The issue for the Govt – as the fate of Tiwai Point smelter is decided – is to work out where the national interest lies

The  Ardern  government  has a  real  headache, as  global  giant  Rio Tinto threatens to  close  one of the  country’s major manufacturing plants.

Rio Tinto has launched   what it calls  a  “strategic review”  of  the Tiwai Point aluminium smelter,  one of the two smelters  in the world producing ultrahigh-purity metal, and  the only one doing so from renewable energy.

It says  it  doesn’t  want  another handout from the government  (like the  $30m it got in 2012)  but  it urgently  needs action on transmission  costs from  Meridian’s Manapouri power station.

Some  of  the country’s  top  journalists have  been on the case.  The New Zealand  Herald  says  fear of  a shutdown has  worked before,  but it may  not  work this time.   Stuff  detects  a consensus emerging within Parliament that the smelter should close. Political commentator  Matthew Hooten  says “Let’s  say  no to Rio’s trantrum”.  He  argues  government  support  will just encourage it to ask for another  handout.

Others   contend  that because the  smelter  consumes  13%  of  the electricity generated  in NZ,  the  government  should welcome  the smelter’s closure because  it will mean cheaper  power for the  rest of us.  Who  cares, they say,  about the 1000  jobs  lost in Southland, the $600m  a  year  in export earnings, or the fact  NZ would have to start importing aluminium from  fossil-fueled smelters?

If  the  Ardern-led   coalition  lets  those jobs go,  wouldn’t  it look  a tad hypocritical  after only  last week  handing out  $20m  to  keep the Hillside  railway workshops in Dunedin  going?

Rio  Tinto may be the   ugliest  multinational,  a hard taskmaster, anti-union,  digging  out minerals.

But if  ministers  like Grant  Robertson  and  David Parker  overturned the decision  of  the Greens’  Eugenie  Sage    on the  Waihi gold mine  to ensure  it   stays  open,  won’t  they  be just  as  concerned   about the  smelter?

The  real  issue  facing  the government is: where does  the  national interest  lie?

If the  smelter  closes or  even downsizes,  the  impact  on the  electricity market alone will  reverberate  through the economy.  Some believe  that Manapouri  power,   suddenly  flooding   the  market,   will  lower power bills and reduce   the profits of  power companies.

Investors   in   the big power companies  certainly   took fright. The announcement that Tiwai might be set to close resulted in $1.5bn wiped from the value of NZ’s listed power companies.  Clearly people who own shares in those companies don’t want to take a chance on that adjustment. The slide in those companies’ share prices shows that while allowing Tiwai to shut might be the easy thing to do, there  will be a  stinging backlash.

Commissioned in 1971, the Manapouri hydroelectric  station (NZ’s single largest power station) was built specifically to supply Tiwai Point.  Manapouri runs  24 hours a  day,  seven days a  week, in supplying the smelter  and  channels the electricity  through a  D/C transmission system.

NZAS accounts for 39% of Meridian’s contracted sales by volume. Electricity and transmission costs make up about a third of NZAS’s input costs.

It is argued  in some  quarters that freeing up the 13% capacity from  Manapouri and feeding it into the grid would eliminate the need   for the Huntly generator.  This coal-fired power plant is kept online to accommodate  peaking periods and dry seasons, when the hydro lakes that generate the bulk of NZ’s electricity are low.

The  difficulty  with  this proposition  is the investment  required  for  transmission.

Someone, either the government or consumers, would  have to step up to pay the cost of getting the electricity from Manapouri to the rest of the country.  It is already hooked up to the national grid, but Treasury estimated in 2012 that an additional $200m will need to be invested to upgrade the lines.

Analysts   say  NZAS currently pays a blended price of around $57/mwh for its electricity from Meridian (a bit more than half the wholesale price) and is seeking to get that cost down by around $10-12/mwh.  That equates to a direct hit to the earnings of the electricity industry of $50-80m a  year.

NZAS accounts for 39% of Meridian’s contracted sales by volume.

Meridian CEO Neal Barclay has been quoted as   saying the fact the smelter owners have called a strategic review shows that they wish to find a solution.

“If they wanted to exit, they could have exercised their right under the contract to reduce consumption or exit with 12 months’ notice. The fact they have not, means that a closure is not a focus right now.”

Barclay said in an investor conference that the company wasn’t prepared to “take one for the team,” or provide NZAS with even more heavily discounted electricity to keep supply tight to the benefit of other electricity companies.

Closing Tiwai Point would just mean a much dirtier smelter producing aluminium elsewhere. It would make  emissions here look good, but do little for climate change.

What does Rio want?

NZAS  chief executive Stewart Hamilton told Radio NZ it isn’t asking for another taxpayer handout.

Rather it wants a protracted review of electricity transmission pricing methodology (TPM) to wrap up, and favours a greater user pays model than is being proposed.

NZAS believes it’s unfair Meridian is having to subsidise the cost of investment in transmission assets in other parts of the country.

Fudged cost/benefit analysis and disagreement on how to move forward with TPM has seen the process extend over a decade.

The proposed beneficiary model includes a cap to ensure no individual customer pays more than 3.5% above what they pay under the current system.  If this gets the go-ahead, it will be implemented from April 2021.

NZAS maintains these changes, which were the subject of consultations until October 31, will be too little, too late.

It points out that, as a business, it has  paid out $656m in transmission  costs over the  past decade.

Hamilton  has  said the fact  Rio Tinto had called a  strategic review means  the  situation   is  “more serious”   than  in  previous  rounds.  He  has  also indicated  the smelter  is currently  losing  millions of  dollars  a month.  (On the other hand  analysts  contend the smelter’s profitability is  better than it  was a year  ago, when the smelter  expanded).

Kerry  McDonald,  now retired, who ran  Tiwai Point   for about  15  years until 2003,  says  the  smelter’s   economic contribution has been  significant  over its lifespan — and he  suspects  it is  still  significant.

Smelters  around  the world  tend to become less economic  over time and Tiwai Point owners  will be looking closely  at  upcoming  spending needs.

But there  would  also be a huge cost  for  the owners in closing the smelter  and  in remediation.

There  are  clearly many facets  to the debate.  For the government, the political, as well as the  economic,  have to be  weighed  carefully.

Hooten  puts it this way:  Is the   government  going to  risk inflicting worse damage  on Southland and  Huntly in an election year by  standing firm?

Others   believe  the  $30m  handout  from  the  Key  government in 2012  was a small  price to  pay  to  keep the  smelter  operating for another six years.

Given the  Ardern  government  has  earmarked   $3bn   for   what  some call  Shane Jones’  provincial boondoggles,  can NZ  First stand by   and let   one of the country’s  biggest   industries   close down in election year?

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