Risks seen to power generators

Agency mulls Tiwai Pt ructions

S&P GLOBAL Ratings said the Rio Tintocontrolled NZ Aluminum Smelter’s (NZAS) strategic review of its Tiwai Point smelter underscored risks to New Zealand’s power generators.

The ratings agency said it continued to factor this risk into its ratings assessment for entities in the sector.

The strategic review is likely to be completed by the first quarter ending March 31, next year.

That said, Rio Tinto is required to provide its power supplier, Meridian Energy, with a 12month notice regarding any reduction in, or full termination of, the smelter’s electricity supply contract.

Depending on the strategic review outcome, electricity demand would reduce if NZAS were to scale back its demand or cease operations. NZAS accounts for about 12% of New Zealand’s electricity consumption.

‘‘Lower offtake from the smelter or a full closure will result in excess supply in the electricity generation market, particularly in the South Island,’’ S&P said.

‘‘If this were to occur, we believe additional grid investment would be required in the South Island to distribute power to the North Island.

‘‘This would result in lower electricity prices in the South Island over the short term, and could take at least two to three years for the market to normalise, subject to the completion of additional transmission infrastructure.’’

If Tiwai closed, the market’s supplydemand balance would alter fundamentally, affecting all of New Zealand’s integrated electricity generators to varying degrees.

Genesis Energy and Contact Energy could face higher risk given their exposure to thermal generation, it said.

Meridian Energy and Mercury NZ were likely to face a lower degree of risk given their portfolios fully consist of renewable generating assets.

‘‘The 12month notice period for any movement in the energy offtake, however, should provide a reasonable lead time for market participants to begin adapting to any change,’’ it said.

The sharemarket took a hit on Wednesday on the news that Rio Tinto was looking at shutting down Tiwai Point, less than a year after a fourth potline was reopened at the facility.

Shares in Meridian — the biggest power generator and the NZX’s biggest company — dropped 8.7% to $4.95 on heavy turnover.

Contact Energy, which like Meridian also has significant South Island generation assets, fell 9.7% to $7.69.

Rio Tinto is an AngloAustralian multinational and one of the world’s largest metals and mining corporations. — The New Zealand Herald