Quebec – Newfoundland agreement on electricity | A copy of the controversial 1969 contract

I must weigh my words, knowing the hypersensitivity of Newfoundlanders on the issue. But all things considered, the Quebec–Newfoundland agreement bears a striking resemblance to the controversial 1969 contract, at least for new electrical projects on the Churchill River.

There are nuances to be made, of course, but a detailed analysis of the 30-page agreement in principle, made public on December 12, allows us to lean towards this conclusion.

As then, Hydro will not pay the market price for new contract electricity, neither in the first year nor 50 years later. Its payments to Newfoundland, between 2028 and 2084, will instead be based on the cost of production of new power stations, regardless of the value of electricity on the market.^⁠1.

In short, Hydro will pay cost price, not market price. And the cost price, according to what is planned, would be the lowest among potential projects in North America.

These new installations will produce 3,900 megawatts (MW) of electrical power, capable of supplying nearly 1.3 million homes. Hydro-Québec will purchase 90% of this new energy, divided between the Gull Island (2,250 MW), Churchill Falls 2 (1,100 MW) and the upgrade of the old Churchill Falls power station (500 MW) projects.

“It’s the same deal as in 1969 at the end of the day,” Dave Rhéaume, the senior vice-president of Hydro-Québec who co-led the negotiations with CEO Michael Sabia, told me.

To benefit from such an advantage, Hydro agrees to assume responsibility for practically all the risks of project cost overruns, as in 1969. It also finances almost all of the projects, even the deposit that Newfoundland must pay for be the majority shareholder of joint ventures with Hydro-Québec.

The difference with 1969, in fact, is the distribution of this cost price over time. At the time, it was agreed that Hydro-Québec would pay a fixed annual amount, essentially, meaning that the payments were actually much higher in the early years given the loss in value of money in time^⁠2.

Under the new agreement, the cost price paid annually by Hydro will start at a much lower level and increase by 2% per year until 2084.

This mechanism ensures that the gap between the price paid by Hydro and that of the market will be less, at the end of 50 years, than is the case with the current Churchill Falls contract (0.2 cents per kilowatt-hour compared to 13 cents for recent Hydro-Québec supplies).

But Dave Rhéaume is categorical: in today’s dollars^⁠3all of the payments at cost price made by Hydro-Québec over 50 years, even indexed at 2%, will give the same overall amount as if Hydro had chosen to make constant fixed payments as in 1969.

Another certainty: the 2% indexation will not be increased if inflation jumps.

“They wanted a curve that rose to 2% per year. We will therefore start lower, but in the end, it is the same cost price for all project payments,” Mr. Rhéaume told me.

This cost price will be on average 11 cents per kilowatt hour in today’s dollars for the entire duration of the new energy contracts, estimates Hydro-Québec, which has taken margins of caution to arrive at such a figure. .

Hydro-Québec concessions

Hydro was able to obtain these terms by ceding various benefits to Newfoundland (in addition to absorbing cost overruns).

First, Hydro-Québec pays 3.5 billion over 11 years (in present value in 2024) for the option to develop the projects, an amount which is integrated into the cost price.

Newfoundland Hydro will use this $3.5 billion to advance its share of the deposit in the joint venture with Hydro-Québec for the Gull Island projects (60%-40%) and the Churchill Falls expansion. (65.8%-34.2%).

Second, Hydro-Québec agreed to reopen the old contract which ended in 2041, although the courts confirmed its legality. The state-owned company thus agreed to gradually increase the price from 0.2 cents per kilowatt hour currently to an average of around 9 cents between 2041 and 2075 (updated in today’s dollars).

But be careful, Hydro judges that it will recover in the long term this price concession granted to Newfoundland for the first years. In fact, the 9 cents post-2041 price compares favorably to the 13 cents per kilowatt hour that Hydro’s current comparable new supplies cost. And again, the 9 cents falls to 7 cents, in reality, since Hydro is a 34.2% shareholder in the old power station and will therefore pocket profits from its own payments.

Over the entire period, before and after 2041 (2025-2075), the average cost of energy from this old plant for Hydro comes to 4 cents per kilowatt hour (in today’s dollars), once its share is subtracted. profits.

This price is very interesting for Hydro, but it is also interesting for Newfoundland, it must be said.

Hydro must also finance earlier cash advances in Newfoundland by increasing the rates of its commercial and industrial customers by 0.4 percentage points and reducing its annual net profit by 200 to 300 million for 10 years.^⁠4.

Third concession: Hydro agrees to accommodate Newfoundland regarding the origin of the energy that the province wants to conserve for its own purposes. By the end of the contracts, Newfoundland will increase its purchases from 525 MW to 1990 MW.

However, most of this additional block will come from the least risky (and least expensive) segment of Labrador, namely the old Churchill Falls power station. Hydro therefore agreed to gradually transfer to Newfoundland 1,105 MW that it purchased from this old power station, which will leave it with 3,660 MW after 2060, rather than the current 4,765 MW.

Once again, then, Newfoundland is dissociating itself from the risks of new projects and the higher energy costs that will result.

One of Hydro’s hopes is that Newfoundland will not be able to take all of the 1990 MW that it reserves, energy that Hydro could then buy back at cost, essentially.

This hope is based on the fact that Newfoundland will not likely be able to use this energy outside of Labrador, because the underwater transmission line between Labrador and the island of Newfoundland is at most its capacity and unreliable.

The underwater line is currently used to transport energy from Labrador’s Muskrat Falls generating station, a project led by Newfoundland that turned into a fiasco^⁠. Newfoundland therefore wants to use its new energy in Labrador, particularly for mining or green hydrogen projects, although the region is very sparsely populated and the environment is difficult.^⁠5.

The unused blocks sold to Hydro would be added to the approximately 7,200 MW that Hydro will purchase in Labrador^⁠6.

The big unknown in this agreement remains the risks of the projects, almost all of which are assumed by Hydro-Québec. What will happen if First Nations refuse to collaborate on Quebec’s transportation lines, if permits delay, if costs explode?

Hydro relies on its expertise in dam construction, which has few equivalents in the world.

In the end, Newfoundland will pocket billions without really taking any risks. May Newfoundlanders not complain in 25 years if the Quebec state corporation succeeds in doing what Newfoundland failed with Muskrat Falls.

1. For Hydro-Québec, the energy from one of the projects will be available from 2028 and the other two would be available around 2035.

2. In fact, the cost price of the 1969 contract declined after a few decades once all plant costs had been amortized. In the new agreement, this reduction was integrated into the long-term projection of payments incorporating the annual indexation of 2%.

3. Wherever today’s dollars are mentioned in the text, it should be understood that this is the present value (as of December 31, 2024) of future payments. These payments are discounted at a rate of 5.822%.

4. In the case of the old power plant, the price indexation will not be 2%, as for new energy. The formula will be based 90% on the price of Hydro supplies in Quebec – including the heritage block – and 10% on the market price of electricity in the American Northeast.

5. In theory, Newfoundland could resell the surplus to the United States or Ontario via Hydro-Québec lines, but the Régie de l’énergie has already ruled that Hydro lines for to reach the final recipient were used to their maximum capacity. As for Quebec customers, Hydro-Québec Distribution has the monopoly. According to the agreement, Hydro could notably buy back at cost the 360 ​​MW coming from new electricity projects that its partner would not use. The price paid could be lower if the availability of energy is not long term (the conditions remain to be negotiated in the final agreement). Hydro could also buy back the unused energy from the old plant at the same price as the rest of the energy from the old plant^⁠.

6. In fact, the total purchased by Hydro-Québec will be 7,200 MW in 2075, but it will have increased to 7,700 MW between 2037 and 2050, before gradually decreasing, according to the agreement.