Canada's Supreme Court rules for Quebec utility over energy contract

Canada's highest court has ruled that Quebec's provincial utility Hydro-Quebec cannot be required to renegotiate a long-term contract to buy power from a Labrador hydroelectric plant at below-market rates, even though the deal has yielded about 14 times more profit for Hydro-Quebec than for the Labrador generator.

At issue is the Churchill Falls hydroelectric plant on the upper Churchill River in Labrador, and a 1969 agreement between Hydro-Quebec and Churchill Falls (Labrador) Corporation Limited -- a company jointly owned by Newfoundland and Labrador Hydro and Hydro-Quebec. The Churchill Falls plant can generate 5,428 megawatts of power, and is one of the world's largest hydroelectric power stations.

According to former Premier of Newfoundland and Labrador Brian Tobin, during pre-construction negotiations, Hydro-Quebec told Churchill Falls that it would not allow the Labrador generator to "wheel" project power through the Hydro-Quebec grid, nor to build its own power line through Quebec to reach U.S. markets. As a result, under the terms of the 1969 agreement, Hydro-Quebec agreed to buy most of the project's power at the fixed price of $2.50 per megawatt-hour, to guarantee construction cost overruns, and to build transmission lines connecting the generators to markets, enabling the Labrador generator to sell power and to use debt financing to construct the plant. The original contract was set to expire in 2016, but included a renewal clause allowing Hydro-Quebec to extend the contract for an additional 25 years at a fixed price of $2 per megawatt-hour through 2041.

After the contract was signed, changes in the electricity market -- including oil price shocks in the 1970s, a decline in public confidence in nuclear power after a 1979 accident, and the U.S. Federal Energy Regulatory Commission's 1996 decision to require open access to transmission systems -- meant the contract's purchase price is now well below market prices. Because Hydro-Quebec sells electricity from the plant to third parties at market prices, Hydro-Quebec reaps substantial profits from the deal. For example, Hydro-Quebec reports that the average retail price for residential customers in St. John's, Newfoundland in 2018 is $120.30 per megawatt-hour. Canada's National Energy Board says the 2017 average wholesale prices for electricity imports were over $24 per megawatt-hour, with exports priced even higher at $38.58 per megawatt-hour -- over 19 times higher than the price Hydro-Quebec now pays Churchill Falls during the extended contract term. According to CBC, the contract has yielded about $28 billion in profits to Quebec, but just $2 billion for Newfoundland and Labrador.

Citing legal theories including a general duty of good faith, Nalcor Energy subsidiary Churchill Falls asked Canadian courts to order that the contract be renegotiated and the benefits be reallocated. After lower courts sided with Hydro-Quebec, the generator appealed to the Supreme Court of Canada.

On November 2, the Supreme Court of Canada rendered its judgment in the matter of Churchill Falls (Labrador) v. Hydro-Quebec. The high court found, by a 7 to 1 decision, for Hydro-Quebec, noting that the parties "bound themselves knowing full well what they were doing" and that Hydro-Quebec could insist on adhering to the contract despite the "unforeseen" increase in the power's market value.

The one dissenting judge characterized the contract as "relational" in nature, and thus said that both parties are subject to a duty of cooperation which Hydro-Quebec breached by failing to renegotiate and to more fully share the benefits of higher-than-expected market prices. He said that because "a profit imbalance of this nature and magnitude is beyond what the parties intended when they concluded the agreement", the parties had an implied obligation to cooperate in establishing a mechanism for the allocation of "extraordinary profits."

Atlantic Ocean oil development in Canada, U.S.

Canadian oil company Husky Energy has announced a decision to develop its West White Rose Project offshore Newfoundland and Labrador.  Meanwhile the U.S. National Marine Fisheries Service has proposed authorizing the take of marine mammals incidental to geophysical surveys in the Atlantic Ocean relating to hydrocarbon development.

Husky Energy is a Canada-based publicly traded energy company.  It is the operator of the White Rose field, discovered in 1984 about 350 kilometres east of St. John’s, Newfoundland and Labrador, in water depths of about 120 meters.  Commercial oil production from the main White Rose field began in 2005; since then, over 275 million barrels of oil has been produced.  Husky holds working interests in the main field as well as satellite fields.

The oil and gas industry is the largest contributor to Newfoundland and Labrador's gross domestic production.  Husky's May 28, 2017 announcement relates to its West White Rose development.  Husky says it and project partners Suncor Energy and Nalcor Energy – Oil and Gas will use a fixed wellhead platform, tied back to the SeaRose floating production, storage and offloading (FPSO) vessel. According to Husky, the tie-back to the SeaRose FPSO vessel "will enable the Company to maximize resource recovery," with "incremental operating costs are expected to be less than $3 per barrel over the first 10 years."  Husky expects a net project cost of $2.2 billion to first oil in 2022, and a gross peak production rate of approximately 75,000 barrels per day (bbls/day) in 2025. 

Meanwhile, U.S. regulators have proposed removing one obstacle to oil and gas prospecting in the Atlantic Ocean.  The U.S. National Marine Fisheries Service has published notice of five proposed authorizations for harassment or take of marine mammals incidental to geophysical surveys in the Atlantic Ocean.  The federal Marine Mammal Protection Act allows the Secretary of Commerce to permit the incidental, but not intentional, harassment or taking of small numbers of marine mammals by U.S. citizens who engage in a specified activity.  In 2014-2015, NMFS "received five separate requests for authorization for take of marine mammals incidental to geophysical surveys in support of hydrocarbon exploration in the Atlantic Ocean."  The applicants proposed "to conduct two-dimensional (2D) marine seismic surveys using airgun arrays" within the U.S. Exclusive Economic Zone "(i.e., to 200 nautical miles (nmi)) from Delaware to approximately Cape Canaveral, Florida and corresponding with BOEM’s Mid- and South Atlantic OCS planning areas, as well as additional waters out to 350 nmi from shore."

NMFS's proposal to issue the incidental take or harassment permits now faces public comment, before a final agency decision.

Muskrat Falls megahydro cost increases

The Canadian province of Newfoundland and Labrador is promoting the development of a multi-phase, gigawatt-scale hydropower project on the Churchill River in Labrador.  But estimates of the so-called megaproject's construction costs continue to mount, now reaching nearly $7 billion (Canadian).

The Churchill River drains much of western Labrador, combining large volumes of water with a significant drop in elevation.  For these reasons, Canadian provinces and utilities have long sought to harness its power.  In 1971, the Churchill Falls dam and hydropower plant came online; today, the Churchill Falls facility can generate 5,428 megawatts of power, giving it the second largest capacity of any power station in North America.

In 2010, Newfoundland and Labrador utility Nalcor Energy and Nova Scotia utility Emera announced the Lower Churchill project.  The first phase proposed, Muskrat Falls, entails the construction of a dam with an 824 megawatt power house, with the subsequent Gull Falls dam bringing the proposed Lower Churchill project's total capacity to over 3,000 megawatts.  The Muskrat Falls project received a key approval by provincial government in December 2012, and construction is now underway.  90 per cent of the project contracts have been awarded, and 98 per cent of the engineering on the project has been done.

Back in 2010 when Nalcor and Emera first announced the project, the cost forecast for the Newfoundland and Labrador portion was $5 billion.  But as the St. John's Telegram reports, the latest cost estimate for building the Muskrat Falls project has jumped by about $800 million, to $6.99 billion.

This estimate does not include the cost of the Maritime Link transmission system to be built by Emera, connecting Newfoundland to Nova Scotia via undersea cable.  The Maritime Link is expected to cost an additional $1.5 billion.

Despite the cost overruns, the project is reported to be on schedule to be completed in 2017.

April 14, 2011 - Canadian hydro imports as renewable

What energy sources are renewable?  What does renewable mean?  Any state developing a renewable energy standard would be wise to consider these questions.  There is broad consensus on a core group of technologies, while the degree to which some other energy sources may be renewable remains a subject of debate.  When it comes to renewable portfolio standards - laws mandating that a certain portion of electricity sold be sourced from qualified renewable resources - it can take an act of the legislature to deem a particular resource type "renewable".

Wood pellets: biomass for homes, on display at a gas station.

The Nova Scotia Legislature is currently considering this very question.  The provincial minister of energy and natural resources proposed a bill to declare hydroelectricity "renewable electricity" by legislative mandate.  That bill, Bill No. 15 classifies hydroelectricity as renewable electricity, for the purpose of meeting Nova Scotia's 40% renewable electricity by 2020 goal.  Bill No. 15 would apply to hydroelectricity generated in Nova Scotia - there are about 40 small hydro plants in Nova Scotia, collectively supplying about 11% of provincial capacity - as well as to hydroelectricity produced elsewhere and imported into the province.

Many states and provinces are wrestling with the question of whether hydroelectricity imported from Canadian large-scale hydro projects should count towards their own renewable portfolio standards.  For many states in the northeastern US, importing hydroelectricity from Hydro-Quebec is one option; New Hampshire's review of the proposed Northern Pass transmission line raises these issues.  In Nova Scotia's case, the province is a partner in the Muskrat Falls portion of the Lower Churchill hydro resource in Labrador.  A 180-kilometer underwater cable called the Maritime Link will connect Labrador and Newfoundland with Nova Scotia.  Nova Scotia will put up 20% of the project capital, in exchange for which it will receive 170 megawatts of hydroelectricity for 35 years, with an option for an additional 330 megawatts.  The province expects this one project to account for a quarter of the province's 40% renewable mandate.

In this context, what does Bill No. 15 do?  By proposing to clarify that imported hydroelectricity counts toward the province's renewable energy standard, does the bill imply that it is not currently clear that hydro is renewable?  Or is Bill No. 15 simply part of the overall package of Nova Scotia's 40% renewable electricity mandate, helping clarify that Nova Scotia can rely on cost-effective regional resources in its pursuit of environmental goals?

March 31, 2011 - Canada backs Lower Churchill hydro project

The Canadian federal government has just announced that it will support the Lower Churchill hydroelectric project in Labrador.  The $6.2 billion project has been in the planning phases for years, but now appears to be moving forward.

Rich in natural resources, Canada is home to a great number of rivers with significant hydropower potential.  Many of these rivers have been dammed and developed in the past century; second only to China, Canada is now a leading producer of hydropower in the world.  In recent years, Canada has been one of the few countries to produce a majority of its electricity from hydropower, with some provinces like Quebec, Manitoba, and Labrador producing over 90% of their electricity from hydro dams.

Since 1971, much of the Churchill River's flow has been diverted into the Churchill Falls hydroelectric station.  At 5,428 MW, the existing Churchill Falls project has the second largest capacity of any power station in North America.  The Lower Churchill project entails building two new plants (Gull Island and Muskrat Falls) with a combined capacity of over 3,074 MW.

It remains to be seen what form the support of the Canadian federal government will take.