Four more years for Tiwai

The on-off negotiations over the future of Tiwai Point smelter have been like a game of board room tennis over the past decade, and heads again turned to the court over the holiday

season. WORDS BY RICHARD RENNIE

After the announcement last July, the smelting company Rio Tinto would be vacating its Bluff premises in a few years, that decision has again been reversed. In mid-January Rio Tinto company New Zealand Aluminium Smelters quietly issued a statement that an agreement had been reached with its main electricity supplier Meridian Energy. Operations would continue for another four years to December 2024, rather than ending in August this year as proposed. The extension negotiated means it allows greater certainty to employees and the Southland community and for all parties to better plan for the company’s exiting of its Bluff site. Back in July finance minister Grant Robertson had described the company’s decision to exit as a sad day for Southland, while acknowledging this has been known to be coming for some years. In a similar move however, the company had been persuaded to remain for longer six years earlier, with a $30 million subsidy on its power supply bill. This time in its statement to the Australian Stock Exchange the company acknowledged discussions with the New Zealand government were progressing with respect to the transmission costs it incurred, while the new agreement had been reached with Meridian Energy on the power prices, keeping it viable for another four years. Anyone with a casual interest in the smelter’s fate could well be forgiven for muddling up their recollections on when or even if the behemoth plant was going to be shut, such have been the standoffs between company, government, and electricity companies over the past decade. Energy analyst Greg Sise has justifiably raised the question about just how valid the latest closure date even is, and whether the smelter may end up remaining even longer again. The original reason Rio Tinto wanted to terminate the plant was on grounds of high energy costs and claimed uncertainty around the global aluminium market prices. However, after a downturn aluminium prices have lifted significantly, hitting a high note of US$2,000 a tonne late last year, and while still short of the peak of US$2,300 hit in May 2018 are still high in the context of the past eight years where the market has touched US$2,100. Analysts anticipate there has been some horsetrading behind the scenes between parties on energy cost versus transmission cost, and views remain mixed on its effect on power prices in the shorter term. Being an extension to an existing agreement, the latest agreed price is not disclosed, but back in 2018 disclosure in the Electricity Code for that contract revealed the company was paying $55 per megawatt hour (MWh). Other contract information does however suggest a price of $34.86/MWh. But along with the threats of “I will huff and I will puff” about shutting down the smelter, time has moved on for Rio Tinto and electricity generators wary of losing a large customer. The August 2021 deadline had big electricity generators supplying it considering other options to make up for what was going to become a 5,000GWh a year gap in their market. At a government policy level, the Climate Change Commission is prompting a sharper focus on electricity’s application to de-carbonise the economy and may yet determine the definitive fate of Tiwai. The commission’s report released in late January pulled no punches, warning New Zealand will miss its Paris Accord emission targets if it did not act now with strong, decisive action. In its forecasting, the commission assumes Tiwai will close with electricity from Manapouri redirected to the national grid by 2026. If this is the case, Commissioner Dr Rod Carr believes wholesale electricity prices will fall for a period, and new generation capacity will be deferred as greater vehicle electrification gradually picks up the resulting market gap through to 2035. By then he estimates prices will be back where they are today. In the shorter term, Tiwai’s continued operation is expected to continue to provide a floor on market prices and underpin Meridian’s share price for some time yet. Tiwai’s eventual departure would deliver a 13% increase in supply capacity from the get-go, from the bottom of the South Island. With a ban on fossil fuel vehicle imports by 2035 and likely some sort of rebate/subsidy will be offered on new electric vehicles, it would appear the demand for electric vehicles will skyrocket and ultimately pick up the slack left by the smelter’s closure. The Commission is seeking new renewable energy capacity built by then, and it is looking for 40% of the country’s fleet to be electric by that time. At present there are only 20,000 fully electric vehicles in New Zealand’s fleet of almost 4.5 million. But as tempting as Tiwai’s departure may appear for meeting this need for more vehicle electricity, it will not be the only solution. Climate Change Commissioner Rod Carr says New Zealand will also need to keep an eye on the dry year problems, also increasing supply from geothermal output, along with wind and solar. “Pumped hydro” has also been touted as a Think Big type project to also help lower use of coal and gas, while large coal users such as Fonterra will also be dropping it for greater electricity use in processing in coming years. Rod Carr maintains a large portion of Manapouri’s 500MWh of power that normally goes to Tiwai could be absorbed by the South Island alone, heading into glass house heating, industrial drying, residential heating, and transport electrification. Come 2023 when Tiwai is once again up for negotiation, it is possible the smelter company finds itself in a weaker position this time around as options for electrification under climate change policy open up. If those policies reflect genuine commitment to the Paris Accord, and prove to be immune to changes in government, then the smelter may well become history if generators are in a position where they do not have to lower their prices to keep one big customer happy.