5 reasons why Muskrat Falls is now costing $7.65B
Nalcor CEO Ed Martin says project remains best option for province's future energy needs
The Muskrat Falls hydroelectric project is a massive undertaking, with construction taking place at 100 locations throughout Newfoundland and Labrador, and around the world.
Officials at Nalcor insist that the project will return more than $60 billion in savings and revenue to the province over the next half-century, and that it remains the best option for the province's future power needs.
Nalcor CEO Ed Martin was again forced to defend the project this week after a special oversight committee reported that costs have increased by another 10 per cent, climbing to $7.65 billion.
The flow of power from the facility, originally scheduled for December 2017, is now set for some time in 2018.
So why are costs going up?
Here is a closer look at the reasons, as outlined by the oversight committee.
1. Higher bids on contracts
The contract for the North Spur stabilization project was awarded at a higher value than originally budgeted. There were similar outcomes for contracts to construct the north and south dams.
Nalcor has indicated that these escalations is reflective of increased market pressures and may also apply to the remaining contract, the supply and installation of the mechanical and electrical auxiliaries. This last contract is still under review.
In all, the total budget for the generation facility at Muskrat Falls has increased by 9.3 per cent to $3.69 billion.
"What we're seeing in these bids when they come in, they're higher, much higher than we have budgeted for," said Martin.
2. Contractor performance
The oversight committee repeatedly uses the word "slippage" to describe progress on the work schedule at the generation facility in Labrador, specifically the powerhouse and intake.
Here is one telling quote: "The committee observed an increase in risk levels associated with contractor performance; powerhouse concrete placement rates; and readiness for river diversion in 2016."
In response, Nalcor is working with the main contractor, Astaldi, to hire more workers and increase production in order to get back on schedule.
These measures are also driving up the costs, although there is a clause in the contract with Astaldi to mitigate Nalcor's exposure to increased labour costs.
3. Challenging ground, weather conditions
The Labrador-island transmission link is being slowed by challenging geotechnical conditions. This, and other factors, have increased the cost of this project by nearly 11 per cent, to just under $3.1 billion.
The challenges were encountered mostly in Central Labrador, meaning additional labour and materials will be needed to complete the work.
Project costs by the numbers:
$3.26 billion — incurred costs as of August 2015;
$5.97 billion — committed costs as of August 2015;
$3.69 billion — cost for generation facility, an increase of 9.3 per cent;
$3.09 billion — cost for Labrador Island Transmission Link; an increase of 10.9 per cent;
$878 million — cost for Labrador Transmission Assets; an increase of 5.5 per cent;
"Harsher than normal winter conditions have also impacted labour productivity, resulting in projected additional labour hours to complete the work," the oversight report stated.
Adding to the cost pressure, the oversight report says Nalcor has been forced to enhance the tower and foundation design in some areas due to unstable ground conditions.
"This change in design, combined with investments towards road infrastructure (including bridges and culverts) to provide long-term operational year-round access reliability in remote areas, will also increase anticipated costs."
4. Additional project management
Nalcor has approved the deployment of additional project management resources to the Muskrat Falls site.
In the case of the Labrador Transmission Assets, costs related to engineering, procurement and construction management have increased by 45 per cent to nearly $145 million.
5. Lower buying power of the Canadian dollar
The value of the Canadian dollar has plunged in recent months, and is now just three-quarters the values of the U.S. dollar.
This has increased costs for the switchyard, transmission towers and conductor, converter and synchronous condensers.
But the impact of the lower dollar could have been much worse.
Many of the contracts were either priced in Canadian dollars, or the goods were delivered and payments made prior to the devaluation of the dollar, the report states.
What is the oversight committee?
It was established by the provincial government in March 2014 to enhance oversight of the Muskrat Falls Project.
The committee focuses on costs, schedule and risk management for the project's construction phase.