Goodbye Holyrood and hello Muskrat
Burning oil at the Holyrood generating plant has been a concern for Newfoundlanders and Labradorians, especially those living in the Holyrood area, for many years. At maximum capacity the plant burns 18,000 barrels of oil per day, 6,000 barrels per day for each generating unit. The current cost of oil used in the plant is about $450 per metric tonne. As there are 7.33 barrels of oil per metric ton, that works out to $61.40 per barrel.
Doing a little math, if the Holyrood generating plant is working at 100 per cent capacity for the full year, the total cost of oil burned is 18,000 barrels times 365 days, times $61.40 or $403,398,000. Of course, the plant is not working at 100 per cent all the time. A more realistic rate would be two thirds or 67 per cent capacity, in which case the total cost of oil burned per year reduces to $270,277,000. The estimated cost in 2012 of burning oil in the plant in 2017 was $324,000,000. To reconcile the above two yearly dollar figures, the projected cost of oil in 2017 (from 2012) was $74 per barrel, assuming a 67 per cent capacity at the Holyrood plant.
Going back about 10 years to when the decision was made to develop Muskrat Falls, the conception plan was to generate electricity at a cheaper rate than oil burned in the Holyrood plant. The cost of developing Muskrat Falls (and associate transmission lines) was estimated to be $6.2 billion. The cost of money then was about 2.5 per cent. The estimated annual cost of financing this capital at that time was $6.2 billion times 2.5% or $0.155 billion ($155,000,000).
When making a comparison of a cost saving of $270,277,000 by not burning oil and the cost of financing a hydro plant of $155,000,000, the decision to retire the Holyrood plant in favour of Muskrat Falls plant was a valid economic choice. Even factoring in a doubling of the estimated costs of Muskrat Falls plant 10 years ago to $12.4 billion would have increased the financing to $310,000,000, which was still comparable to the cost savings of not using the Holyrood plant.
The figures in the previous paragraph assumed a cost of oil of $74 per barrel. At the time the decision was made to start the Muskrat Falls project, oil was about $120 per barrel. In other words, the planners of the Muskrat Falls project were discounting the then price of oil by about 38 per cent to arrive at an approximately break-even cost of continuing with the Holyrood plant or going with the Muskrat Falls option.
Clearly the intention was to have a cheaper cost of electricity by opting for the Muskrat Falls project, which was planned to be self financing — in other words, the capital cost of the Muskrat Falls project would not add to the electricity rates. If the capital cost of the Muskrat Falls project is charged to the current electricity rates, consumers of electricity would have the equivalent of double taxation, as an allowance is not made for the increasing savings of not using the Holyrood plant.
However, costs today are somewhat different from 10 years ago. Oil is about $62 per barrel and rising and interest costs are 3.5% and rising. (The provincial government recently wrote a bond issue at 3.5%.) Based on the above current figures of oil and financing, the capital cost ($12.7 billion) of the Muskrat Falls project is currently about $444,000,000 per year. The savings of not using the Holyrood plant is $270,000,000 per year and rising with the price of oil and increasing maintenance costs.
I must emphasize that the intent of the Muskrat Falls project was not to capitalize the cost of the project on to current and future electricity rates but to capitalize the cost on to the savings of not using the Holyrood plant. There should not be any increase in electricity rates as a result of a transfer of electricity from the Holyrood plant to Muskrat Falls.
Ian Mcmaster St. John’s