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The Debate on Conservation or Development of Muskrat Falls in Newfoundland and Labrador

The Newfoundland and Labrador economy has been booming in recent years due in part to the profitability of developing energy resources such as offshore oil and hydroelectricity. The province is reaching peak energy levels and new alternatives to solving the energy problem are being studied. The question is if the demand for energy can be reduced and if not, what the least costly alternative to providing this energy is. The debate has come to the forefront of the media, sparked by a proposed hydroelectric energy project on the Lower Churchill River (Muskrat Falls) in Labrador that is expected to be approved with development beginning in the near future. This project would create 824 MW generating facilities producing energy for the province and enough to be sold via transmission links being built between the province and mainland Canada. This however comes at a cost of over $6.2 Billion (≈ €4.9 Billion) and a number of environmental and social concerns. Two prominent economists from the province hold separate views on how to proceed – one arguing an efficient pricing regime to curve energy demand, the other championing the development of Muskrat Falls [1],[2].

The argument against development focuses on the conservation of energy which is priced artificially too low. In the conservation scenario, current island production with investment in smaller energy projects can meet the reduced efficient energy demand for decades until more cost effective energy solutions are researched and developed. The current pricing regime for energy has consumers paying a reduced cost relative to the actual cost of production. This implies that the marginal benefits and marginal costs are not balanced, leading to an over-consumption of energy. The difference between consumers and production cost is estimated at $30 MW hour. It is argued that an increase in the price of electricity to reflect the true cost will reduce demand to a level where development of Lower Churchill is unnecessary.

Alternatively using cost-benefit analysis based on projected energy prices, revenue using a 12% rate of return, and other underlying assumptions, it is argued that the development of Muskrat Falls is the least costly way of meeting provincial demand compared to alternative energy sources. One of the strongest arguments for the development is that it will open up further opportunities by creating a link from the island portion of Newfoundland and Labrador to the mainland with access to North American energy markets. Because the infrastructure isn’t currently available, alternative energy sources such as natural gas, shale, and wind are more costly than Muskrat Falls. Future development of these energy sources will be less costly once transmission infrastructure is in place from Muskrat Falls.

Comparisons of alternative policy methods can be undertaken using the concept of compensating variation, measuring the impact of policy changes. For an increase in price of energy to reflect true prices, the compensating variation is the amount needed at the new price levels to bring consumers back to their original utility. For the cost-benefit argument for development, the compensating variation is derived from the consumers’ willingness to pay for (or willingness to accept) the impacts resulting from the project. Obtaining comparable measures for the compensating variation of each alternative allows for a more accurate evaluation of economic impacts. The debate of conservation against development will continue during the lifespan of the project with the varying ideas and opinions coming from the province. 

 

Jacob Macdonald
Nova SBE

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[1] Locke, Wade. 2012. “Muskrat Falls: The Best Option? A Public Forum.” A Presentation to Memorial Presents. St. John’s, Newfoundland

[2] Feehan, James. 2012. Newfoundland’s Electricity Options: Making the Right Choice Requires an Efficient Pricing Regime. C.D. Howe Institute, e-brief 

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Author: studentnovasbe

Master student in Nova Sbe

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