Auckland voters decided the fate of the Tiwai Point smelter.
Opposition from the city, and particularly its business community, to proposals, put up in 2016 to change the way consumers paid for the transmission component of power pricing killed off what could have been a $20 million cost-saving for the smelter.
That might have been enough to save it.
Rio Tinto’s loss on the smelter last year was $46 million.
The smelter’s largest shareholder is international mining giant, Rio Tinto, which has been threatening to close a smelter in Iceland as well as New Zealand because of high power prices from state-owned power companies in both countries.
There is also a glut of aluminium on world markets; the Financial Times has forecast that glut could be as high as six million tonnes.
But in New Zealand, the transmission component of the price the company, New Zealand Aluminium Smelters, pays its power supplier Meridian Energy, has been an issue for the past five years.
NZAS has argued that it is forced to pay for investment in the country’s power supply network that has no relevance to it, such as upgrades in the North Island when it is based at Bluff.
In 2017 a company press statement said NZAS paid around nine per cent of Transpower’s transmission charges to consumers, “including paying towards the $1.3 billion spent on upgrading the grid in the upper North Island since 2004 without receiving any additional benefit to its business.”
“When it comes to transmission charges, we believe you should pay for what you use,” said then-CEO Gretta Stephens.
“This isn’t what is happening now, so we are committed to working with the Electricity Authority and Transpower to achieve a more sustainable method of pricing transmission services.”
Stephens was therefore ready to endorse an Electricity Authority proposal in May 2017 to radically overhaul the transmission pricing regime and essentially make it a user-pays system.
The further a consumer was from their power generator; the more they would be likely to pay.
The smelter uses only about 40km of Transpower lines because the main transmission lines from Meridian’s Manapouri power station to the northern outskirts of Invercargill are owned by Meridian.
The total length of all transmission lines owned by Transpower is 12,000km.
So in proposing that this imbalance be addressed, NZAS, told the Electricity Authority in 2017 the smelter had been located in its current position to allow for port access and to minimise the need for transmission.
“Auckland, by comparison, grew organically because of the natural advantages the location has for residential living,” the company said.
“These advantages did not include nearby economic energy resources.
“As a result, considerable expense has been, and continues to be, applied to transporting electricity to Auckland.
“Because of these characteristics, the economic cost of providing transmission services for NZAS is considerably lower than the economic cost of transmission to Auckland”.
The Electricity Authority then produced a new transmission pricing proposal which would have seen NZAS’s transmission costs drop by 34 per cent to $40 million a year.
But to help pay for that, the Authority proposed increasing the transmission costs to Vector, the former Auckland Electric Power Board, by 44 per cent or $50 a household a year.
There was an immediate uproar.
Prices would also increase in Northland, and NZ First was quick to announce their opposition.
The Auckland Employers and Manufacturers’ Association (EMA) led a campaign against the charges, which included a court challenge, but initially, their lobbying had little impact on the-then National Government.
The-then Energy Minister, Simon Bridges, supported the proposal.
Asked at a select committee whether he was comfortable that the Tiwai Point aluminium smelter would see its power bill drop by $20 million while Auckland and Northland consumers paid more, he said he was.
“I think this is about rational, efficient economic and energy policy about transmission pricing,” he said.
“I don’t think its right to have a socialising of costs across the entire country, which incentivises the wrong behaviour.”
But at the end of 2016 Bridges stepped up to become Minister of Economic Development and Judith Collins replaced him in Energy.
As an Auckland MP, she took a very different view of the Electricity Authority’s proposal and using her powers to direct them wrote saying: “The review of distribution pricing underway presents challenges in terms of balancing this with the impact on consumers as they transition to potentially quite different pricing models. I expect the Electricity Authority to be cognisant of the impact of price shocks on consumers while progressing this work. “
The Authority’s original proposals attracted a mountain of objections from around the country and were not helped when it was discovered there had been an error in the cost-benefit calculations.
And so the Authority came back with new proposals which included a new price for the smelter. This offered only half the saving of the 2016 proposal and instead dramatically reduced the increase proposed for Vector in Auckland.
Under this proposal, the transmission component of Auckland power prices would rise by only 4.5 per cent.
Given the brutal political fact that there are many more votes in Auckland than Invercargill, it was not surprising yesterday that National’s reaction to the closure announcement by NZAS was muted.
“ We have not been privy to the discussions between the Government and Rio Tinto, so it’s hard to make a judgement on what could have been possible, without that information,” said Finance spokesperson, Paul Goldsmith.
Ironically, the smelter’s closure might actually increase power prices in Auckland anyway because, without its contribution to the transmission grid, Transpower will have to go back to its original calculations about sharing the cost of the grid across the rest of the country.
However, the Government suggested yesterday that it might accelerate the upgrade of the grid so that the power currently being consumed at Tiwai Point could get to the North Island.
“We can’t fully dispatch Manapouri generation out of the area without an upgrade to the grid,” Energy Minister Megan Woods said yesterday.
“And so what we have is the Clutha Waitaki upgrade that has been approved by Transpower, and it’s about $100 million.
“It can be completed in three years.
“We’re actively looking to see whether that date that could be brought forward even further using the recently legislated RMA fast track process that could actually get the work underway earlier.
“And we’ve had a number of people approach us about alternative uses for the very large amount of generation that sits down there in that part of the country.”
There will, however, be a downside.
A Treasury report from October last year released under the Official Information Act shows that the smelter uses 13 – 14 per cent of New Zealand’s total electricity production.
“ Were NZAS to close and release this supply we would expect to see:
- A drop in wholesale electricity prices, most notably in the South Island;
- A lesser drop in North Island wholesale price until additional transmission is built to enable extra Manapouri generation to be delivered to the North Island
- earlier retirement of high-marginal cost generation (particularly the Huntly generators) once new transmission is built; and
- deferral of investment of around 1000 MW investment in new generation.
“Whether lower electricity wholesale prices will be passed through in full to consumer retail prices, and how long such a change will persist is uncertain.”
The biggest immediate issue though, will be the loss of 990 jobs, nearly two per cent of the total Southland workforce.
But the payoff will be nearly two million Aucklanders and people living in the north not facing big power bill increases.