Newpage loss could put up power rates for other customers

Ah that old contribution margin sneaking up on NS Power the way it did for NB Power. I noticed the following tweet from a CBC reporter yesterday:

Witherscbc Paul Withers: NS Power and stakeholders consider the future of power rates without NSP’s largest customer: NewPage. “Situation very serious.” #cbcns

There continues to be a fairly large group of folks who believe that large industrial power clients are ‘subsidized’ by the poor small business and residential customers.  And it it strictly true that large customers pay less (just like just about any business under the sun there are volume discounts) but if you back out the power utilities fixed or semi-fixed costs, the very large customers are eating a huge portion of these costs that will not go away when the large customer goes away (i.e. that is why they are called ‘fixed’ costs).

Large industrial power customers could be charge a rate structure based on ‘contribution margin’ – that is they could be charged a rate that was lowered down to the point of the variable cost component – at that point other rate classes would be in a real subsidy mode.

This is a bit obtuse this morning, I guess – I hope it makes some sense.  The bottom line is that residential and small business customers will have to pay more for energy if NewPage stays offline for a long period or closes forever.

I have argued that the best approach would be for NB Power and NS Power to treat the very large customers separately – maybe even a separate utility – where rate structures could be set to align with an average of competitor jurisdictions.  Maybe we should let these companies buy power directly from a merchant supplier or some other solution.

Playing chicken with them where the choices are either ‘pay a high rate’ or ‘go under’ doesn’t seem to make sense to me.

A while ago I looked at several big U.S. forest products firms and they were increasingly producing their own power (directly).  Maybe we should look at this although if we do – we will end up with more tweets about the eventual cost to other ratepayers.

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5 Responses to Newpage loss could put up power rates for other customers

  1. 4themargins says:

    Good morning David,

    Their is an important distinction that needs to be made between the various pulp and paper producers. The ones that are newsprint makers using Thermo Mechanical Pulping (TMP), such as the Newpage Port Hawksbury facility you are referring to in Nova Scotia, cannot easily produce there own electricity without a significant investment in the 70 to 100 million range because they don’t have the boiler capacity to put out that amount of steam and run it through a turbine so they would have to build it green field. The TMP producers basically grind the pulp with huge grinders run by huge electrical motors.

    The pulp/paper producers making a Kraft pulp, or a modified Kraft pulp, can do it a bit more easily because they don’t grind the wood as the TMP does, they cook it with steam heated cooking liquor. So they have huge boilers and with a turbine and some piping they can be self sufficient or even sell back to “the grid” in some cases.

    This difference is what makes life difficult for the TMP operators because [1] they can’t produce their own electricity without significant investment and [2] the huge TMP grinder are power hungry…very hungry! I remember hearing about the Dalhousie Bowater mill having power bills of 3million a month. I am not sure if it is fact but its probably not far off. It was so expensive that Bowater operated it’s plant at full capacity only at night because they were off peak and would save a lot in electricity. It’s important to note that the Bowater Dalhousie plant is now closed and NB Power has no idea what to do with the Dalhousie Generating station…Their were other factors in its closure but electrical cost was an important one. There are no TMP’s left in NB and it looks like there might not be one in Nova Scotia for much longer.

    It’s not clear wether or not the Newpage facility is healthy as a business. To me the debate is also about how long, and by how much, does the province subsidize a failing industry not just about playing chicken.

  2. I think that is a fair assessment but there are broader issues at play. If the NewPage mill cannot survive even with a solution to its power costs, then I might be inclined to agree with your conclusion. I have said many times that I do not like subsidizing companies with unsustainable business models.

    The only point I would add here is that it is more complicated than some people think. Losing more than a 1,000 jobs in rural NS will end up with the province/feds spending hundreds of millions more in direct subsidies to individuals and communities. It is possible that there will be another use for the fibre but the experience so far in Northern NB is not that encouraging (shipping the fibre to Europe with limited value add here).

    Despite what some think tanks say, governments just can’t walk away from rural communities. When the economic base collapses, governments still have to pay for all the public services and end up dramatically increasing direct transfers to individuals as well. My point is that governments end up spending more taxpayer money directly subsidizing services and people than they ever might have supporting the mill.

    As a result, if there is a sustainable business model for that mill but it requires a solution to the energy cost issue or some tax breaks, put me down in the support camp.

  3. mikel says:

    It’s also worth noting this:

    “The Premier also took a shot at Nova Scotia Power Inc. for its proposal to hike power rates in the province for a larger profit for its shareholders.”

    And this:

    “The Premier of Nova Scotia, Darrell Dexter, met with NewPage Port Hawkesbury‘s top mill managers this morning. Dexter has offered the province’s assistance for marketing the mill’s products to Asia and South America.”

    So this is not exactly like NB. Not only would the public be paying higher rates (whether it closes or not), they’d be doing so in order for shareholders to make more profits. Gee, I wonder why the public wouldn’t support that?
    The company has been losing money for years, it closed its Kimberley Mill, it closed its Kentucky Mill, it closed its Whiting Mill. Cheaper power rates are no guarantor of anything, so the question then becomes…how long do you prop up another Atcon?

    Another issue is the biomass project. It entered into an agreement to create a 60 MW biomass boiler. So here’s an interesting question. IF it has a boiler to create more power than it uses (60 MW is a LOT of power) then why does it care WHAT power rates are?

    In Wisconsin, the turbines produce steam that provides 40% of the power necessary to run the mills. So you’d literally have to have almost dirt cheap power, in other words, pay almost all the costs. Given that they also have a mill in Luke, Maryland, I have a hard time believing that Maryland has cheaper power even than NS’s private market.

    So power rates is almost a red herring. More than likely its a power play because Nova Scotia’s energy company is about to hike rates by a huge amount. Nova Scotia is in a bit of a bind because since the power company is private, they really have their hands tied. However, as the consumer advocate says, it is up to the province to provide subsidies. Now, THAT is kind of strange when you have a public intervenor who is basically saying “no, ratepayers should NOT have to subsidize this company…..TAXpayers should”. That’s just really weird. But its also how things work in NB. If you remember the Saint John pulp mill made gripes about moving to Quebec, then along came a 10 million ‘forgiveable loan’ and all has been quiet since.

    So either way, these companies tend to get what they want. Changing the administrative structure STILL simply means that other ratepayers take up the slack. And I should also point out that this is not a data farm. The company in PH ALREADY benefits by cheap access to 607,000 hectares of crown land. So its not like they aren’t getting handouts already. All for the sake of calendars and print ads, two very rapidly dying industries, which will no doubt be obsolete by the time the new generation of wireless users comes online (not to mention once they start using bamboo and grass to make paper).

  4. 4themargins says:

    @mikel
    Interesting points Mikel. I tend to agree that this may be a power play, pardon the pun. A wise man once told me that the truth usually lies somewhere in the middle. I think it is partially playing political games (because they usually work when 1000 jobs are on the line) but I would not discount it completely. The 60 MW project sounds like a lot of power, and it is, but it may not meet all their needs. For example, the Bowater Dalhousie plant required 100MW of power. Half of the Dalhousie generating station was for that mill alone. I don’t know much about the production capabilities of the Port Hawksbury mill but I know its big and maybe even bigger than Dalhousie.

    It makes a lot of sense for many pulp/paper operations to have a cogen but it rarely meets all their needs because the cheapest biomass comes from their own operation. Logs come in yard, then get de-barked, then get chipped, then get cooked or ground depending on the operation. That bark from the logs provides the cheapest source of biomass for the cogen and most times energy requirements outrun the in house biomass production. Biomass from other sources can be purchased and trucked in but as you can imagine the margins and savings are not as good.

    The other side of the coin to the bio mass story is that if they get cheaper power from the province they can generate revenue by selling there “Green” power (biomass power fits the green criteria) and they might also be able to generate revenue from their biomass production. So it’s difficult to determine what their true intentions are sometimes…it’s all a big shell game sometimes and a penny here or there when you are dealing with these types of volumes can make a big difference in the $$$.

  5. mikel says:

    Thanks for the comments, I dug a little deeper and found my initial response was wrong: “The co-generation facility will produce about 400 gigawatt hours of energy a year – or about 3% of Nova Scotia’s total electricity requirements”

    It’s true that they are NS Power’s largest customers, but 400 GW is a LOT of power. Again, I’ve found two different sources, so people should do some of their own research.

    I wouldn’t be surprised if the mill were long considered just a front to get into the power production game. NS Power was putting up a lot of the dough, and already bought much of the mill from Newpage.

    It’s true we don’t know what their intentions are, which is why it makes sense to look at it from an ED point of view. How much is invested for how many jobs-is it more cost effective to just make all those guys civil servants? Or is there something magical about cutting down trees that we’ll PAY companies to do it.

    It’s true what David says, you can’t just abandon rural areas. HOwever, sometimes you have to take a hard look at the Yarn companies that are operating there and investigate whether X investment is worth Y result. Particularly in a field that most can safely say is dying anyway. Usually the devil is in the details, but bending over for company’s rarely gets the long term ED strategy one hopes for. IF there is an argument to be made about ‘bailing out rural areas’ then that becomes a POLITICAL issue, not an economic one. All those people aren’t going to go on welfare, and hate to say it, but this has been going on for CENTURIES. How many complaints do were hear that the poor old Village of Kouchibouguac used to be a main shipbuilding centre, and why oh why isn’t the government propping up wooden shipbuilding in order to save the economy of Kouchibouguac and the mill that it long had there. That’s all ancient history, and there are about ten different families in Kouchibouguac. Sad, but sometimes that’s life. If you want to ‘save’ people, we know how to do that-its called ‘lifelong learning’ and it means ‘don’t expect being a fisherman is always going to be your livelihood’.

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