Meridian gets thin pickings as aluminium prices soar but door is left open for future negotiations on powering the smelter

Meridian Energy issued  a  terse  statement earlier  this  month on the future of the Tiwai Point aluminium smelter.

This followed  speculation that   with  the price  of  aluminium soaring  to US$3000  a  tonne  (it  used  to vary  between US$1400 and US$1800)  the  smelter’s majority  owner, international  giant Rio Tinto, would  want to extend  its contract for  cheap  electricity   (some  say  the  cheapest  in the world)  beyond its current contract date of 2024.

The  price  of  aluminium  on  world  markets  is  now  just  on $US3300.

The Meridian statement on February 8 simply said:

“Meridian Energy notes today’s media coverage on the future of the Tiwai Point aluminium smelter. Meridian confirms it is not in discussions with the smelter’s owner, NZAS, about a new electricity contract. The existing contract between Meridian and NZAS ends on 31 December 2024.”

 Meridian had to  fight hard to renew the power contract and make concessions on price, to keep the smelter open beyond 2021.

The smelter is  Southland’s  biggest employer, with 600 workers directly employed  and 1000 indirectly. The smelter  is  a  vital element in the Southland economy  and  has  been for  nearly 50 years..

The  power company’s   miff with media speculation – if  that is what it  was earlier  this month – is  understandable  in the  light  of  its six-monthly report (published this  week).  For  while Rio Tinto is  no  doubt  enjoying  juicy profits from the  smelter, the  pickings were thinner for  Meridian.

The company  reported net profit after tax of $145m from continuing operations for the six months ended 31 December 2021, $82m (36%) lower than the same period last year, mainly reflecting negative changes in the value of hedge instruments. Excluding these hedge value movements, Meridian reported a $5m decrease in underlying net profit after tax.

Meridian’s Chief Executive, Neal Barclay, says operating performance in the first half of this financial year includes a reduction in revenue received from the Tiwai Point Aluminium Smelter.

Point  of  Order thinks  some  of  Meridian’s  executives  may  still  be  feeling  bruised   from the negotiations  with Rio  Tinto – but  perhaps  they  may feel better  if  Rio Tinto comes  back to them, this  time  perhaps  with  a  begging  bowl.

Certainly Barclay has  sensibly left the  door open for  further  negotiations, although he  says   there  are  “no current  discussions” with the smelter  on  a   new contract.  But  Meridian  is  “not  averse” to  further  talks and  Barclay  says Rio Tinto  will need to pay  “a fair  and  enduring price” for electricity”

You  bet.

As well,  it  will need  to demonstrate proper environmental responsibility, and to make  a  long-term commitment to  NZ.

“If  Rio Tinto are  serious about decarbonisation then 10 to 15  years,  or  even 20 years, is not unreasonable,” Barclay says.

Some  reports have suggested Rio Tinto screwed  down the price  it  pays  for electricity  to about 3.5c  a kw/hour  from about 5.5c in its latest power contract.

Meanwhile  Meridian says the on-par performance with last year reflects continued strong momentum in the company’s operating business.

“It’s pleasing to see continued growth in retail sales, which reflects an enduring commitment to excellent customer service and support,” Barclay says.

“Our retail performance has helped offset the impact of NZAS exit pricing, and we’re making sound progress on our strategy to develop new sources of South Island demand following the Tiwai contract end in 2024.” 

Meridian completed the sale of MEA (which includes Powershop Australia) on 31 January 2022. The final sale price was A$740m. Meridian expects to recognise a gain on sale in the order of $240m in its full year accounts for 2022.

“This transaction is an outstanding result for Meridian’s shareholders and a testament to the quality of the Meridian Energy Australia business and the employees who have been dedicated to its success,” Barclay says.

Meridian has  completed bulk earthworks at its Harapaki wind farm development in Hawke’s Bay and has been actively working to increase its renewable development pipeline. This includes the company’s November 2021 announcement of the development of Ruākākā Energy Park.

This project will house a battery energy storage system (BESS) at least 100MW in capacity, as well as a utilityscale solar farm.

Four potential partners have been selected for the next phase of the Southern Green Hydrogen project, a joint venture between Meridian Energy and Contact Energy to investigate the feasibility of developing the world’s first large-scale green hydrogen plant in Southland. A process is now under way to assess proposals from each of the four counterparties to develop the production and export facility in Southland.

“We’re excited to move forward with the RFP and bring the project closer to fruition,” adds  Barclay.

The electricity sector has been the focus of a number of regulatory reviews, including the Electricity Authority’s Wholesale Market Review and reviews of the 9 August 2021 power outages.

“While we have some concerns with some of the preliminary findings from the Electricity Authority’s most recent Wholesale Market Review, there is no doubt that as an industry we need to move faster to help New Zealand achieve its climate goals. We always support ways that the sector can provide better outcomes to consumers, and we’re committed to working with the sector, businesses, government, and consumers to ensure we  achieve  these goals”.

Point  of Order  doesn’t  often  praise  power  companies  but believes  on this  occasion   Barclay  and his team  deserve  a  bouquet.

Dare  we  confess  we  have a  soft spot for  Meridian  which harks back to our standing  a  little  way  behind  the  Hon  Ralph Hanan  at  the  hole-through  for  the  underground tunnel—one  of  the  great engineering feats in NZ— carrying  the  water  from  the Manapouri  station out  to Doubtful  Sound in  Fiordland.

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