Decision on power for smelter

The Tiwai Point aluminium smelter. Photo by Allison Beckham.
The Tiwai Point aluminium smelter. Photo by Allison Beckham.
Wednesday is ''D day'' for the future of the Tiwai Point aluminium smelter near Bluff when its owners decide whether they want to give Meridian Energy notice they want to terminate the smelter's electricity contract.

Many options can be considered by the smelter's owner, Australian mining giant Rio Tinto.

About 3500 Southland jobs could be affected, directly and indirectly.

The 44 year old Tiwai smelter is operated by NZ Aluminium Smelters (NZAS), owned Rio Tinto, which in the last round of negotiating two years ago got a $30million sweetener from the Government to remain open.

Meridian Energy supplies electricity to NZAS from its Manapouri hydro electric plant _ a total of about 13% of the country's electricity production _ at a discounted rate.

NZAS has one day, Wednesday, to announce what it will do. It is a decision which will affect plans of electricity generators around the country.

At the heart of the matter are conflicting issues: long depressed aluminium prices and Tiwai Point being an ageing asset versus Tiwai making some of the highest grade of aluminium in the world and Rio Tinto closing the smelter would trigger site clean up costs in the hundreds of millions of dollars.

If the smelter were closed, the theory of extra electricity capacity would mean potential closure or mothballing of other companies' generation assets or development, including coal, gas, gas turbine and potentially cutting back hydro electric production.

It has been estimated that if Tiwai closed, electricity demand would take nine years to recover.

Forsyth Barr broker Andrew Rooney looked at all the options, including one where a possible consortium of electricity generators could band together to share supply.

''D day is only days away, with NZAS having the option to terminate its electricity supply contract, effective January 1, 2017,'' Mr Rooney said.

He said NZAS had been ''dangled a carrot'', in the form of lower transmission charges that would save it $55million a year.

''Our central thesis is that NZAS will not say anything on July 1 and that NZAS remains open for the foreseeable future,''he said.

While it was preferable for the smelter to remain open, taking the existing 572MW of power, a consortium could step in.

Mr Rooney noted the generators were not able to work together, as that would amount to collusion, so any consortium approach would have to be driven by NZAS.

''While there is significant logic to Meridian Energy remaining the provider of of electricity to NZAS, it is not the most [negatively] affected by NZAS closing, which increases the chances of a consortium,'' Mr Rooney said.

He noted NZAS could announce termination of its electricity contract, but do that in order to put pressure on the electricity sector to come up with a better price, meaning plant closure was not a foregone conclusion.

''It would be a gutsy call to provide notice if there is still the possibility of remaining open,'' Mr Rooney said.

If NZAS chose to decrease to 400MW, Meridian could take that for a short period and knew it could get a better price for at least the surplus 172MW of its generation after 2017.

''Meridian has, therefore, been keen to step back and let others negotiate with NZAS in the first instance,'' Mr Rooney said.

If Tiwai closed, that, and the combination of lower wholesale electricity prices and lower retail margins could strip $160million to $370million from the electricity sector in general, he said.

Tiwai is one of several Rio Tinto smelters, under the banner of subsidiary Pacific Aluminium, which are for sale.

NZ Aluminium Smelter's options on July 1

Do nothing: Revisit similar options January 2017.
Take same amount of electricity: 527MW.
Take less amount of electricity: 400MW.
Terminate contract: Tiwai closes January 1, 2017.
Terminate contract: Negotiate with new ''consortium'' of two or more electricity generators for new deal.

Source: Forsyth Barr 

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