Between the lines
How Govt planned to subsidise Tiwai Point transmission costs
In public the Government was clear: whatever Rio Tinto might threaten to do with the Tiwai Point aluminium smelter, taxpayers were not going to simply write a cheque to stave off closure. In private, the story was different. Realising there was not enough time to reorganise the costs of the country’s transmission network to offer relief to New Zealand’s single largest electricity user, ministers tasked officials with drawing up plans for how taxpayers could provide financial relief to convince the mining giant to delay the closure of the smelter.
Documents released under the Official Information Act show that in the weeks after Rio Tinto announced it intended to close the smelter in July 2020 (a decision that would later be reversed), ministers continued to have meetings to try to thrash out how they could reach an agreement to delay the closure by several years.
Right away, it was clear that any agreement was likely to involve taxpayer money, because Rio Tinto needed to know if its transmission costs would be cut by August.
“The only expedient way to achieve a lower transmission price within Rio Tinto’s stipulated time frame is through Crown funding,” officials at the Ministry of Business, Innovation and Employment (MBIE) warned in July.
In response, Energy Minister Megan Woods asked officials for more advice on how the Government could provide support to help to keep the smelter open.
While much of the documentation is redacted, the advice makes repeated reference to taxpayers — rather than other electricity users — picking up the bill, if the Government could strike a deal to delay Tiwai’s closure and remediate the site.
Although the private discussions of a bailout were rendered irrelevant because Rio Tinto eventually received such a sweet deal for electricity that it did not need government intervention on transmission, officials had warned that the prospect of a bailout could see other major industrial users turning up to demand assistance.
The demands may already be landing. With wholesale prices — and contracts for electricity over the next two years — soaring, the Major Electricity Users Group has warned thousands of jobs are at risk.
Signs the Government was preparing to bail out the smelter again also contradicts repeated public statements from a series of senior ministers. In a statement, Woods said ministers “recognised the fact that Rio [Tinto] exiting quickly would have pushed transmission costs on to other customers, which would have had a flow-through to New Zealand consumers”.
When asked about the Government’s repeated assurances that there would be no payment to Rio Tinto, she said simply that the Government had said “just as many times” that it wanted to smooth the transition period for Rio Tinto’s departure.
The ministers “had yet to settle on the mechanism for an offset — in the event one was agreed — in exchange for remediation,” Woods added.
“Officials also provided options for funding, however ministers were clear that a direct payment to Rio [Tinto], was not desired.”
Woods denied the move would encourage other major industrial users to come forward asking for relief.
For years, the owners of the smelter have not only pressed for lower electricity prices, they have argued that the amount they pay for transmission — recently $50-$60 million a year — was far higher than was justified given that its electricity source was the nearby Manapouri Power Station.
While in Government circles there appears to be some sympathy about the transmission issue, the protracted process to review transmission pricing — and concerns cheaper costs for Tiwai Point would mean higher transmission prices for users in the North Island — meant relief has never been delivered.
In 2013, National gave the smelter’s owners $30m after Rio Tinto arguably exploited the timing of the partial sale of Meridian Energy — Tiwai Point’s electricity provider — to threaten closure.
Both John Key and Bill English said publicly that the smelter would not get more financial assistance from a National government.
Little over an hour after Rio Tinto announced in 2019 that it was undertaking a strategic review of its New Zealand operations, raising the spectre of closure, Woods made it clear that if the mining company was wanting taxpayer assistance, it would be disappointed, as the coalition was maintaining the position of its predecessors.
“There will be no more financial assistance from taxpayers for Rio Tinto,” Woods said in a statement on October 23, 2019.
Months later it appeared the Government was preparing to help Rio Tinto to build a business case for a discount on transmission costs through the “prudent discount” mechanism.
However progress appeared to stall as Covid swept across the planet, causing the outlook for aluminium demand to soften amid concerns of a deep recession and by July 9, Rio Tinto claimed it was leaving.
While the news surprised financial markets, Finance Minister Grant Robertson indicated the announcement had been inevitable, and again referenced National’s pledge of no more assistance.
“We as a government have backed what John Key and Bill English have previously said to them,” Robertson told reporters.
As the election approached — and with National pledging to require Transpower to strike a deal to reduce the smelter’s transmission costs — Labour also promised to take action to “negotiate an extension of Tiwai Point Aluminium Smelter”.
Although the policy was vague, Ardern indicated national grid operator Transpower would negotiate with the Anglo-Australian mining company about the way its charges were shared, and ruled out “direct” government payment.
“What we are asking is that Transpower will go into negotiation with Rio Tinto around the way that they deploy their lines charges,” Jacinda Ardern told reporters in Southland, on September 28.
“We’ve said we don’t believe that we should be giving a direct government subsidy to Rio Tinto, so that’s not what we’ll be doing, but there is an opportunity, through Transpower, to find a solution.”
What was being contemplated by ministers would have been, for all intents and purposes, a direct subsidy.
Ardern’s senior ministers had been warned weeks earlier that there was unlikely to be any chance that transmission costs could be rejigged to fit a timeframe set by Rio Tinto, which had demanded to know what kind of transmission savings might be available by August 21, 2020.
Even if it was Transpower through which transmission costs to Tiwai Point were lowered, “Government will essentially be paying the equivalent of a portion of Rio Tinto’s transmission costs so that they are not passed on to consumers,” MBIE pointed out in August.
After meeting with Rio Tinto on July 24, Woods asked officials to draw up a “workable method for Crown intervention if required”.
Much of the advice is redacted on the basis that it would prejudice commercial negotiations, but points to the costs falling on taxpayers, and the figures which were being talked about would have amounted to a significant saving for the smelter.
MBIE warned that if Tiwai was to close, in the order of $50m-$60m of transmission costs would be shared among other consumers.
“Intervention from the Crown to pay part of the smelter’s transmission costs will avoid this allocation to consumers, but will shift this cost to taxpayers,” officials wrote.
MBIE’s advice was that “on balance”, intervention may be worthwhile, if it was reached alongside both a commitment to delay closure and to remediate the site, which officials said was contaminated.
The sudden closure would have a “profound” impact on Southland’s employment market, while there were signs that the closure of New Zealand’s largest electricity consumer may not even lower prices for consumers.
While MBIE’s analysis showed that the closure of Tiwai was likely to see lower wholesale electricity prices endure in the South Island, in the North Island, lower demand would threaten the viability of Huntly Power Station as well as gas-fired generation in Taranaki.
“Their closure would in turn put upward pressure on electricity wholesale prices in the North Island in particular as it may reduce security of supply,” MBIE wrote.
It was almost certain that Tiwai’s closure would see transmission costs shared among other electricity users, consumers may not see lower electricity prices and if they did the impact “may be transient” due to the consequential closure of generation.
But there were drawbacks to providing relief. As well as the direct fiscal cost, keeping Tiwai open would mean the company would continue to get tens of millions of dollars worth of free carbon credits. There was also the risk that signalling a subsidy for the Crown could send a message to other companies.
“Granting transmission relief to Rio Tinto through government intervention may increase the probability of other threatened industrials asking for similar assistance against transmission costs,” MBIE warned.
In the end, the threat of abrupt closure was enough to get Meridian Energy — assisted by Contact Energy — to give the smelter such a good electricity deal that Rio Tinto committed to remaining open until at least 2024.
Negotiations with the Government over clean-up were suspended in March, which Robertson blamed on the smelter’s refusal to put up a detailed plan around site clean-up.
When talks over cleaning up will resume — or what the Government will offer to deliver cheaper transmission — remain unclear.
Act Party leader David Seymour said in spite of the public statements the Government was “clearly indicating to Rio Tinto that actually, they were willing to do a deal”.
If the Government wanted to subsidise an activity it should do so as efficiently as possible through general taxation, Seymour said “and refrain from interfering in markets we need to function, especially the electricity market”.
New Zealand needed to be a good place to invest capital “because they know there’s clear rules of the game, and they know they’re not going to be arbitrarily jerked around”.