In 1968, I could fill up my mid-size car for $5. I have a much smaller car today, which I filled up with gas recently; it cost me $65.
Fifty years have passed since. In inflationary terms, gasoline increased at the rate of 5.25 per cent per year. This is typical of fossil fuel prices over an extended period of time. They increase at a faster rate than the consumer price index inflation rate, which the Bank of Canada attempts to keep to two per cent per year.
Muskrat Falls project is not a short-term project. It is built to last 50 years
Looking at the cost of operating the Holyrood generating plant (See my Aug. 27 letter, “Goodbye Holyrood and hello Muskrat”) — assuming the Muskrat Falls generating plant did not exist — the current cost of oil used by the Holyrood plant is about $270 million annually. The latter figure assumes the cost of oil is $61.40 per barrel and the plant is operating 67 per cent of the time. With passage of time, the above annual cost of oil will increase and not necessarily in a linear fashion. The cost of doing nothing would have increased electricity rates in the years ahead as the cost of oil increases.
For example, if the cost of oil increases to $65 per barrel, the annual cost of oil to feed the Holyrood plant increases to $286 million. If the cost of oil increases to $70 per barrel, the annual cost of oil to feed the Holyrood plant increases to $308 million.
The cost of financing Muskrat Falls plant (including transmission lines) is about $444 million, assuming a capital cost of $12.7 billion at 3.5 per cent interest.
When the province shifts to Muskrat Falls power, the province will be saving a minimum of $270 million annually. Hence the Muskrat Falls power is costing the province, currently, the difference — in other words, $174 million ($444 million less $270 million). This amount will only decrease over time and eventually become positive. Note also that as the price of oil increases, oil royalties will increase and Muskrat Falls power plant will become an increasing positive asset to the province.
Muskrat Falls project is not a short-term project. It is built to last 50 years. If the price of fossil fuels continues to increase at the rate of 5.25 per cent per year, as it has in the last 50 years, the annual cost of oil to operate the Holyrood plant 50 years hence will be $3.51 billion, the cost of doing nothing.
The provincial government has made the right decision not to increase electricity rates as a result of a transfer of electricity from Holyrood plant to Muskrat Falls plant.