Power politics of aluminium smelting

Manapouri Power Station, on the western arm of Lake Manapouri in Fiordland National Park, is the...
Manapouri Power Station, on the western arm of Lake Manapouri in Fiordland National Park, is the largest hydroelectric station in New Zealand, originally built in 1971 to supply electricity to the Tiwai Point aluminium smelter near Bluff. Construction involved the excavation of almost 1.4 million tonnes of rock to build the machine hall and a 10km tailrace tunnel to Doubtful Sound. Photo: Supplied
The uncertain future of the Tiwai Peninsula aluminium smelter near Bluff is all about electricity.

More specifically, how much the smelter, the region's biggest employer, has to pay for the privilege of securing about 14% of New Zealand's generated electricity capacity - or about 776,000 households worth.

That's about the same electricity usage as a city the size of greater Auckland.

Pylons on Tiwai Rd. Photo: Stephen Jaquiery
Pylons on Tiwai Rd. Photo: Stephen Jaquiery
Yesterday, majority owner Rio Tinto confirmed it was reviewing the future of New Zealand Aluminium Smelter (NZAS), saying it might either curtail operations or consider closing the 48-year old smelter outright.

The potential implications of the review for the local economy are significant.

According to infometrics the smelter accounts for about $500million to the Southland economy annually, while about 3200 jobs are either directly or indirectly linked to aluminium production and export.

At issue are high energy costs - in particular transmission costs.

As all transmission costs are averaged out over the country, in effect NZAS, as a massive user, is subsidising the rest of the country.

The South Island, which generates the majority of the country's energy through renewable hydro, geothermal and wind, pays a disproportionate share.

Last year Pacific Aluminium (NZ), which holds Rio Tinto's 79% stake in Tiwai, reportedly paid $66million in transmission costs alone, three times its earnings of $22million off production of 340,000 tonnes of aluminium.

Southland's former Chamber of Commerce president Carla Forbes believes the smelter has been ''quietly overcharged'' nearly $200million for grid upgrades in the North Island over the past 10 years, during which time overall transmission costs have been hiked by 61% on the South Island.

For the most part, the energy in question for the smelter is generated at the Manapouri Power Station at Lake Manapouri, Fiordland, the largest hydroelectric power station in New Zealand.

NZAS has an agreement signed in 2013 with Manapouri-owner Meridian Energy for the supply of 572MW until 2030, though the agreement allows the smelter to either terminate or cut back consumption to 400MW, with 12 months' notice to Meridian.

Meridian chief executive Neal Barclay, yesterday said Meridian has been in discussion with NZAS for some time and Meridian had tabled a number of concessions to the existing contract.

''NZAS has advised Meridian that the changes we had offered to date fall short of the pricing for delivered energy that NZAS needs to re-establish its position as an internationally competitive aluminium smelter.''

Rio Tinto Aluminium chief executive Alf Barrios said the mining multinational would like to hold discussions with the NZ Government and energy providers to explore options and identify ''economically viable solutions to find a pathway to profitability''.

Unsurprisingly, and in line with recent regulatory proposals, NZAS prefers a ''user pays'' approach to transmission costs.

Otago Southland Employers Association CEO Virginia Nicholls agrees that the issue of fairer transmission pricing is not a new one.

''The electricity authority has been looking at a fairer way to apportion electricity transmission costs for the past nine years.''

She said the purpose of the pricing work by the authority was to correct an ''inequality in the current way that transmission is charged'' and to shift the method to a better, fairer, more durable footing.

''Since 2004 more than $1.3billion has been invested in the grid in the upper North Island but only 39% of that is being paid for by the upper north, while transmission costs have increased by 61% in the Lower North Island and South Island to cover the cost.''

She said that on that basis, the smelter was facing an imbalance.

''People and regions should pay for the services they receive and what they use.

''No-one wants to pay more but subsidising particular regions and their industries dampens not sharpens their competitiveness,'' Ms Nicholls said.

The authority accepts changes need to be made.

In its recently released discussion paper on transmission pricing methodology it acknowledges there are ''significant flaws'' with the current transmission pricing model, in spreading the cost of regional transmission investments across New Zealand ''regardless of the benefit the users get from the grid.''

In their current form, South Island generators pay for all of the costs of the high-voltage direct-current line that transports electricity between Islands, it said.

''The line charge has been about 10% of the wholesale price of electricity, which is like a ''tax'' on South Island generation and encourages investment in otherwise more expensive North Island generation,'' the authority said.

The proposals in their current form would result in the smelter's transmission costs being reduced by about $11million in five years.

The authority included a cost-benefit analysis in its proposal which showed a net benefit of $2.7billion over the current transmission model over the next 30 years.

Rio Tinto has advised Meridian that it will provide the market with an update on the strategic review by the end of the first quarter in 2020, which would ''consider all options for the future of the smelter.''

Meridian, for its part, says that in the event of closure, the smelter owners would incur ''significant'' remediation costs, which NZAS has recently estimated to be about $256million.

Comments

''Since 2004 more than $1.3billion has been invested in the grid in the upper North Island but only 39% of that is being paid for by the upper north, while transmission costs have increased by 61% in the Lower North Island and South Island to cover the cost.''
And that is a problem, the south island generates it and the south island has to pay for it.
The north island wants it, they should pay for it but no, the south island will continue to be gouged.

Nothing new there.
Until the electricity sector moves to a user pays system for transmission, the economics of generation will always be distorted.
The hypocrisy of government telling everyone else they need to do more to 'save the planet', when they are the biggest obstacle to getting on with the job, is so typical of leftist thinking, it turns my gut.
Nice bit of factual reporting though.
Makes a nice change from all the dribble that is reported coming out of parliament and our universities.

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