The payoff of paying for Tiwai Point
Labour has belatedly realised that allowing an abrupt closure of Tiwai Point in August next year was not only bad politics for Southland and bad for the overall economy, but it would have been bad for power consumers and the Government’s own revenues from power firm dividends.
That’s why it has decided to stump up somewhere between $90 million and $150m over the next three to five years to buy time for the workers, and to find new ways to distribute and use the power produced cheaply at Manapo¯uri.
This may seem like an awful lot of money to hand to a global company, but the alternative is tens of millions of dollars per year worth of lower taxes and dividends for the Government, and higher electricity lines costs for consumers. This makes it a worthwhile concession for taxpayers, even those north of Southland.
The announcement in Invercargill on Monday by Prime Minister Jacinda Ardern and Energy Minister Megan Woods that they would negotiate with Rio Tinto to extend the life of the smelter was a stark contrast with the Government’s initially more relaxed reaction in July. Finance
Minister Grant Robertson was initially completely resigned to the 2021 closure and his initial visit to Southland with Ardern was all about limiting the fallout.
But that attitude shifted as NZ First leader Winston Peters and National argued for either a state takeover and an extension respectively, and as the wider revenue implications for the Government became clearer.
Cabinet should have been briefed on all of these things in the first six months of 2020, when it was told of Rio Tinto’s hardline approach. The economics of closure within 12 months would have been awful in the middle of the worst recession in living memory – a loss which would have included over 2600 highly paid jobs, large amounts of tax and GST income, and more than $1 billion per year of aluminium export receipts.
An August 2021 shutdown would also have left much of Manapo¯uri’s power stranded in the lake because the Clutha to Upper Waitaki lines upgrade was not due to be completed until mid2023.
But it has also dawned on the Government that removing Tiwai Point from the electricity network would mean the $60m in lines charges Rio Tinto pays to Transpower each year would be shifted to other electricity consumers, including in the voter
rich environment of Auckland.
Another power price jolt in the middle of Covid-19 would not have been politically or socially good for the Government. There’s also the issue of lost GST and income taxes and dividends from the Government’s 51 per cent stakes in Meridian, Genesis and Mercury to think about.
It wasn’t clear how much of the nearly $500m worth of dividends each year would have been put at risk, but the sharemarket’s ebullient reaction on Monday to the news showed it was not nothing.
Combine the extra $60m of lines charges for consumers, another $50m to $100m in lost tax revenues and the estimated
potential loss of dividends of another $100m, and then the financial costs for the Government and taxpayers broadly start to stack up.
So the Government then had to work out how to buy itself some time for the lines upgrades and to avoid the initial financial hit.
Meridian had decided not to stump up with an even bigger discount for the power produced at Manapo¯uri.
A subsidy like that paid by the previous Government would not be a good look, given Robertson had said Labour and National had the same approach to Rio Tinto’s pleadings of not paying any more subsidies. A roundabout way of delivering the subsidy was required, and the Government looks to have found a sleight of hand it can use in the transmission pricing system and via Transpower, which it controls 100 per cent. Buried in the system is the idea that Transpower can pay a ‘‘prudent discount’’ to a large consumer able to build its own power lines to a power generator.
The idea is that if the factory or smelter can build lines cheaper than Transpower’s lines, the network operator would pay a discount to avoid the expense of having two lines side-by-side. Until now Transpower has never engaged with Rio Tinto on the issue, in part because it knew Rio Tinto would never be able to get resource consent for new lines.
The trigger for Rio Tinto’s July announcement of a closure in 2021 was Transpower’s comments in June that it would not be able to propose a standalone prudent discount policy for the smelter until June 2021 at the earliest, with the potential for the new lower charges to not be in place until 2024.
That was too long for the smelter owner. Now Woods or whoever becomes Energy Minister will have the task in the coming months of prodding a reluctant network operator to bring forward its prudent discount plans and stump up the money needed to keep the smelter going for three to five years.