Friday, July 29, 2022

Point of Order: Price of power looks likely to become an issue, now that the Tiwai Point smelter wants to keep operating

A shot in the arm for the province of Southland came this week with the news that the Tiwai Point aluminium smelter will not shut down in 2024 — and could have a long term future.

Since the global giant Rio Tinto renegotiated the last electricity contract, extending the life of the smelter for three years from 2021, the price of aluminium soared as high as $US3800 a tonne, and although it has retreated from those levels, it is still high at around $US2400.

And because the aluminium produced at Tiwai Point is among the purest in the world, it is not surprising that Rio Tinto, and its Japanese partner, Sumitomo, want to continue production.

The question now is whether Meridian Energy, which supplies the bulk of Tiwai Point’s electricity from the big Manapouri station, will be willing to do so without a significant price hike. The last price negotiation was difficult, with Rio Tinto using the threat of closure to screw the price down.

When Rio Tinto earlier was signalling it might keep the smelter open beyond the term of the current contract, there was a cool response from Meridian.

Chief executive Neal Barclay has been quoted as saying the company would no longer give the smelter rock-bottom prices, once the current contract expired, even if it wanted to stay open.

The problem for Meridian is that there are no other markets available in Southland for the big block of electricity it supplies to the smelter.

The smelter employs over 700 workers and many more indirectly. It is a vital element in the Southland economy.

NZ Aluminium Smelter (NZAS), the company that runs Tiwai Point, has announced it has begun “exploring potential pathways” with electricity generators. Its chief executive, Chris Blenkiron, said it understood the importance of providing certainty to its staff and the people of Southland.

“There is lots of work to do, but we believe there is a positive pathway to securing a long-term presence for the smelter,” he said.

A spokesman for the company said it was “early days”.

Great South chairman Ian Collier said the Southland region needed certainty around the smelter’s future.

“Until we have certainty as a region as to what the future of the smelter is, that impacts on other decisions that need to be made [for the region].”

The electricity price negotiations between the smelter and power companies would be different this time, Collier said.

“There’s an end date for the current supply contract so we need those parties to get around the table and negotiate the future of the smelter … so decisions can get made and we can move on with or without the smelter.”

The smelter hired about 1000 people and was a vital player in Southland and it’s workers and the many businesses associated with it and the region as a whole needed to know what its future held, Collier said.

Local reports are that when in 2020 NZAS terminated a contract with its major power supplier, Meridian, the price was at about 5.5 cents per kilowatt hour until 2030 but, the following year, it struck a shorter-term deal at a cheaper price believed to be about 3.5c/kWh that secured it power until the end of 2024.

Meridian Energy said in a statement to the NZX it would engage with the smelter and expected to be involved in contract negotiations.

Sources have suggested Meridian could be more comfortable with the smelter going to the market for a new power deal, rather than immediately beginning direct negotiations with the company.

That is especially after the Electricity Authority expressed concerns in October that their current agreement was distorting power prices and may have resulted in consumers’ power bills being $200 a year higher than they would otherwise have been.

So there are complex issues within what should be a desirable outcome — both for Southland, and the broader NZ economy.

Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton

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