(November 18, 2013) As Hans and Franz of SNL fame used to say, “we want to pump you up,” and that appears to be what Northland Power Inc. want to do with a water-filled abandoned iron ore mine in Marmora, Ontario.
Northland Power’s June 30, 2013 three month report indicates they are pumping up their revenue per megawatt hour (MWh) and generated earnings of $169.71 per MWh, up from $116.05 per MWh in the comparable three months of 2012. And it now appears that Northland are determined to “pump that up” even more with their proposal to turn the abandoned Bethlehem Steel iron ore mine in Marmora into a pumped storage facility.
They have managed to garner the support of the local council and the current Energy Minister, Bob Chiarelli, along the way, although the latter’s support was gathered just prior to his current Ministerial appointment to the Energy chair. At the time he sent the January 17, 2013 letter of support to former Energy Minister Chris Bentley, Chiarelli was Minister of Infrastructure. Northland have a cadre of five hired consulting companies registered with the Ontario Lobbyist Registry to ensure they can influence the gullible Liberal party.
Northland Power trades on the TSX “Top 100” with a price of $16.52 per share (October 31, 2013), pays a dividend equivalent to 6.5% of its value at a price earning (PE) multiple of 31.8, signalling that the company is regarded highly by investors for their future earnings potential. Northland count John Turner, former Liberal Prime Minister (for 79 days), amongst others, as a director.
Northland recently held an investors meeting to announce their third quarter results and discuss the way forward. The podcast is available on their website and is almost three hours long but the most interesting part is the Q&A starting at 2.31.30. There were several questions related to the Marmora plans and some interesting answers.
What this writer gleaned from the responses to the questions was that all three parties have endorsed the project and it is simply a question of the government taking a “political step” to move it forward. One response said that Minister Chiarelli would likely put a requirement for 1,000 MW of “pumped storage” in his upcoming revision to the Long-Term Energy Plan. The planned investment according to a Northland spokesperson was “pushing $1 billion” and went on to say “Marmora will happen”. We should all find the remark that “IESO want it” alarming however as that implies our system operator may have serious concerns about managing the grid with all of the intermittent supply coming from wind and solar generation.
Visiting the municipalities website promoting this project you find videos, testimonials, support letters, etc. etc., extolling its virtues but information on the actual plan are, to say the least, sketchy!
The Toronto Star published an article that provides hints on its magnitude however, and information that goes beyond the hyperbole found in either the township’s or Northland Power’s site. The following is a summary of the facts that can be gathered in order to determine its viability:
Facts found/claims made:
- Capital costs will be a minimum of $660 million up to a possible $750 million.
- The rated capacity of the pumped storage facility is 400 megawatts (MW)
- The unit will have the capability of providing 400 MWs of power for a period of 5 hours.
- The unit will require 6 hours to pump the water back to the reservoir.
- There will be 45 permanent jobs created.
- Northland are looking for a 10/11% return over 40 years.
- The unit will “soak up” cheap surplus power on “very windy nights” when production is high and demand is low.
- Power from Marmora will cost less than other forms of peaking power, including natural gas.
It is the latter claim that should be disputed first. It appears to be a contrived calculation (as are all of the renewable related “cost” claims) which we would hope our elected politicians appreciate.
So, in order to deal with the last “Fact/Claim” we need to look at the above eight points to determine the overall costs of producing power that will “cost less than other forms of peaking power” presumably including “unregulated hydro” produced by Ontario Power Generation (OPG). According to OPG’s “Fact Sheet” unregulated hydro generated in the six months ended June 30, 2013 earned them 2.8 cents per kilowatt hour (kWh). Northland may have trouble competing with that price but let’s look at what they have told us to determine approximately how much pumped storage will cost. To do this we must make some assumptions which are:
a) We will assume a “total capital cost” of $700 million dollars.
b) We will assume that “equity” will represent 30% of the total cost meaning equity will be $210 million.
c) We will assume that financing will be arranged for $490 million at an interest rate of 6% amortized over 40 years but will simplify to only estimating interest charges.
d) We will assume the targeted “Return on Equity” (ROE) is 11%.
e) We will assume the pumped storage unit will run every 2nd day (unlikely) each year and produce 2,000 megawatt hours (2 million kWh) of electricity each run.
f) We will assume it will take 6 hours to replenish the reservoir and Northland will use 3,000 MWh for that process every 2nd day.
g) We will assume permanent staff will earn an average of $75K each per year including benefits.
h) We assume Northland would qualify under the Stream 2 OPA program (new investment over $250 million for existing Ontario based companies) pricing purchased electricity at the hourly Ontario energy price (HOEP) eliminating the Global Adjustment costs.
With the foregoing assumption we can calculate the annual revenue needs to achieve Northland’s targets:
|Marmora Pumped Storage Estimated Annual Costs|
|Staffing Costs 45 @ $75K per employee||$ 3.40|
|Return on Equity ($210 Million @ 11%)||$23.10|
|Interest Costs (6% on $490 million)||$29.40|
|Cost of Purchased Power||$14.60|
|NB: Cost of PP is $26.70 per MWH for 546,000 MWh|
Establishing that Northland’s annual revenue targets are $73.5 million dollars we can than look at the average cost of the pumped storage:
|Marmora Pumped Storage – Estimate of Cost per Megawatt Hour|
|Annual production calculation: one cycle per every two days:|
|400 MW X 5 hours X 182 would generate 365,000 MWh|
|Replenishment of the reservoir for one cycle per every two days:|
|400 MW X 6 hours X 182 would require 546,000 MWh of purchased power annually|
|Cost of Pumped Storage Production therefore:|
|$73.5 million divided by 365,000 MWh||$201.00|
|Add: Ratepayer subsidized Global Adjustment for power purchased to replenish the reservoir at difference between:|
|current residential average rate and HOEP||$ 95.00|
|Total cost of Pumped Storage per MWH||$296.00|
It is unlikely Northland’s pumped power would be required to run every second day, as has been suggested in the above calculations, and less run time would only serve to drive the price per kilowatt hour up from the 29.6 cents demonstrated. Running the system for 90 days would double the cost and even that is unlikely as Ontario only has a few hot summer days when our demand peaks near 24,000 MW. July and August of 2013 saw only 4 days when this occurred. Should the costs top the $700 million level the resulting price per kWh will jump further.
Minister Chiarelli’s previous support of this project demonstrates once again that the concept of a cost/benefit analysis escapes the Liberal energy ministers and the consequences to ratepayers is forgotten in their effort to endorse any and all insane electricity concepts if they think it may win a few votes come election day.
In a search of postings on the Internet in respect to pumped storage, I found several papers prepared by qualified “experts” and the cheapest price that I could find for pumped storage was a cost of 12 cents per kWh added to the cost of electricity. If a self appointed guru (Energy Minister Brad Duguid’s opinion of me) can do that it is shocking that a minister in Ontario’s legislature cannot do the same. I am sure there are many within the ministry and their various public sector electricity generators, transmitters, planners, grid operators, etc. who could have easily supplied the same information to the minister.
Hopefully, the minister will grasp the fact that he should utilize those experts close at hand, instead of suggesting that producing electricity for a price well north of 60 cents a kilowatt hour via “pumped storage” makes any sense. It is time to respect the taxpayers and ratepayers of the province.
Parker Gallant is a retired bank executive and a former director of Energy Probe Research Foundation. As with all independent bloggers on this site, Parker views do not necessarily reflect those of Energy Probe.