The Business Initiatives Group:
Peat-To-Energy Project Evaluation

Introduction

In late June 1993, members of the Economic Recovery Commission's (ERC) Business Initiatives Group prepared for a meeting with the Premier of Newfoundland, concerning the future of the Stanton Group peat-to-energy cogeneration project. This American energy-project development firm had proposed to build a 40 Megawatt (MW) electricity generating facility in the town of Stephenville, near Newfoundland's west coast. After nearly eighteen months work by the Stanton Group, and a comprehensive cost-benefit analysis prepared by the provincial Department of Mines and Energy, the time had arrived to decide whether the project would proceed. While the ultimate decision regarding the project's future was the responsibility of the Premier and his Cabinet, the recommendation of the ERC, through the Business Initiatives Group, had great influence. The Group would have to determine if the project represented a positive economic development strategy.


This case was prepared by Kevin Baldwin, BComm ('90) under the supervision of Professor Robert Greenwood of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright 1993, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproductions must acknowledge the copyright. This permission does not include publication.


Economic Development History and Climate

Newfoundland's economic development history began in the last half of the nineteenth century with the establishment and development of responsible government, which gave the new dominion the tools to create and implement national economic policies. The first development policies included import-substitution, development of inland agriculture, building of the trans-island railroad and a system of tariffs and subsidies to protect local manufacturers: all policies that had been proven successful in central Canada, Argentina and Australia. Applied in a peripheral region with low populations and geographic dispersement, however, these policies contributed to the advent of financial and commercial crisis by the end of the nineteenth century, manifested most brutally in very low per capita incomes and poor standards of living.

As the American and British industrial economies grew during the very beginning of the twentieth century, they began to look to peripheral regions for access to raw materials. Newfoundland, desperately needing new injections of capital, provided not only raw materials and unskilled labour, but also concessions on taxes, royalties and import duties, as well as subsidies. This began a pattern of outside ownership and external decision making that has persisted ever since.

This pattern was most apparent in the forestry and mining industries, where much of the inputs were purchased from outside of Newfoundland and the industries were foreign owned and controlled. Because the raw materials were exported and processed elsewhere, multiplier effects were negligible and almost no revenues accrued to the Newfoundland government.

In the early 1950s, Newfoundland's first attempt at post-Confederation economic development was similar to the first development drive of the late nineteenth century; the traditional economy was neglected, the urban-industrial thrust was adopted as the only desirable development mode, and the creation of a secondary manufacturing base was sought. However, not only did the newly established manufacturing firms fad, but so did many established local manufacturers, victim of larger central Canadian firms no longer subject to import tariff or other protections. Again, the government of Newfoundland turned to large-scale resource development, offering subsidies, tax concessions and other incentives to Canadian and multi-national firms. An illusion of wealth was created by the subsequent construction boom, as mining companies, oil refineries and pulp and paper producers moved in to take advantage. By the early 1970s, however, the construction boom died, and what remained was an economy dependent on primary resources and transfer payments from the federal government, with low productivity and high unemployment.

In the late 1980s and early 1990s, a new direction in economic development took shape. Based on the tenets proposed by the 1987 Royal Report on Employment and Unemployment, and directed by the Premier, the provincial government embraced a strategy aimed at exploiting Newfoundland's inherent strengths and developing new areas of opportunity. The practice of luring outside firms was still encouraged, but only in situations where there were opportunities to use the acquisition of the outside firm as a catalyst to local business development.

The creation of the Economic Recovery Commission in 1990 was an integral part of the Premier's strategy for developing a new economy. The goals of the ERC were to contribute to the economic development of the province, and to address the problem of chronically high unemployment. The ERC researched areas of opportunity for the province, and produced, in conjunction with private sector working groups and community groups, a series of twelve sectoral strategies named New Opportunities for Growth. The areas identified included light manufacturing, innovative technologies and alternative energies.

Within the ERC, the Business Initiatives Group was responsible for most dealings with individual firms. The stated mission of the Group was "to facilitate the establishment of long-term economically viable enterprises in Newfoundland and Labrador which generate wealth, create employment, and contribute to the economic base of the province," and its objectives were to:

  • identify and facilitate the establishment or expansion of provincial enterprises;
  • attract to Newfoundland and Labrador, enterprises which had expertise, skill, markets or technology not operating in the province;
  • encourage, where desirable, and assist in the establishment of joint ventures and other strategic alliances between enterprises in Newfoundland and Labrador and those from outside the province which had expertise, skill, markets or technology not operating in the province;
  • assist enterprises in Newfoundland and Labrador in restructuring and stabilization activities; and
  • undertake special initiatives, of a non-enterprise specific nature, that would contribute to the realization of the group's mission.

Because the ERC was so fundamentally linked to the Premier's own plans for the province's development, it shared an especially close relationship with the Premier. While this relationship allowed the ERC to help forge integral components of the province's development strategies, it also caused a certain amount of resentment among the line-department bureaucracy, and among elected politicians. Added to this was the fact that the chair was an appointee of the Premier, selected from the academic community. This may have added to resentment, and to a prepossessed disapproval of ERC initiatives.

The ERC enjoyed favourable working relationships with other economic development agencies; federal, provincial and local. The most important of these agencies, in terms of assistance to entrepreneurs, were the Atlantic Canada Opportunities Agency (federal), Enterprise Newfoundland and Labrador Corporation and the provincial Department of Industry, Trade and Technology. The Business Initiatives Group acted as project facilitator, actively coordinating the flow of information among these agencies and other project stakeholders.

The Town of Stephenville

Stephenville was a southwestern Newfoundland town of approximately 12,000 people, settled in 1846. Early settlers had created an economy based on fishing, farming and lumber production, which dominated the area until the United States government established a military base there in 1940. The base had provided employment and economic activity during its wartime role as a staging area for air traffic across the North Atlantic. After World War II, the Stephenville base had remained active as a major refuelling centre. In 1966, however, the base was officially closed, and Stephenville lost 1200 permanent jobs and nearly half of its population, as 4500 US servicemen and their dependents left the area.

The first provincial effort at revitalizing the economy of the area had come in the form of a linerboard mill, constructed by Canadian javelin Limited and heavily supported by the provincial government. It had commenced commercial operations in 1974, but that same year, financial failure caused Canadian Javelin to surrender control of the plant to the provincial government. A crown corporation named Labrador Linerboard Limited reopened the mill. Reference to Labrador in the name of the crown corporation had occurred because, at the same time the mill was opened, logging operations and a wood chip mill had been created in Goose Bay, Labrador to provide raw materials to the Stephenville plant. The min continued to operate under severe financial difficulties until August of 1977, when the provincial government, acting on the recommendation of its own advisory board, shut it down. Closure of the Mill resulted in the loss of 600 jobs and eliminated the town's economic mainstay.

The Newfoundland government continued to search for a buyer for the Stephenville plant, and in 1979 it was sold to Abitibi-Price Limited. Abitibi-Price undertook a two-year, $115 million conversion to newsprint manufacture, using modem production techniques, and began operation in 1981. The conversion reduced pressure on the indigenous wood supply, but also created a condition of excess boiler capacity. Abitibi-Price began to search for uses for this excess capacity, and during this search became aware of Stanton Group waste-to-energy projects in other areas.

The Stanton Group Project

The Stanton Group inventoried the equipment made redundant by the Abitibi-Price mill conversion, and made initial judgements concerning the potential to convert it to electricity generation, by burning peat. The Stanton Group also investigated the area of western Newfoundland, and its ability to provide needed services during the construction and operation of the generating facility. They found that between the three largest centres in the region (Comer Brook, Stephenville and Deer Lake), a wide array of services and products were available, including engineering, construction, transportation, legal services, office supplies, chemical supplies and engine repair.

There was also positive indication of an adequate supply of fuel peat in the province (See Figure 1). In fact, a Department of Mines and Energy study conducted several years earlier had concluded that 11% of Newfoundland's landmass was covered by peat.

The federal government, through the Atlantic Canada Opportunities Agency (ACOA), contributed $347,000 toward the cost of a Phase I Pre-Feasibility and Engineering Study. The Stanton Group had suggested that if the study provided positive indication of financial and technical feasibility, they and the other project proponents would pay the $65 million (US) required to build and operate the facility.

Dr Stephen Browne, president of the Stanton Group, had attended several meetings in Newfoundland over the summer of 1992. Federal government interest and support were evidenced by the substantial contribution by ACOA. Newfoundland and Labrador Hydro (Newfoundland Hydro), the primary electricity generating agency in the province, was less enthusiastic. Two very difficult obstacles had been placed before the project developers by the utility.

Figure 1

First, in order for the $65 million (US) project to prove feasible, it would have to be granted the status of a non-utility generator (NUG) of electric power. Newfoundland legislation deemed any facility producing more than ten megawatts of electricity per year to be a public utility and subject to regulation under the Public Utilities Act. The Stanton Group, and the project team it represented, would require independent control of the Stephenville facility. Second, the success of the project would be predicated on contracting to sell the electricity to the provincial utility, Newfoundland Hydro. Based on reports prepared and distributed by Newfoundland Hydro, the Stanton Group believed there to be a shortfall in Newfoundland Hydro's ability to fill the growing power requirements of the province. They proposed to sell electricity to Newfoundland Hydro, at a price equal to the utility's cost of producing the same amount of power. At a meeting on March 11, 1992, however, Newfoundland Hydro officials had insisted that any shortfalls would be met or obviated by other means: subcontracting to small hydro, producers; decreasing demand by promoting energy efficiency; and negotiating cash payments to large customers for power disruptions.

The Project Team

The Stanton Group, Inc developed, built, owned and operated waste-to-energy projects, independent power plants and cogeneration facilities around the world. Headquartered in Cambridge, Massachusetts, the company had extensive experience producing electricity from alternative and waste-based fuels: municipal, commercial and demolition solid wastes; wood chips, bark and other lumber mill wastes; and peat. The Stanton Group consisted of the following individuals: Dr Stephen L Browne (Economics, Massachusetts Institute of Technology), faculty member at Harvard University, Dr Charles B Warden (Economics, Harvard University), faculty member at Drexler University; and Dr Harry L Brown (Nuclear Engineering, Stanford University), previously Dean of Business Studies, University of New Hampshire. The Stanton Group acted as project managers and catalysts; they assembled the total project team whose other members included: Commercial Union Energy Ltd, a subsidiary of the giant British insurance firm Commercial Union, the Irish national peat supply board, Bord na Mona; the power plan engineering firm, Babcock and Wilcox; and Northland Associates, a Newfoundland engineering firm.

Commercial Union Energy would provide the project with financial backing, and with management-level interaction with developmental and regulatory agencies. It would also garner investment support from other corporations and agencies throughout Europe and North America. Bord na Mona were experts in peat harvesting and prospecting and would conduct an analysis of peat reserves in Newfoundland. Babcock and Wilcox were familiar with the site of the proposed project, and would provide engineering services throughout. They would also supply the required equipment once the construction/ refitting of the facility had begun. Northland Associates Ltd had several years of experience in the peat industry in Newfoundland, and would participate in the preparation of the environmental registration documents and, if required, an Environmental Impact Statement.

Peat-to-Energy Technology

Fuel peat was most often found beneath a layer of less dense horticultural peat. The harvesting involved first the removal of the horticultural peat, in order to access the more hydrated fuel below. Land stripped of both peat layers could be used for many purposes, as described by the Department of Mines and Energy in December, 1985:

After the fuel peat has been removed from the site, the land may be reused for agriculture, afforestation, pasture lands, or for recreational purposes. The ultimate choice will be influenced by the needs of the people in the areas, the site location, the quality of underlying mineral soil, and environmental considerations.

The peat-fired power plant proposed for the Abitibi-Price mill in Stephenville was based upon the Rankine Cycle. In its simplest configuration, a Rankine Cycle plant operated in three phases: 1) fuel was burned to boil water into steam; 2) expanding steam drove the turbine which generated electricity, 3) the spent steam was condensed by cooling, and fed back into the boiler to become steam again. As the steam was being fed back to the condenser unit, it would be used (according to the Stanton Group's plans) to warm portions of the Abitibi Price facility.

The rehabilitation and conversion of the Abitibi-Price equipment and associated facilities in Stephenville to bum locally harvested milled peat would involve major plant modifications to the boiler, fans, pumps, boiler auxiliaries and controls, precipitator and stack The project also would require procurement and installation of a peat fuel handling and feed system, turbine generator, cooling system, additional flue gas cleaning system, emissions monitoring equipment, transformers, generator controls, and numerous other pieces of smaller equipment. The heated gas produced by the system would be filtered to remove pollution and contaminants, and used to dry the fuel peat. As well, an ash handling system would be installed to remove furnace bottom ash and fly ash to storage bins or to a local landfill by two separate units. The planning stages of the project would include the preparation of detailed drafting and engineering drawings.

Ongoing operation of the facility would require much support, including a constant supply of fuel and a fuel delivery system (either by road or rail), maintenance and repair services, specialized engineering services, administrative services, and a small tool and equipment supply.

The burning of peat to produce electricity was determined by provincial government officials to be very safe. Less fumes would be produced than from a similarly sized oil-fired generator. The Department of Mines and Energy had been investigating the peat industry for some fame, and while the Stanton Group project was being considered, other peat-based projects in western Newfoundland were also being developed. Often cited as an impediment to the development of commercial peat-based projects in Newfoundland was the considerable capital cost of infrastructure and site development: removal of horticultural peat layer, harvesting and transportation mechanisms, site drainage techniques, peat drying facilities, and the training of various personnel.

Project Benefits

The Stanton Group suggested the following benefits would accrue to the province of Newfoundland, if its proposed cogeneration project was pursued:

  • creation of direct employment in plant construction and operation, as well as peat harvesting and transportation: approximately 5948 person years over the 30 - year life of the project (See Figure 2);
  • creation of induced employment, according to employment multipliers calculated by the Newfoundland Statistical Agency (See Figure 3);
  • provision of goods and services by local businesses (wherever possible);
  • contribution to the financial stability of the Abitibi-Price mill (monetization of redundant assets, reduction in steam plant capital and operating costs would result in net present value savings estimated at $7.5 million - $15 million); and,
  • development of peat-based industries infrastructure and transfer of peat handling technology, which could have contributed to the development of other peat-based businesses, including high-value added processes such as pharmaceuticals and cosmetics.

Figure 2

Figure 3

A cost-benefit study, completed by the Department of Mines and Energy in the spring of 1993, concluded that among three alternative energy generation projects, the Stanton Group project would provide the least direct benefit to the economy of Newfoundland and Labrador. Table 1 reflects the results of the financial viability analysis, performed on the Stanton Group project and two other alternatives, using the following as evaluation criteria:

  • Net Present Value - adjusted net cash flow stream by a discount factor that accounted for the rate of return available from the next best investment alternative.
  • Internal Rate of Return - the rate of discount that caused the Net Present Value to be zero.
  • Minimum Supply Price - the minimum price required for economic viability.

The table also reflects results from the cost-benefit analysis, stated in contribution to the economy of Newfoundland.

Energy Industry and Policy

The electrical power industry in Newfoundland encompassed both the generation of electricity and its distribution to the end user. In Newfoundland and Labrador, the industry was dominated by two large firms: Newfoundland Hydro and Newfoundland Light and Power Company (Newfoundland Power). Newfoundland Hydro was a provincial crown corporation which generated most of the electricity in the province. It sold the power to Newfoundland Power and to large industrial users, including mining companies, pulp and paper mills and the Come-by-Chance oil refinery. Newfoundland Power, in turn, sold the electricity to households and the remaining industrial consumers. There were six main generating facilities in the province, most of them hydroelectric (See Figure 4). While the Churchill Falls plant produced over 70% of the electricity generated in the province, virtually all of it was exported to Quebec, under a long-term contract which was not due to expire until 2041. (The Supreme Court of Canada had upheld the validity of this contract, after Newfoundland petitioned for renegotiation in the late 1980s.) Many pilot projects initiated during the 198N had prompted discussions concerning the contributions that alternative energy sources, including peatfired plants, could have made to the province's power grid and economy. In 1985, Noval Technologies Ltd and Memorial University of Newfoundland had concluded, "it is feasible to mine fuel grade peat in Newfoundland and to use it to replace imported fuel oil in the industrial and utility sectors of the provincial economy." Stephen Delaney, in a background paper prepared for The Royal Commission on Employment and Unemployment, concluded:

Dependence on oil-fired electrical generation must be reduced. Alternatives to diesel generation of electricity must be explored. In consideration of current energy policy that seeks to maximize the use of energy resources within the province, the government should review and eliminate...restrictions. The Energy Program division [should] maintain and develop a number of programs designed to promote the reduction of dependence on imported oil by the increased development of indigenous energy sources such as wood, peat and wind.

For purely economic reasons, pressure had been mounting on Newfoundland Hydro to relax its monopolistic control over electricity generation. In 1992, provincial legislators responded by raising the maximum level of power generation free from Public Utilities Board purview from one megawatt to ten megawatts. This illustrated the potential for political visibility to dominate Newfoundland Hydro's business environment, and its responses to it. Newfoundland Hydro was provided not with flexibility, but with malleability: a propensity to be shaped by its political masters, suggesting economic and developmental objectives carried less influence than political concerns.

Figure 4