Tiwai feels the heat as closure consensus grows

There’s a barely perceptible consensus emerging within Parliament that Rio Tinto’s Tiwai Point aluminium smelter should close. No-one wants to say it in public – what politician would want to stick their neck out for job losses? – but for their own reasons, politicians from most parties think the smelter’s days are numbered.

The reasons are complex. Some of a free-market persuasion see Tiwai as a business on life support, kept alive by a sweetheart deal from Meridian Energy and propped up by a $30 million cash payment from the government in 2013. Treasury, guardians of the free-market orthodoxy, damned the 2013 bailout. A briefing at the time said assistance should be rejected because it ‘‘would result in a significant transfer of value from New Zealanders to PA and Rio Tinto shareholders’’. The analyst even calculated how much the government was paying for each additional job (the number was redacted, but I estimate it to be roughly $30,000).

Others say the smelter should close for environmental and social reasons. It consumes 13 per cent of New Zealand’s entire electricity supply. Almost all of its electricity is sourced from a hydro dam in Lake Manapouri that was built for the purpose of supplying the smelter. This allows Tiwai to claim it produces the greenest aluminium in the world, but it also means an enormous amount of clean hydro-energy is tied up supplying the smelter. Freeing up the 13 per cent capacity and feeding it into the grid would mean we could probably afford to close the coal generator at Huntly.

This coal-fired power plant is kept online to accommodate peaking periods and dry seasons, when the hydro lakes that generate the majority of our electricity are stretched. Environmentally, closing Huntly makes sense. Burning coal is no way to make electricity in the 21st century.

It also makes sense in terms of lowering electricity prices. Once installed, renewable energy is cheap to produce: water, wind and sun are free. The only cost is that of transmission.

In fact, the strongest arguments for closing Tiwai aren’t actually about closing Tiwai at all – they’re about significantly reducing our reliance on Huntly. That 13 per cent of electricity generation means Huntly needs to keep burning, and that means the spot price for electricity isn’t set by the very low cost of transmission, but the often quite high cost of commodities such as coal.

Many people may fairly wonder what companies such as Meridian stand to gain from the allegedly ludicrous (but confidential) amount Tiwai pays for all this electricity – the truth is that they gain the ability to keep Huntly running.

Victoria University’s Dr Geoff Bertram and energy consumer campaigner Molly Melhuish have both previously made the strong case that the gentailers (combined energy generators and retailers) such as Meridian look to Tiwai to keep the price high by constraining the supply of electricity.

The gentailers deny this, saying the market will eventually adjust. The market, however, has other ideas. The announcement that Tiwai might be set to close saw $1.5 billion wiped from the value of New Zealand’s listed power companies. Clearly the people who own shares in those companies don’t want to take a chance on that ‘‘adjustment’’.

The crash in those companies’ share prices shows that, while allowing Tiwai to shut might be the right thing to do, it wouldn’t be easy.

Someone, either the government or consumers, would also have to step up to pay the cost of getting the electricity from Manapouri to the rest of the country. It’s already hooked up to the national grid, but the Treasury estimated in 2012 that an additional $200m will be needed to upgrade the lines. And the price of the gentailers would likely crash, meaning they might need to be renationalised.

Southland would be hard hit. Nearly 1000 jobs would go, and investors in the power companies partially privatised by the previous government would be burnt. Treasury is optimistic about Southland’s ability to absorb those jobs, although some people would no doubt have to leave the region.

Tiwai is itself a large emitter, but here’s the rub: it’s a much cleaner smelter than anyone else has got.

The biggest effect of closing the smelter would be on New Zealand’s emissions. Again, according to the Treasury, Huntly produces 20 per cent to 50 per cent of the generation sector’s total emissions – these would be slashed by closing the smelter.

Tiwai is itself a large emitter, but here’s the rub: it’s a much cleaner smelter than anyone else has got. Closing it would just mean a much dirtier smelter producing aluminium elsewhere. It’d make our emissions look good, but do little for climate change.

But New Zealand has to take a hit somewhere. We can’t keep saying our aluminium, like our agriculture, is dirty, but cleaner than everyone else’s. We can’t continue making that argument for every sector without losing all credibility.

There are other concerns coming down the line. A Transpower report last year estimated demand for electricity will more than double by 2050 as electric cars become the norm. That will put enormous strain on generators, requiring either more eyesore dams and wind turbines, or more coal-burning, which rather defeats the purpose of electric cars.

The unforgiving truth is that extra generation is going to have to come from somewhere, and 1000 jobs and $200m worth of power lines is a rather low cost for the ‘‘nuclear-free moment’’ this Government wants climate change to be.