LOWER CHURCHILL RIVER HYDROELECTRICITY DEVELOPMENT: The Project’s Day in the Sun May Have Finally Arrived

Executive Summary

With much of Canada facing prospects of electricity shortages, there has been considerable focus placed on the need to develop new sources of power. This study shines the spotlight on one major supply-enhancing opportunity that is currently making waves – namely, the potential for a hydroelectric development at Lower Churchill in Newfoundland & Labrador.

The Lower Churchill project comprises both the proposed generation facilities at Gull Island and Muskrat Falls and the associated transmission infrastructure. Combined, this development would carry a direct capital cost of roughly $3.3 billion (2004 dollars) and have a planned generation capacity of nearly 3,000 MW, representing the fourth largest hydroelectric project after La Grande in Quebec, Newfoundland & Labrador’s Churchill Falls, and Manic complex in Quebec. In short, while this hydroelectricity development would be smaller than its counterpart in Churchill Falls, it would still mark one of the largest of its kind in Canadian history.

On again, off again

The idea of developing the Lower Churchill hydro resource is not new. In fact, proposals to develop the area have been floated around as far back as the early 1970s, shortly after work on the Churchill Falls project began to gear up. But, while the Churchill Falls development was ultimately completed in 1974, Lower Churchill never managed to get off the ground. Over the past three decades, there have been several efforts to kickstart the project. And, each time, hopes have ended in disappointment – most recently in 2002.

The events surrounding Churchill Falls have been most important impediments that have blocked successful development of Lower Churchill. With Labrador situated between Quebec to the west and the Atlantic Ocean to the east, the most economically viable option – especially at that time – was to transmit the power across Quebec’s territory. As such, in 1969, the Churchill Falls (Labrador) Corporation Limited entered into a 65-year deal to sell electricity to Hydro-Quebec. Unfortunately for Newfoundland & Labrador, the price in the contract proved to be leaps and bounds below that which ultimately prevailed in the market, generating a windfall gain for the province of Quebec. For an Atlantic province that has recorded a per-capita income well below the national average rate, these events left some deep and long-lasting scars among the residents.

What’s more, the sour legacy of the Churchill Falls contract enormously complicated the chances of arriving at a deal between Newfoundland & Labrador and Quebec to develop Lower Churchill. Not only was trust between the parties damaged, but negotiations over Lower Churchill were usually tied in some shape or form to re-configuring aspects of the 1969 contract. But, while Quebec has addressed some of Newfoundland’s concerns in two side deals in the 1990s, re-negotiating the contract has been a non-starter.

Lower Churchill Project – the time is right

Since taking office in 2003, Newfoundland & Labrador Premier Danny Williams has placed the development of Lower Churchill at the top end of his list of priorities. Although the question has been raised as to why the Premier would be interested in resuscitating a project that has failed in so many earlier attempts, a closer look at the dramatic shift in the landscape provides a good explanation. Most importantly, market opportunities have improved significantly over the past few years, following the 2003 power blackout and warnings issued by both the Ontario and Quebec governments that their respective provinces are confronting looming power shortages. Even in Newfoundland & Labrador, which has enough electricity to supply its domestic needs, there is the potential to displace power generated by the less-environmentally-friendly oil-fired generation at Holyrood, not to mention facilitating the operations of large industrial projects.

Federal appetite has grown for east-west power grid

Another tailwind blowing in favour of the Lower Churchill development has been the increasing interest of the federal government in the power file, and notably, in assisting the development of an east-west power grid. In the past, the federal government has elected to stay on the sidelines with respect to electricity infrastructure development, owing in part to the fact that electricity falls under provincial jurisdiction. However, armed with a strong fiscal position, the rising concerns about power supplies in the country’s two largest provinces, and the need to meet Canada’s commitments under the Kyoto Accord, the federal government appears to be changing its tune. The April 2005 federal Kyoto plan announced some $10 billion for environmental measures by 2012, a portion of which will be eligible for investments in “clean” electricity.

First Nations must be part of the process

There is no doubt that there remain some roadblocks that will need to be dealt with before the vision of developing Lower Churchill becomes reality. And, chief among them is addressing the needs of aboriginal communities. The Labrador Innu, Labrador Metis and Innu peoples of Quebec have all claimed aboriginal rights and title to land in Labrador, including the proposed development area. The Labrador Innu are the only aboriginal party with a land claim overlapping the proposed development area that has been accepted for negotiations by the governments of Canada and Newfoundland & Labrador. Happily, the players involved in the negotiations, namely the government of Newfoundland & Labrador, have got the message that aboriginal communities will need to be involved in the process from the outset if there is any hope in achieving success.

Environmental impacts less with Lower Churchill

A selling feature of the proposed hydroelectric project is the potential to lower greenhouse gas emissions. But, while this is only one, albeit important, aspect of the environment – and the overall impact will need to be assessed before development can proceed – there are other factors that would help the project pass the overall environmental test. For one, although large-scale hydroelectric projects often result in the displacement of local communities along the route, this is not an issue in the case of Lower Churchill. Second, the area around the proposed project is in a temperate and boreal climate, implying that emissions from the reservoirs would be considerably less than those located in tropical regions. And, above all, Lower Churchill would be a “run-of-the-river” development, and thus, result in relatively little flooding.

Project’s economic benefits could be substantial

A reliable and abundant supply of power has been, and always will be, a key driver of Canadians’ living standards. And, to the extent that hydroelectric power flowing from Lower Churchill can supply markets that are facing the prospect of power shortages down the road, notably Ontario, this would provide a boost to the nation’s long-term growth rate. Undoubtedly, though, the largest share of benefits would be enjoyed by Newfoundland & Labrador. Coming up with precise measures of these benefits is made virtually impossible at this stage, since the configuration of the project, the price the power would be sold at, and what share of labour and materials could be supplied locally remain big question marks. In the short run, there will be a significant boost to both employment and economic growth associated with the construction phase of the project. The longer-term rewards related to development would stem primarily through raising incomes increases, and hence, provincial government revenues. This higher revenue profile would lend a helping hand to the Newfoundland & Labrador government as it tackles its fiscal challenges.

In January 2005, the Williams government issued a request for expressions of interest and proposals in the development of the Lower Churchill project. At the time of writing, the March 31st, 2005 deadline had expired, and the government announced it had received a total of 25 proposals. Based on a preliminary review, up to 10 were considered to be comprehensive. While most of the proposals have been kept under wraps, one public-private partnership consisting of the governments of Ontario and Quebec and the engineering construction group SNC-Lavalin Inc. issued a press release to indicate they had made a joint submission. A committee consisting of representatives from the provincial government and Newfoundland & Labrador Hydro are currently making an initial assessment, with the complete process – including feasibility studies and commercial negotiations – expected to take up to 18-24 months.

The Bottom Line

With Ontario and Quebec thirsty for new power, and with Canada ramping up efforts to lower greenhouse gas emissions, market conditions are highly supportive of a Lower Churchill hydroelectric development in Labrador. And, recently, the federal government has shown an increased desire to put its financial weight behind the establishment of an east-west power grid, and hence, possibly in lending a helping hand to this power project. And, while a number of challenges remain in bringing aboriginal communities on board and in passing the environmental test, these roadblocks appear more surmountable today than in the past. All in all, despite encountering storm clouds since the mid-1970s, the Lower Churchill development’s day in the sun may have finally arrived.

Derek Burleton, AVP & Senior Economist
416-982-2514

Priscila Kalevar, Economist
416-982-2555

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