UPDATE 2-Ottawa pledges Newfoundland power project loan guarantees

Fri Nov 30, 2012 5:26pm EST

* Loan guarantee for C$6.3 bln, total project cost C$7.4 bln

* Project may lower power rates in Newfoundland, Nova Scotia

* Quebec protests the deal

OTTAWA, Nov 30 (Reuters) - Canada's federal government will provide a loan guarantee of up to C$6.3 billion ($6.3 billion) for Lower Churchill River hydro-electric projects in Labrador in a move that could cut the cost of power to residents of two Atlantic provinces.

The loan guarantee, announced by Prime Minister Stephen Harper on Friday, is intended to give new impetus to the long-stalled Muskrat Falls hydro-electric generation station near the Quebec border in Labrador and to three transmission projects.

The loan allows the project proponents to seek financing at lower costs, eventually making electricity cheaper for residents of the provinces of Newfoundland and Labrador, and Nova Scotia.

"The federal loan guarantee will lower the costs of borrowing for the proponents, with projected savings of over a billion dollars for ratepayers in Newfoundland and Labrador and Nova Scotia," Harper's office said in a statement.

The guarantee, which Harper promised in the 2011 federal election campaign, will remain valid for 35 to 40 years. The term sheet for the deal was signed by Ottawa, the premiers of Newfoundland and Labrador and Nova Scotia and by the two energy companies involved.

Newfoundland and Labrador has been looking since the 1970s at harnessing the Lower Churchill River, which can produce more power than the province needs, but it did not start active development until the last decade.

In November 2010, Newfoundland government-owned Nalcor Energy and Nova Scotia-based Emera Inc announced plans to develop the 824-megawatt Muskrat Falls plant and related transmission lines.

The estimated cost of the projects is C$7.4 billion. Muskrat Falls is expected to start operations in mid-2017, generating 4.9 million megawatt-hours (MWh) annually.

Nalcor will build and own 100 percent of Muskrat Falls and will also build one of the transmission lines through a joint venture with Emera.

It will build the Lower Churchill project in two phases, the first at Muskrat Falls and the second 2,250-MW phase at Gull Island.

The cheap and clean power produced at Muskrat Falls could also attract buyers in New England.

The project plays into a longstanding dispute between Newfoundland and Quebec over energy development on the Churchill River. The dispute spurred Newfoundland and Nova Scotia to become partners to find a way to deliver power to other markets while bypassing Quebec.

Quebec's new separatist government immediately criticized the loan guarantee, saying Ottawa was giving preferential treatment to one region.

The federal government said the Muskrat Falls facility would reduce up to 4.5 million tonnes of greenhouse gas emissions annually.