Meridian supports smelter, within limits
Tiwai Point uses 12 per cent of the country’s electricity, affecting the entire sector
Meridian chief executive Mark Binns says the South Island electricity generator and retailer wants to see the Tiwai Point aluminium smelter stay, “but not at any cost”.
At yesterday’s annual general meeting in Christchurch, Binns told shareholders he had recently returned from seeing investors in the UK and US, where the smelter i s always the first issue for discussion.
That was “not surprising, given the smelter uses 12 per cent of New Zealand’s electricity and its future has implications for the whole sector,” he said.
From January, Meridian gets a price increase under the refreshed contract it negotiated last year with the smelter’s owners, NZ Aluminium Smelters, which is majority- owned by Rio Tinto. The deal was a blend of the old price for 400 megawatts of supply and 172MW at a higher price.
The contract runs to 2030 but the owners have an annual option to close or partially close the facility, with January 1 being the first date it can make that decision. They also gained a right to cut the smelter’s electricity demand to 400MW from April 30 with one year’s notice.
Binns said investors’ views on the smelter vary. Some investors are concerned, although they tend to be those who have not invested in the sector but probably would if the smelter left and the uncertainty was removed, he said. Others think the smelter economics, although still difficult, don’t justify closure and its costs.
His own views haven’t changed: “I believe the smelter will stay for the foreseeable future and hope that they do so. However, the owners have to form their own views based on the reality of the world aluminium market and their view of the future.
“The only thing we can manage is the energy price, which even with the 1 January increase, will remain the cheapest electricity price to any New Zealand customer.”
If the smelter closed, the excess power in the lower South Island would flow north and the supply and demand side of the markets would need to adjust to the “new normal”, he said. On Meridian’s modelling, over a medium- term horizon of five years, the company could be in an even stronger strategic position than it is today, he said, with the caveat that there will always be uncertainty.
Meridian was last year unable to convince any of its rival electricity suppliers to take up the slack on the Tiwai Point contract and remains the sole electricity supplier, although it achieved financial hedging contracts with other power companies.
Board chairman Chris Moller also praised the Electricity Authority’s proposals for transmission pricing, which he called a “fairer and more durable option”.
The proposals, on which the authority is undertaking another round of submissions, is “users’ pay, a concept introduced to New Zealand many decades ago,” Moller said. “Despite some misinformation in the public domain, the fact remains that households in most areas of New Zealand will see a decrease in their bills.”
However, the proposals have drawn widespread criticism and sparked a campaign led by major electricity users in the Upper North Island to overturn them. They would raise the price of electricity for Auckland, Northland and the South Island’s west coast by changing the way the national grid i s paid for. The main beneficiaries of the long- debated reforms would be Meridian and other South Island electricity generators and the Bluff aluminium smelter.
The EA has delayed a final decision on the pricing methodology until mid- April.
Moller said he hopes at the next annual meeting, it can outline a time frame for implementing a resolution of the long- standing issue.
Changes in the supply- demand dynamics in the market, with the retirement of about 800MW of thermal generation capacity, have spurred Meridian to revise its view on when new renewable generation will be required, with planning brought forward to potentially as soon as 2019.
“It’s our intention to be ready with the lowest cost renewable option when the market requires it,” Moller said.
The shares closed at $ 2.60 yesterday, up 16 per cent so far this year.