The Newfoundland and Labrador government should hold the line on electricity rates, and instead use taxes to finance the Muskrat Falls megaproject, according to a Memorial University economist.

A 22 cent per kilowatt hour electricity rate will only hurt the provincial economy, according to Jim Feehan, who told CBC's Here & Now that high electricity rates will lead to wasted spending by consumers.

Feehan said that high electricity rates will drive consumers to seek alternatives, like conservation and oil heating. But, though consumers will try to escape paying the costs of the Muskrat Falls project, Feehan said they won't be able to.

'The money will have to be found by raising electricity rates more, or by coming off our taxes.' - James Feehan

He said if the province doesn't consume — and pay — for as much electricity as is expected,the provincial government will be forced to look elsewhere for financing for the Muskrat Falls project, which could lead to a new tax or government spending cuts.

"As people conserve, and cut back on electricity consumption, that won't do much good because the debt we've incurred from Muskrat Falls would be unchanged," he said. 

"The money will have to be found by raising electricity rates more, or by coming off our taxes."

Feehan noted that the mounting provincial debt, which has increased to cover construction costs of the megaproject, cannot be ignored. 

"Anything spent on converting from electric heat to oil heat or something else, will in a sense be a waste of money. We will spend it, and then we'll find out, oh, we still have to pay the same debt as before." 

Splitting the burden

Feehan said the entire burden of the Muskrat Falls project cannot be paid through electricity rates.

Instead, he says the government will have to lower their expectations for the rate of return provided by the project — which does mean a hit to the provincial budget.

Muskrat Falls

The Muskrat Falls hydroelectric project will generate electricity in Labrador that will then be sold in Newfoundland and in the Maritime provinces. (Nalcor Energy)

"This isn't magic, in the sense that we're not getting a free ride here," he said.

"If you're going to mitigate the price, and bring it down to something that's appropriate … then government's going to take a hit. And that's going to work back to all of us as taxpayers and beneficiaries of government services."

Feehan said the electricity rate charged to Newfoundland and Labrador consumers should be modelled on what the province could get for the power on the open market.

With files from Debbie Cooper