Mercury starts $256m wind farm

Plant would be economic even if Rio quit smelter

Mercury Energy chief executive Fraser Whineray says the threat by Rio Tinto to close its Southland aluminium smelter is sabre-rattling but concedes the company will at some time pull out of the Tiwai Pt plant.

Mercury begins work on a large windfarm today which Whineray says would be economic even if Rio walked away.

Rio wants lower power prices from Meridian Energy and its announcement it was reviewing operations here walloped all generators’ shares. Mercury stock tumbled last week by 9 per cent to $5.05 at end of trading on Friday.

Mercury will start site works today at Turitea, southeast of Palmerston North, and spend $256 million on the wind farm. It’s the company’s first foray into its own wind project and the first large scale addition to the country’s generation in five years.

Whineray said Rio’s stance was “deja vu” . Periodically Rio would try to enhance its arrangements which was “core business” for smelting around the world.

“Normally a power company is owned by the state and it’s a negotiation around jobs with the nation state,” he said.

Rio’s New Zealand Aluminium Smelters uses about 13 per cent of the nation’s power and argues its electricity prices are high and it is forced to pay transmission costs for unused infrastructure. The Government says it will not subsidise the smelter after forking out $30m in 2013.

Whineray says Rio is probably bluffing this time.

“There’s a lot of sabre-rattling going on in Australia around their smelters. We would find it pretty incredible if they turned off here in favour of a brown coal plant in Australia given the way the world is going.”

Rio chiefs would need to be “pretty brave” to face shareholders concerned about environmental, social and corporate governance (ESG) requirements.

Whineray, who will next March go to Fonterra as chief operating officer, questioned whether Rio was serious about leaving but said “at some point” it would happen. “We would prefer [Rio] to stay on but at some point the terms become challenged.”

His company had a long-term investment strategy and the first stage of Turitea was part of that.

“We’re committed to building this. We’re very comfortable.”

The electricity market was suffering stress with thermal fuel and plant reliability issues. Spot prices had been on a 13-month run of elevated spot prices about $115/MWh, he said. This reinforced the need for more renewable plants with the increased shift away from gas and coal generation.

“We have to think in the long term interests of New Zealanders.”

If Rio pulled out the market would be unsettled for a few years because of the need for new transmission to shift the vast bulk of electricity to the the north, but then better off.

“I think the market resets — it takes some time to do that — then we move on without this ever-present threat of the smelter sabre-rattling every three years or so.”

Mercury has Waikato River hydro

There’s a lot of sabrerattling going on in Australia around their smelters.

Fraser Whineray

plants, geothermal stations, some small scale solar and from the end of next year, wind.

“We’re well placed because we don’t have to turn off any thermal all in the (upper half of the) North Island so we have some great advantages in respect to that scenario.”

The first stage of Turitea will involve the installation of 33 Vestas turbines — each with 3.6 megawatt capacity — at the site on the Tararua Range. The turbines are expected to deliver about 470 gigawatt-hours of electricity annually and will earn Mercury about $30 million a year, assuming an average generation price of $75/MWh. There is scope to add a further 27 turbines.

“At some time during the lifetime of this investment that smelter may not be there. We’ve thought about that in the business case and how quickly the market may be able to reset itself,” he said. Right now spot prices were “well ahead” of the business case.