Thursday, March 29, 2012

Northern Pass Makes No Financial Sense Today. Why Build It?

When Hydro-Quebec (HQ) started planning Northern Pass (NP)several years ago, gas prices were four times higher, and HQ’s hydropower had a big pricing advantage. Not so now, when today, literally, gas prices hit a 10-year low. Today, HQ’s power does not enjoy a price advantage.
         Northern Pass Makes No Financial Sense Today. Why Build It?
                                              A Guest Blog

Today's "Heard on the Street" column in the Wall Street Journal provides some interesting comparative data points on the cost of coal and gas-fired generation:

"A typical coal-fired power plant burns 10,000 British thermal units of fuel to produce one megawatt hour of electricity. With Appalachian coal costing $55 a ton, the fuel cost alone, not including transportation, is $22 per MWh. An efficient gas-fired power plant can get one MWh for 7,000 BTU of fuel. With gas at $2.24 per million BTUs, the implied fuel cost is under $16."

In short,

Gas -- $16/MWh (fuel costs only).
Coal (Appalachian sources) -- $22/MWh  (fuel costs only);

If you add 25% as a rough estimate for other operating costs, gas plants can produce at ballpark $20/MWh. This is on par with HQ's’s headline number of $22/MWh average operating cost of hydropower.


Gas -- $20/MWh (fuel cost plus operating costs);
HQ hydropower -- $22/MWh (average operating cost);

These figures comport with what the market is showing for wholesale electricity prices. As of the most recent hourly pricing report from ISO-New England (3/29/2012), NH wholesale electricity is at $27/MWh.

This is an interesting development. When HQ started planning NP several years ago, gas prices were four times higher, and HQ’s hydropower had a big pricing advantage. Not so now, when today, literally, gas prices hit a 10-year low. Today, HQ’s power does not enjoy a price advantage.

As today's "Heard on the Street" points out, the long-term trend may be toward higher gas prices if there is more demand because of coal plant shutdowns and substitution to gas, and also increased opportunity for gas exports. But if we believe the 10 cent/kWh Romaine cost per the film, "Seeking the Current,"* or even the 6.5 cent figure that HQ insists upon,** gas prices will have to go up a lot to make Romaine power competitive with gas generation.

The bottom line is that the incredible decline in US natural gas prices, and thus of US gas-fired electric generation, has taken HQ by surprise.  At current pricing, and taking into account that NP’s cost structure is grossly understated (it footnotes rather than quantifies the PSNH ROW rental payments, as just one example), Northern Pass is simply not economic.  You can’t make money selling $65 electricity into a $25 market!

If it is actually serious about pursuing NP, HQ is betting the farm on a relatively rapid increase in New England wholesale electricity prices.  We say “relatively rapid” because of the magic of compounding – the profits that HQ stands to make over the first 15 years of the 40-year NP transaction matter much more in terms of the discounted cash flow than the “out years” of 16-40.

How does one explain the fact, then, that HQ/NU/PSNH/NP appear to be moving ahead with NP, guns blazing?  It doesn’t seem to be a careful financial decision.  Rather, one could surmise that, per “Seeking the Current," HQ has been transmogrified into a “build baby build” culture, with financial considerations irrelevant or at least under weighted.  After all, as the film points out, HQ can always impose excess costs on Quebec ratepayers.

Another interesting observation from "Heard on the Street": cost of construction for a new gas-fired plant is $1MM per MWh. So, to replace NP's 1200 MW with new gas-fired generation would cost....$1.2 billion. The same as Northern Pass!

The bottom line is that we could build gas-fired capacity in New England of the same 1200 MW of electricity promised by Northern Pass (NP) for the same capital investment (likely less seeing since NP is almost certainly low on its cost numbers), and the electricity would cost the same.

Which is “worse” – destroying the Romaine River, completing the rest of the devastating Plan Nord, and ruining NH with the HVDC transmission lines, or building the gas plants and making upgrades to the existing grid as needed? For the carbon implications, the Conservation Law Foundation's and HQ’s own research on the carbon impacts of new hydropower show that there is no net gain over natural gas for at least 10 years.


*The next NH screenings of the documentary film, "Seeking the Current," are in Keene (April 5) and Bethlehem (May 24). CLF will lead discussions after the film.

**See HQ's Myth #8.