Looking for a safe return on your investment?

Worldwide, government borrowing has been much reduced in recent years, according to Jim Thistle, and safe long-term investments are becoming hard to find. For those searching for an interesting investment, Thistle and his colleagues at the province of Newfoundland and Labrador (NF&LAB) are about to offer a unique opportunity. Thistle is the province’s chief negotiator, working with his counterpart in Québec on the fine print of a project that could increase hydro capacity around the existing Churchill Falls plant by over 4000MW.

Churchill Falls has been in operation since the early 1970s, and its 5400MW of capacity supplies both Newfoundland & Labrador Hydro (NLH) (which takes around 300MW of the capacity) and Hydro Québec (HQ). The associated dams, some 30m high, impound a reservoir — Smallwood — which has a capacity of around 32B m3. The new project may add three new power stations to the Churchill Falls system: the Churchill Falls extension; Gull Island; and Muskrat Falls.

To supply the Churchill Falls extension, the inflow to the existing Smallwood reservoir will be increased by some 185m3/sec. This will be accomplished by partly diverting the flow of the St Jean and Romaine rivers from the St Lawrence river. The St Jean river will be diverted to the Romaine; in turn, the Romaine will be dammed and a reservoir impounded (likely to have an area of around 1100km2) which will back up into the existing Smallwood reservoir. Although the engineering design work is still going on, the dam is expected to be some 130m high, and a rockfilled design is currently favoured.

The increased reservoir capacity will make it possible to build a new powerhouse next to the original Churchill Falls plant. As with the original, the new plant will be underground. The rock in the region is highly competent granite, part of the Canadian Shield, and conventional drill and blast techniques will be used. The new plant will generate 1100MW by way of two 550MW turbines, Thistle says.

Both river diversions will in fact be in Québec, and they will be owned by a partnership of HQ and local communities. The power plant will be owned by NLH, which has 65.8% of the project, and HQ, which has 33.2%.

Downriver, two further developments are under examination. The first — and the largest of the three potential project elements — is at Gull Island. The site, according to Canada’s National Energy Board, is the best undeveloped site in North America. According to Thistle, this site has an extremely high water flow rate, already augmented by other tributaries which join the river Churchill river below Churchill Falls. This will be increased further by diversions from Québec into the Churchill Falls extension. The project under discussion is a 2264MW station, using six 377MW turbines. To feed this plant, Thistle explains, the river will be dammed at Gull Island by an earthcore rockfill dam around 100m high, to produce a workable head of 85m.

The reservoir impounded by the dam will have an area of around 200km2, and will stretch to the tailrace of the Churchill development, Thistle explains. The river valley varies in width between 900m and 1200m, he says, so the extra flooding will mainly be up the sides of the river valley. This plant will again be owned jointly by HQ (33.2%) and NLH (64.8%).

Some 40km downstream of Gull Island, the feasibility of Muskrat Falls is being investigated for the third part of the programme. As Thistle explains, this is in some ways the oldest project component, as engineering studies were first carried out at the end of the 1970s, and it is still the least definite. The site offers a head of only 35m, but water flow is more than 2000M m3/sec, and studies show that up to 824MW could be extracted. The price of the electricity from Muskrat is the sticking point, but Thistle is adamant that the cost per kilowatt can be reduced, and this is the current focus of engineering studies.

The province of Newfoundland and Labrador’s small population lives largely on the eastern seaboard of the Island of Newfoundland, and its electricity need is not great enough to use all the power supplied by the new project. Most of the electricity users will therefore be on the Québec side — already the destination for more than half of the power from the existing Churchill Falls plant. To meet this need, two new 735kV transmission lines will be built, one from Gull Island to Churchill Falls and one from Gull Island to Montagnais in Quebec.

Hydro Québec Energy Services will market all the power from the Churchill Falls extension and from Gull Island, apart from 1000MW which will be reserved for NF&LAB. The sale will be governed by a ‘take or pay’ power contract in which hydro-quebec Energy Services will pay a price for the energy related to the energy market price, with a guaranteed floor price in the case of market prices falling below a preset level. Under the ‘take or pay’ contract Hydro Québec Energy Services pays a minimum price for the electricity regardless of whether in practice it takes the energy. Hydro Québec Energy Services will market the power in Québec and elsewhere, and in return for bearing these risks it will receive a marketing fee of 2.8%. N&L will receive a royalty for energy produced from Muskrat Falls (if developed) and from Gull Island, in recognition of the fact that NF&LAB owns the water resources of the Lower Churchill river.

Of the 1000MW to be used in NF&LAB, around 200MW is expected to be used in Labrador on the mainland, and around 800MW will be used in the island of Newfoundland. To transfer the power supplied to NF&LAB to the populous eastern part of the province, a ±400kV HVDC transmission line is planned. This will be the only part of the project funded entirely by the province of NF&LAB, and it will be extended to the island of Newfoundland via a submarine cable across the strait of Belle Isle. The line is expected to cost in the region of C$2.2B. Jim Thistle pegs capital costs for the new plants at C$600M for Churchill, with the river diversions expected to cost C$700M for a combined total of C$1.3B.3B; C$3.2B for Gull lsland; and C$2.1B for the Muskrat Falls plant if it goes ahead in its present form — although, he says, the cost for Muskrat could come down.

On top of that, the new transmission lines into Québec will cost some C$3.1B. Theses figures are in service dollars, assuming the plant will be started up by 2007, and include interest on capital during construction.

The Labrador project has plenty of political will behind it: not only will it will make a significant contribution to Canada’s attempt to reduce greenhouse gas emissions in response to the Kyoto agreement; it also offers thousands of jobs during the construction period, and once the power stations come on line there will be opportunities to sell into the power-hungry markets of the US. But will investors buy into the project? Jim Thistle is confident that they will.

‘It will be an interesting investment possibility,’ he says. ‘It is large, with good security, and safe investments on this scale are hard to find’. Long lead times can be seen as a bar to investment in power projects but Thistle does not see it is a problem. ‘It is not significantly different from other power projects,’ he noted. ‘The offshore Hibernia project was completed in 1997 and contracts were signed in 1990. Those contracts were all signed on a project basis. Investors are familiar with and sympathetic to large scale energy projects.’ Thistle points out two other advantages of the project: ‘Once the plant is built it is essentially immortal, and the returns will be so large I don’t see it at all as being difficult to finance.’ And the environmental questions that have dogged so many hydro projects? Thistle is confident enough to say that, if at any time it did not comply with environmental standards, it would be cancelled. But Thistle says that local people have been involved in every stage of the development, and the fact that it is a highly efficient project, using largely existing infrastructure, has given them a flying start in convincing stakeholders of the project’s benefits. ‘It is quite clear that the project must, and will, comply with environmental regulations for Québec, Newfoundland and Labrador, and Canada,’ he says.
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