Tiwai decision has impact on many
AUCKLAND: Few single issues impact the New Zealand economy like the future of the Tiwai Point aluminium smelter.
When Rio Tinto announced it was conducting a strategic review of the smelter in late 2019, billions were wiped off the value of the NZX, more than 1000 people feared for their jobs and Treasury warned that investment in renewable energy could be put off for years.
Others claimed the closure of New Zealand’s largest electricity user was likely to lead to lower electricity prices and could attract new industries to Southland as the excess power became available.
Rio Tinto announced last week it had reached a deal with Meridian Energy to keep the smelter operating until at least the end of 2024. What does that mean for:
Southland
There is little argument that the decision is great news for Southland, where the smelter is the largest single employer. Directly and indirectly, the smelter is believed to support more than 1000 wellpaid jobs, in a province with a population of just slightly over 100,000.
Treasury’s earlier warnings about the impact of the smelter’s closure were that it was likely some of the workers would either leave the region or alternatively find other, lowerpaid jobs.
‘‘This deal will save jobs and gives us more time to plan for the long term,’’ Southland Mayoral Forum chairman and Gore Mayor Tracy Hicks said.
Rio Tinto
Exactly how sweet a deal the mining company was able to extract is unclear, but it is expected to have saved tens of millions of dollars on its power bills. Analysts have pointed to the company seeking savings of more than $70 million across transmission and electricity prices.
Last week’s deal secures the future of the smelter without the issue of a reduced transmission charge being resolved (negotiations with the Government continue) meaning it is possible that Rio Tinto may extract bigger gains, although a deal with the Government would require an agreement on a plan to clean up the smelter, which is likely to be a costly one. Finance Minister Grant Robertson has expressed hope that the remediation plan could well exceed the minimum required under law.
The latest deal promises to keep the smelter open until the end of 2024, not set 2024 as a closure date, meaning Rio Tinto may seek even more next time to keep going.
‘‘The Australians may have done it again with today’s announcement being a masterstroke in terms of negotiating and getting one over their New Zealand cobbers,’’ Harbour Asset Management’s Craig Stent wrote in a note titled ‘‘four more years’’.
Power prices
By virtue of its being New Zealand’s largest electricity user, closure of the Tiwai Point smelter would be expected to flood the wholesale electricity market with excess power, causing prices to plunge.
Some studies have suggested prices could drop by 10%.
But the calculation ignores transmission constraints which mean much production in the lower South Island would be stranded if Tiwai were to abruptly shut.
Electricity would probably become so plentiful that major power stations in the South Island would be forced to spill water for long periods.
It is possible that power prices elsewhere would show little fall, in the short term at least.
Transpower is pushing ahead with upgrades to improve capacity between Manapouri (Tiwai’s source of electricity) and Benmore (the point at which electricity is exported to the North Island) but these are likely to be several years from completion.
Investors
Contact Energy chief executive Mike Fuge described the announcement as ‘‘great news for Southland and New Zealand, global carbon emissions, and Contact’s shareholders’’.
Even though his company’s stock dropped as much as 4% in the morning after, reports that the smelter will be around for several years longer is indeed good news for his investors.
New Zealand’s electricity companies have been strong, steady providers of significant dividends and share prices have boomed. Meridian Energy now has a market capitalisation of more than
$20 billion, compared to less than $4 billion when it was partially privatised.
New electricity generation
What is good for investors is often good for development.
Tiwai Point has many critics, but few deny that a swift closure would probably delay the development of wind and geothermal projects for years.
Mr Fuge acknowledged that he personally loves to build new projects and he is gushing about Tauhara, a possible geothermal plant near Taupo, which was put on hold due to uncertainty around Tiwai.
‘‘I have my own passion around developing renewable energy.
‘‘Investors are always a bit more gunshy . . . The more stable the investing environment, the more investors are willing to invest and the more they’re willing to do it at lower rates of return.’’
Investor groups agreed, Harbour’s Mr Stent adding that as well as Tauhara, Meridian’s North Island Harapaki wind project was ‘‘likely to go ahead’’.
Alternative uses of generation
The departure of the smelter, whenever it comes, could leave room for new electricityhungry industries, ranging from data centres to a hydrogen plant (Contact and Meridian are jointly spending $2 million on a feasibility study for a hydrogen plant in the region).
Because of the time it takes build investment cases, one of the backers of Datagrid, which hopes to build a data centre in Southland, welcomed the deal.
‘‘The reality is that undersea cables and largescale data centres are not built overnight,’’ entrepreneur and Datagrid backer Malcolm Dick said.
Politics
Rio Tinto has developed a reputation for seeking concessions from Governments. In 2013, the mining giant arguably exploited Meridian’s looming partial privatisation to extract a $30 million payment from the former National Government. When Rio Tinto first announced its strategic review, within minutes Energy Minister Megan Woods announced the Government would not make a similar payment.
In September, however, shortly after National promised to effectively direct Transpower to come up with relief for the smelter, Labour promised more or less that same thing, both sides promising to extend the life of the smelter and ensure it comes to a deal on the cleanup of the site.
In last week’s deal, the electricity sector itself secured the future of the smelter for several years without the Government granting concessions (aside from indirectly through its 51% investment in Meridian).
But the negotiations over transmission charges continue, even though the site’s future has been secured.
Talks were expected to be concluded in a ‘‘small number of months’’. — The New Zealand Herald