The Government appears to accept the inevitability of the Tiwai Point smelter closing even though talks between New Zealand Aluminium Smelters and the Government over its future will continue today.
At the same time, the Prime Minister, Jacinda Ardern and Labour’s energy spokesperson Megan Woods have announced that the 2035 target for 100 per cent renewable electricity target would now be brought forward to 2030.
There is a direct relationship between that announcement and the smelter closure.
Environment Minister David Parker last night also announced that he would use new legislation to fast track the resource consents for upgraded Clutha Upper Waitaki electricity transmission lines.
That too is related to the smelter and Parker conceded that the upgrade would have greater relevance if the smelter closed.
He said that upgrading the capacity of the lines would mean that if operations at Tiwai Point Aluminium Smelter ceased or reduced, excess power from Manapouri could flow north.
But getting that power to the North Island will require at least $1 billion in new transmission investment — and the question will be who will pay for that.
If Tiwai Point closed, that would free up 13 per cent of the country’s current electricity production.
That amount of “new” power would make Labour’s 2030 target much more achievable.
But Transpower, who oversees the New Zealand electricity system, says that it would not be 100 per cent renewable until after the original target, 2035.
Transpower says under its Tiwai Exit scenario, “we forecast continued decarbonisation of the electricity system, from being around 85% renewable today to around 98% renewable in 2035, moving towards being 100% renewable from then on.”
The Ministry of Business, Innovation and Employment projects that electricity demand will grow at a maximum rate on average by 1.5 per cent a year up to 2050. That would see aggregate growth of 16.2 per cent by 2030 — slightly more than the amount of power freed up by a Tiwai closure. The Ministry says much of that growth will come from the transition to electric vehicles.
The Ministry’s report said the main effect of closing the smelter would be to reduce the need for new generation capacity to be built from 2030 onwards. (The Ministry assumed the smelter would be “switched off” in 2030 whereas it now looks more likely to happen in 2022.)
“Switching off the smelter results in no new generation capacity being built for four years,” it said.
The main constraint to using the smelter power elsewhere is the current inability to get it to the north of the North Island.
Transpower is currently investigating replacing the Cook Strait cables and adding extra capacity to them. That is a 10-year project, but if the smelter closed it would need to be brought forward.
In 2005 the cost for this was estimated to be $795 million; that will have escalated to over $1 billion now.
“Transferring the surplus generation from the lower South Island to the load centres in the upper North Island will exacerbate existing constraints on the North Island 220 kV circuits,” Transpower said.
“The increased power transfer may require investment in the Central North Island, Taranaki, and Wairakei Ring 220 kV circuits to increase capacity.”
The Government’s decision to fast track the Cultha Upper Waitaki upgrade has been directly motivated by the probable closure of the smelter.
It will be the first proposal referred to an expert consenting panel for fast-track consenting.
“This is the first project to go through the referral process under the COVID-19 (Fast-track consenting) Act 2020,” Parker said.
The Act is one of the Government’s measures to boost jobs, speed up infrastructure development and improve environmental outcomes in response to the economic impacts of COVID-19.
The project will now be referred to an expert consenting panel by way of an Order in Council. A decision on the application is expected to be made by the panel in early 2021.
But what is not clear from the Government announcement and background material supplied with it last night is who will fund all these transmission upgrades.
Ironically it is who pays the transmission costs which lie at the heart of New Zealand Aluminium Smelter’s reasons for closing the smelter.
The Electricity Authority has designed a process with Transpower which effectively evens the costs out across the country. NZAS says this means they pay 11 per cent of the total transmission costs even though they use only around two per cent of the electricity grid – from Manapouri to Tiwai Point.
The 2016 proposal would have seen the smelter’s transmission costs drop by around $40 million; roughly the same as its loss last year but after considerable political pressure, the Authority has continued to modify its proposals, and the smelter now faces a benefit of only around $11 million a year.
But without the smelter footing 11 per cent of Transpower, transmission prices for all other users are likely to rise and will be compounded by the extra investment required to get the Tiwai Point power to the North Island.
A recent Westpac report suggests that after Tiwai Point closes, electricity prices are likely to reflect the lower cost renewable generating capacity as well as higher transmission costs associated with the loss of the smelter.
“That is likely to mean lower electricity prices in the South Island,” it said.
“How prices react in the North Island is less clear and depends on whether the lower costs of additional electricity supply made available to the region can offset the impact of higher transmission costs.”
There will also be a massive hit to the Southland economy.
Westpac estimates that 10% of the region’s GDP will be lost — or 0.2% of New Zealand’s GDP. The country will also lose around $1.2 billion in exports.
The price for a 100 per cent renewable energy policy will be high.