Power outages and rolling blackouts are an annoying fact of life in many regions of the world – most notably, in war-torn and poverty-ridden regions.

So, it came as a nasty surprise to the majority of residents on the island of Newfoundland in early January, when – in the midst of an extended cold snap – they suddenly were introduced to the reality of power rationing. Nalcor Energy, the Crown corporation responsible for electrical generation and transmission, imposed rolling outages across the province, thereby compelling schools, businesses and government offices to remain closed for up to six days.

There now are three inquiries beginning work on establishing why the province’s electrical infrastructure failed in this manner. Nalcor blames higher than anticipated demand for the outages, but the company also admits that one of its three thermal generators at the Holyrood plant was awaiting repairs and had been operating far below capacity for several months.

The effects on the business community were substantial; most notably, for two of the province’s major employers – both of which already face an uncertain future. The power outages resulted in the cessation of operations at North Atlantic Petroleum’s Come-by-Chance oil refinery, which is a subsidiary of Korea National Oil Corp.

In a news release, the company indicated it had incurred considerable loss of income. “This power failure was very unfortunate and disappointing for North Atlantic,” spokesperson Gloria Warren-Slade says. “Our refinery was operating at peak performance in the weeks leading up to the power failure and economics were the best we had experienced in some time.”

Similarly, production slowed at the Kruger Inc. pulp and paper plant in Corner Brook after Nalcor diverted power from its Deer Lake hydro plant to reinforce the province’s electrical grid. This forced Kruger to adjust operations at the mill, halting production on one of its newsprint machines when the provincial grid was at peak consumption and then bringing it back up in periods of low overall demand.

In reports, Kruger warned that the mill, which has been the recipient of government financial assistance, could not afford to off-load power to the main grid over the long term. “We are in the business of producing paper, not power,” says mill general manager Ric Tull.

Questions about the accuracy of electrical demand forecasting now are dogging both Nalcor and Newfoundland Light and Power, a power distributor owned by Fortis Inc. But the provincial government also is being criticized for not implementing meaningful power-conservation measures, even though former finance minister Jerome Kennedy warned in 2012 that “rolling blackouts” would soon occur unless additional generating capacity was added.

Kennedy’s prescience has bolstered the unpopular provincial government arguments for the Muskrat Falls hydro project, which is scheduled to begin producing power in 2017. Critics have pointed to construction costs and the significant rate increases that will accompany Muskrat Falls. But after the extended outages during the depths of winter, many clients now may be willing accept that high price.

© 2014 Investment Executive. All rights reserved.