) between the US and Canada to aggressively develop and globally sell our existing energy resources.

Within a week following the Premier’s speech, other analysts have started to chime in about the need and merits for such an alliance (see for example, Ms. Francis’ column, North America needs an energy revolution now more than ever). The idea of some sort of coordinated energy alliance or cooperative continued to spread until powerful people in Quebec began advocating for such schemes though on a national level. On May 30, Ms. Sophie Brochu, chief executive of Hydro-Quebec had some thoughts on the creation of a “national energy conversation“.

That’s when I lost my last shred of faith in Canadian peoplekind, for whenever Quebec public figures (Justin Trudeau especially) talk about national benefits, the rest of Canada needs to hide its valuables. One needs to look no further than the disastrous Churchill Falls hydro project in Newfoundland, or the egregious National Energy Policy of the 1980s for confirmation of my thesis.

The History of Churchill Falls Hydro

Churchill Falls is a hydroelectric generating dam in Labrador (Newfoundland, see Fig. 1). Construction for the dam started in 1967 and was completed and operational by 1971. At the time of operation, there was only one route for the excess power to be transmitted to markets and that was through Quebec. Consequently, under some duress, the Premier of Newfoundland and the Newfoundland Utility agreed to a fixed price contract of $2 / MWh. That was the price and IS the price for a hydroelectric facility that is rated at 5,428 MW. There are roughly 365 days per year, and hydropower is generated 24 hours a day. Using a bit of arithmetic, this means that Newfoundland is paid just under $92 million a year for the power produced by the Churchill Falls project. In 1972, $92 million was a substantial amount of money going into the coffers of the less economically fortunate province of Newfoundland. In 2022, $92 million is insignificant to the budgetary needs of the province that struggles to provide good services (education, healthcare) for its residents.

That’s right astute readers, in 1972, Hydro-Quebec with the full backing of the Federal Government of the Liberal Party of Canada with Pierre Trudeau as Prime Minister, locked Newfoundland into a contract for all the electricity generated by Churchill Falls at $2 per MWh, in virtual perpetuity. Newfoundland has tried numerous times to get the contract quashed in the Canadian courts to no avail. The current pricing scheme is supposed to expire in 2041, but by then it is very unlikely that it will change or that Hydro-Quebec will continue to buy power from Churchill Falls.

This is the Arbitrage: Hydro-Quebec sells a lot of electricity to New York state. In 2019, the amount of power sold to New York amounted to about 33.7 TWH at about $67 / MWh, and that looks to increase significantly in the future. Currently, Churchill Falls alone provides about 45.9 TWH to Quebec. Thus, Quebec buys 33.7 TWh (plus more) at $2 / MWH and sells it to New York at $67 / MWH (Figure 1). That’s an arbitrage profit of $65 / MWh. I’m ignoring small transmission losses and some infrastructure costs, but when all physical assets are factored in, this is still a huge arbitrage profit that one Crown corporation reaps at the expense of another Crown corporation. How’s that for equity in Canada?

The excess of power from Churchill Falls feeds into the Hydro-Quebec’s domestic customers and lowers their overall average electricity (hydro) bill.

Is This a Special Case?

Is this just a special case of Hydro-Quebec and the Federal Government shafting Newfoundland? No, there are numerous other cases in which Hydro-Quebec and the Federal Government shaft other constituents in Canada. For example, 36% of all of Hydro-Quebec’s total hydroelectric power is installed on native lands that the Crown corporation and the Crown (The Federal Government in Canada) just outright ignore:

In total, 33 production structures, 130 dams and dikes, 10,400 km2 of reservoirs, tens of thousands of kilometres of transmission, distribution and road lines have been illegally installed.

Again, how is this equity?

Muskrat Falls, Another Hydro Project with Problems

We briefly mentioned the Muskrat Falls Hydro project in the Canada and Energy Blog, Part 3 in 2019.  That project is also a fiscal disaster in large part again to Federal Government interference and Federal Government (Liberal Party) insistence on Newfoundland using one federally preferred contractor from Quebec, SNC Lavalin.  The residents of Newfoundland and Labrador are kind, hardworking and smart people; they just aren’t smart enough to deal with the political influence peddlers from Ottawa and Montreal.

“Nalcor has indicated that they experienced performance issues with SNC shortly after the contract was awarded, including turnover of key project resources, the failure to complete key project deliverables, lack of adequate systems and tools, and significant organization and alignment gaps.“

More complete reports about the problems with the Muskrat Falls project are available in the documents: “Muskrat Falls: A Misguided Project – executive summary” and “Muskrat Falls Project – A Critical Review“.

When the Trudeau regime crows about providing massive funding support for the Muskrat Falls project, the Trudeau regime simultaneously ignores its culpability that led to the massive project problems. In all likelihood, many of those additional $billions will eventually find their way back into coffers around Ottawa and Montreal. 

Is it Just Muskrat Falls?

No, there are far too many problems with big energy and infrastructure problems in Canada.  There is the Site C dam in British Columbia, a project started in 1972 and still not complete.  

There is the Saskatchewan Carbon Capture Scheme that stumbled in 2015 with the provincially owned utility embarking in a dispute resolution process against contractor SNC Lavalin over serious design deficiencies.

There is the Ottawa Light Rail expansion. “Memo made public Friday confirmed SNC-Lavalin didn’t meet technical threshold”. Additional readings about the Ottawa Light Rail fiasco can be found in Trains.com, CTV News, TVO Today, and CBC.

The foul ups in Canadian energy and engineering projects just never seem to end, and Canadian taxpayers and New York rate payers just keep paying.

It is said that Canada was confederated in order to keep the French in, the Americans out and the Natives down. By the actions of the Federal Liberal Governments of the last few decades, I think it would be better to think that the purpose of the confederation of Canada is to keep the Liberals Governing, Quebec Booming and the Natives Ignored. That is why, for example, 66% of Quebec residents would prefer getting oil from Alberta, but the Quebec government insists instead to get oil from Saudi Arabia because it is better to send money overseas than to confederates out west where nary a Liberal can be found.  A North American Energy Alliance can be a very good thing, if it involves all forms of conventional and new energies, and I’m all for such. But when Ms. Brochu or anyone from Hydro-Quebec speaks of a national energy and conversion policy, everyone else in Canada needs to be very suspicious.

Vive l’Alberta Libre!

Shut Down Line 5

OWOE Staff: The world recently celebrated Earth Day on April 22 – 52 years after the first Earth Day celebration in 1970. Unfortunately, like pretty much all the prior Earth Days, very little concrete progress was committed to addressing the world’s global warming crisis. If I may paraphrase  my favorite environmentalist, Greta Thunberg, it was all “bunny, bunny…blah, blah, blah“. Perhaps the biggest news in the fight against climate changes was Denmark’s proposal for a new corporate carbon tax, which would set a value of 1,125 Danish crowns ($164.21) per tonne of carbon equivalent and make it the highest such tax in the world if implemented. But again, that’s just a proposal. In the meantime, fossil fuel use has recovered from its Covid lows, CO2 levels in the atmosphere continue to rise, the Arctic and Antarctic ice sheets continue to melt, and environmental damage from storms, fires, and rising sea levels continue. I personally witnessed a real-life example of that the very week of Earth Day when I visited one of my favorite beaches in the world, Cancun. I have been going to the beaches of Cancun almost every year since the early 2000s, and the change to the beach caused by the increase in seaweed over the past few years is dramatic. We all tend to miss the big picture when all we see are incremental changes, but after skipping two years because of pandemic travel restrictions, the magnitude of the beach changes was more obvious and led me to look back at my earlier visits and take a broader perspective. Figure 1 shows the change over the last 8 years, with a) from April 2014 and b) from April 2022, both the exact same stretch of beach.

Guest blog by S. A. Shelley: Governments’ penchant for wasting taxpayer money and harming the environment is not a recent phenomenon but it went industrial in 20th century at all levels. At the beginning of the century Mother Nature and society had a tremendous capacity to forgive bad decisions even when some such decisions resulted in millions of deaths over the span of several decades. Human, sorry, people-kind abused Mother Nature and the pocketbooks of taxpayers in the name of progress and energy transition but managed to overcome crises such as anthropogenic acid deposition and the oil embargo of the 1970s. People-kind barely limped out of the 20th century into the 21st century. In all likelihood Mother Nature and taxpayer pocketbooks are now beyond the capacity to forgive our shortcomings and bad decisions for much longer.  Who is to blame for this? Big business has big shame, but most blame lies entirely before the governments who are elected to be wise but are faddish populists with inherent graft and “ism” agendas. Difficult and complex solutions require deep thinkers, not pot-addled Princes of Privilege (shout-out to Justin Trudeau, see notes 1 and 2).

Guest blog by S. A. Shelley: It is very difficult to keep up with all the energy changes in the world. Every week, some Big Government Agency, NGO, International Think Tank or Big Company proclaims some new solution to the looming global energy problem of too much of the wrong kind of energy and too often from the wrong place. While most of the analysts and prognosticators seem knowledgeable and well intentioned, OWOE analysts cannot conclude for certain that the resultant big government plans foisted through bureaucrats onto ordinary citizens are based upon sound knowledge and understanding of energy markets, resources, technology and costs.  I emphasize technology and cost because most government edicts are based more upon woke and vote political expedience than anything technically attainable without causing significant long term economic pain, e.g., recent decisions to shut down nuclear reactors. Nor have governments shown themselves to understand the political issues of energy supply, as we now see with Europe stuck paying for Russia’s conquest of Ukraine. We have some insightful and interesting comments about the Russian war, but these won’t be discussed in this blog – maybe later.

Guest blog by Mr. R. U. Cirius: Here are some interesting and somewhat offbeat energy stories that haven’t gotten much media attention that OWOE readers might have missed.

Very Small Modular Reactors There has been a lot of press coverage for Small Modular Reactors (SMRs) recently, with some touting them as the solution to the world’s energy challenges to others expressing doubt that they can actually be successful (see also OWOE blog Nuclear Power: Climate Solution or Hype). However, a new version of these nuclear reactors has just been announced that may actually meet the high expectations. William Fences, the entrepreneur and philanthropist, and his company MicroPower, claims to have developed the first Very Small Modular Reactor (VSMR). This is a stand-alone suitcase-sized micro nuclear reactor for both private and commercial use. The reactor includes: molten salt nuclear fuel module, molten salt pump, thermo-electric battery with inverter to export power at 480v, water coolant system that connects directly to the home or business water supply, and auxiliary air cooling motor that plugs easily into a standard 220v power receptacle, all enclosed withing an easily movable case (see Figure 1). Although not yet available for purchase, MicroPower is planning to sell units with power generation capability ranging from 5kW to 50kW.

OWOE Staff: The Russian invasion of Ukraine is a tragedy on many fronts – for the civilians caught in the crossfire, for the concept of democracy, and for the rest of the globe that will certainly feel the impact of economic sanctions imposed in an interconnected world. One impact of those sanctions in the US can be seen in the sharp rise in gasoline prices. In high-priced gasoline states like California, gas prices at the beginning of this week reached an average of about $5.40/gal (up about 10% from the previous week – see Figure 1).

Such a sharp increase, especially coupled with inflation stemming from the Covid pandemic stimulus packages and more recent supply chain issues, is certainly going to have a significant impact on Americans. Other impacts of the sanctions, including the US banning of Russian oil imports will create another round of challenges. US companies curtailing business in Russia will see impact to their financial bottom lines which will have a follow-on effect on the stock market. And now we are now getting warnings that prices for other commodities that Russia exports to the world have become volatile and are surging. But can something good come of this?

OWOE believes that the world can use this opportunity to step back and reassess how it moves forward to address the challenges of energy security, energy transition and climate change. In particular, how we can change our dependence on fossil fuels from a supply-focused approach to a demand-focused approach? This has been a recurring OWOE theme (Don’t Blame the Suppliers; The Fundamental (and Somewhat Existential) Source of Climate Change – and How We Might Overcome It). And just recently, Hal Kvisle, a former chief executive of TransCanada Corp., was quoted in BNN Bloomberg as saying: “Until consumers have other alternatives, other ways of getting around, or other ways of heating their homes effectively – until we address the demand on the consumer side – we’re not really going to change the balance”. Prior to the Ukraine invasion, the Covid pandemic dominated not only the news cycle but our daily lives. In 2020 the demand for gasoline (i.e., oil) dropped dramatically to a level not seen since the mid-1990s. This was driven in part by the economic stagnation during the first year of the Covid pandemic, with many people losing their jobs or being forced to take time off work and many others forced to work from home. As a result, transportation by both vehicle and plane dropped dramatically. Figure 2 shows petroleum consumption history from 1950 through 2020, with consumption by the transportation sector dropping from a yearly average of 14.1 million barrels/day in 2019 to 11.9 million barrels/day in 2020.

But we managed to survive. Then in 2021 as many of the Covid restrictions were lifted, people started to return to a normal life, and, driven by the pent-up demand from the prior year, oil consumption surged. In November 2021 consumption in the transportation sector jumped up to 13.7 million barrels/day, or just 3% under the 2019 peak, as shown with the added data points.

The first conclusion that can be drawn from these numbers is that, with the right behavior, banning Russian oil imports should have essentially no impact on the US economy. In 2021 average oil imports from Russia were 672,000 barrels/day. That was only 5% of transportation needs (and only 3% of total oil consumption of 23.2 million barrels/day across all sectors). Loss of all Russian barrels would mean the November 2021 transportation consumption would have been about 13 million barrels/day, which would still have been well above the 2020 value. Given that Americans in 2022 are now driving on average 14,263 miles/year (on track for 3.2 trillion miles total) and that the average car in the US gets 23 mpg, it would only take a decrease of about 25 miles per year per vehicle to eliminate completely the need for the Russian oil imports. Certainly, support of Ukraine against Russian aggression is worth driving 1/2 mile less each week.

The second conclusion is that we now have a very good data point for what behaviors can quickly result in a 10-15% reduction in oil consumption, i.e., the 2019 to 2020 drop. This drop was not driven by the cost of gasoline; it was driven by a much broader reduction in demand. While a Covid-scale drop might be too aggressive and costly to the economy, an intermediate value seems very doable. Let’s continue to support clever ways to work remotely and reduce commuting; let’s focus on energy efficiency with electric vehicles, LED lights, home insulation, etc.; let’s scale back our rampant consumerism; let’s walk and bike more in place of driving. These are easy technology changes that can be made with minimal impact to lifestyle and the overall economy and could be greatly enhanced with government encouragement, including ad campaigns and incentive programs. The result would be a huge step forward in the US effort to reduce oil imports, and, concurrently, reduce greenhouse gas emissions and help slow global warming.

OWOE also notes that we have been pointing out the risk that dependence on oil supplies from non-democratic countries creates for several years now. See OWOE blogs: Is There Any Limit to How Dumb Can Governments Get?, It’s a Mad Mad World of Energy,  Time for a New Energy Policy, etc. This crisis appears to be the catalyst might make that a reality. The European Commission just published plans to cut EU dependency on Russian gas by two-thirds this year and end its reliance on Russian supplies of the fuel “well before 2030”.

Hopefully, the Ukrainian tragedy can be used to change the mindset and approach of governments around the world. We’ve proven that we can live with less oil; now we need to make that the norm. It is time to eliminate dependence on Russia for any commodity, moderate our seemingly limitless demand for fossil fuels, and save the planet!

Guest blog by S. A. Shelley: The answer is no, there is no limit to how dumb governments can get in terms of irrational legislation, fanciful proclamations and of course impossible energy policies. There are a few fundamental things that governments need to do right for society to survive, let alone thrive. Amongst them are protecting their citizens from external threats (military or viral, for instance) and protecting individual rights to conduct commerce or disagree with the government. After that, arguments start about everything else that people think governments should do or not do. I won’t argue those points, but I will argue that governments all around the world, except for China, are being complete idiots when it comes to energy trade and transition.

Guest blog by S. A. Shelley: In early November of 2021, the UN’S COP 26 climate conference wrapped up in Glasgow with all sorts of politicians pledging this or that with respect to greenhouse gas emission reductions, renewable tech investments and invoking equity across the world. But really, what are the actions that followed those ballyhoo words bantered about in public? The staff at OWOE took at look at some of the subsequent oil production announcements away from the public spotlight. The following summarizes planned increases / decreases and shares what we found is the most amusing quote associated with each country’s plans.

OWOE Staff: California tends to be a polarizing state. As the most populous US state and what would be the 5th largest economy in the world if it were a country, as the home of the television and movie industry, as the home to Silicon Valley with its technology leaders and billionaires, and as the home base to many environmental organizations, it has always been a trendsetter. In the battle against climate change, California has been a leader. It is the #1 state for installed cumulative solar electrical capacity by a factor of about 3 over the #2 state (Texas). It has the highest volume of Electric Vehicles owned of any state by a factor of about 7 over the #2 state (Florida). It has required higher vehicle emission standards than the rest of the US since the 1970 Clean Air Act. It has set a goal of 100% clean electric power by 2045. It has banned the sales of new gasoline powered automobiles by 2035 and is moving toward accelerating that to 2030. Progressives and those concerned about the health of the planet love these programs. Conservatives and those beholden to the fossil fuel industry hate these programs. But, suddenly, California is making a move against residential rooftop solar power as in Florida, where utilities argue that rooftop residential solar affects their business model. That’s correct; suddenly California is limiting the ability of its residents to achieve both energy independence and greatly reduce the State’s overall carbon footprint.

OWOE Staff: An OWOE contributor shared a BBC News article with OWOE staff regarding the possible construction of four (4) Small Modular Reactors (SMRs) in the UK. This would be a demonstration project for nuclear reactors based on nuclear submarine technology that some companies are touting as a key contribution to the sustainable, renewable energy mix of the future. The following day Rolls Royce announced that it had procured sufficient funding to develop its SMR concept that would trigger additional funds from the UK government to kick-off the project, with the first plant targeted for completion in the early 2030s. A further BBC News article referenced these Rolls Royce SMRs again, along with barge mounted SMRs being developed by Denmark’s Seaborg Technologies. The problem here is not with the projects themselves or the technology, but with the way they are characterized to the public. To quote the first BBC article: