Impact on electricity sector of smelter closure 'cannot be overstated', analyst warns

Monday, 13 July 2020

The impact that the closure of the Tiwai Point aluminium smelter would have on the electricity sector “cannot be overstated”, an energy analyst has warned.

Tiwai Point aluminium smelter chief executive Stewart Hamilton discusses the closure of the smelter.

Enerlytica director John Kidd said the closure of the smelter would also be “squarely negative for climate change”.

If production from the smelter was replaced with aluminium from a coal-based smelter overseas, that would release emissions equivalent to putting an extra 3 million cars on the road, he said.

“The loss of New Zealand Aluminium Smelter is in our view a dreadful emissions outcome.”

* Meridian boss: 'We offered smelter compelling deal'

* Sudden closure of aluminium smelter worst outcome for jobs, consumers and the environment**

Meridian Energy is the power company that seems to have the most to lose from the closure of the smelter.

Another analyst, Energy Link managing director Greg Sise, said wholesale power prices in the South Island could “collapse” in wetter years, following the closure of the smelter.

Some indication of the scale of the impact might be provided by what happened during the first week of ‘level 4’ lockdown in April, when electricity demand fell by about 16 per cent and spot prices fell by 46 per cent on average, or by about 4 cents per kilowatt-hour, Sise said.

”Larger consumers with electricity bills in the hundreds of thousands or millions per annum will see significantly lower prices the next time they go to market to renew supply contracts,” he said.

”We may witness a ‘price war’ of sorts as suppliers move to fill the gap left by the loss of Tiwai, or to protect their market share.”

It is not unheard of for electricity prices to plummet to fractions of a cent per kilowatt hour in situations of electricity oversupply.

But Forsyth Barr analyst Andrew Harvey-Green said he didn’t see wholesale prices being annihilated long term.

“I don’t see it nearly as grim as that.

“There will probably be more volatile prices. It won’t be at ‘zero’ the whole time.”

Southland's Tiwai Point aluminium smelter looks set to close after Rio Tinto announced plans to wind down operations.

The smelter’s majority owner, mining giant Rio Tinto, announced on Thursday that it planned to cease producing aluminium at Tiwai Point by August next year.

The smelter has in the past consumed about 13 per cent of the country’s electricity production.

Meridian Energy is believed to earn about $250 million a year from selling electricity from its Manapouri hydro scheme to the smelter.

Meridian chief executive Neal Barclay said on Friday that Rio Tinto had rejected an offer that would have reduced the smelter’s total power costs by between $50m and $70m a year over four years.

There remains some speculation that Meridian might offer the smelter an improved deal that would slow the smelter’s closure and buy time for grid upgrades that would be needed to carry power from Manapouri further north.

The alternative may be that much of the power that can be generated by Manapouri will go to waste for at least 18 months, with water being “spilled” from Lake Manapouri instead of running through its turbines.

Invercargill Mayor Sir Tim Shadbolt talks about the closure of the Tiwai Point aluminium smelter.

A Rio Tinto spokeswoman would not comment on whether a more protracted closure of smelter might be an option.

Barclay said on Friday that Meridian was “waiting to engage with Rio Tinto to discuss an orderly exit”, and that Rio Tinto had verbally indicated on Thursday it would “be open to some sort of offer”.

But Meridian said in a statement on Monday that it had no developments to report since then.

Meridian has suggested that it might be able to find other “bulk buyers” for electricity produced by Manapouri.

One possibility – once South Island grid upgrades are completed in 2022 or 2023 – would be to use some of the surplus electricity to electrify Fonterra’s major South Island factories, which currently largely rely on coal boilers to dry milk into milk powder.

An industry source suggested Meridian couldn’t expect to earn more than tens of millions of dollars for the power produced by Manapouri if it was used to create “green hydrogen” using current technology, which is another option that has been suggested by Energy Minister Megan Woods.

The smelter might be only the first of a number of organisations to cut back their power purchases “over the next few weeks and months”, Kidd said.

“At the other end of country, Refining NZ is another major energy user and regional employer that is looking at contraction options that would, if actioned, be both substantial and permanent,” he said.

The market value of the five electricity companies listed on the NZX – Meridian, Mercury, Contact, Genesis and Trustpower – fell by nearly $3b on the day of Rio Tinto’s announcement.

Meridian has indicated the smelter’s closure could lead it to reconsider its investment in its proposed 41 turbine Harapaki wind farm north-west of Napier.

Electricity supplier Contact Energy has said that the “sensible option” would be for Contact to cancel another renewable energy project: the construction of a $600m “shovel-ready” Tauhara geothermal power station.

Sise was confident that the big generators would be able to manage their way through the closure of the smelter while staying afloat.

“I don’t think there is any doubt about that.

“New generation that might have been built will not be built, and lower spot prices will cause demand growth to increase as larger businesses and industries take the opportunity to switch away from fossil fuels,” he said.

“In the upper North Island spot prices under this scenario will rise again, over five or six years, to where they would be if the smelter had stayed. But the recovery in spot prices will take longer the further south one moves on the grid,” he forecast.