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 the 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 would likely lead to lower electricity prices and could see new industries attracted to Southland as the excess power became available.
What does Thursday’s news mean for:
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 well-paid jobs, in a province with a population of just slightly over 100,000.
Treasury’s earlier warnings about the impact of the closure of the smelter were that it would likely that some of the workers would either leave the region or alternatively find other, lower-paid jobs. “This deal will save jobs and gives us more time to plan for the long-term,” Gore mayor Tracy Hicks said.
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 in excess of $70m across transmission and electricity prices.
This week’s deal secures the future of the smelter without the issue of a reduced transmission charge 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 the smelter up, which is likely to be a costly one, with Finance Minister Grant Robertson expressing hope that the remediation plan could well exceed the minimum required under law.
Interestingly, 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”.
By virtue of being New Zealand’s largest electricity user, the 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 per cent.
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 likely 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.
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 per cent in the morning after, news 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 which has seen prices boom. 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 likely delay the development of wind and geothermal projects for years. Fuge acknowledged that he personally loves to build new projects and he is gushing about Tauhara, a possible geothermal plan 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 gun-shy… 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, with Harbour’s 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 electricity hungry 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 large-scale data centres are not built overnight,” entrepreneur and Datagrid backer Malcolm Dick said.
Rio Tinto has developed a reputation for seeking concessions out of 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, with both sides promising to extend the life of the smelter and ensure it comes to a deal on the clean-up of the site.
Thursday’s deal sees the electricity sector itself secure the future of the smelter for several years without the Government granting concessions (aside from indirectly through its 51 per cent investment in Meridian).
But the negotiations continue over transmission charges continue even though the site’s future has been secured. Finance Minister Grant Robertson said the Government was hoping to extract clean up commitments above the “legal minimums”.
Talks were expected to be concluded in a “small number of months”.
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