Running the numbers on Tiwai Point

Former Prime Minister John Key went against Treasury advice to stump up a handout to the owners of the Tiwai Point aluminium smelter. Now, as Rio Tinto again threatens a shutdown, Jacinda Ardern's Government is having to weigh up whether to step in with subsidies.

On the one hand, the Tiwai Point aluminium smelter employs 1,000 Southlanders. On the other hand, saving it might require a cash injection of tens of millions of dollars.

It sounds like a simple case of deciding between jobs and the balance sheet - but it's far from straightforward. If the smelter closes it will cost an estimated $200 million to reroute power from Tiwai up to the North Island, plus the Government would lose the income tax and GST revenue from those well paid smelter workers with cash to spend.

The many factors that will influence the Government's decision, beyond the political ramifications of being seen to let regional jobs go or subsidising a multinational conglomerate, can roughly be split into three groups: the impact on the Government's balance sheet, the economic effects for New Zealanders and the environmental implications.

"Ministers should not agree to give any support"

When New Zealand Aluminium Smelter (NZAS) asked John Key's government for financial support in 2013, it won $30 million and a renegotiated electricity deal, against the advice of Treasury.

In a July 2012 report, Treasury told the government, "From a national welfare perspective, the situation seems straightforward. Any request by [Pacific Aluminium, the Rio Tinto subsidiary that owns NZAS] for Government assistance should be rejected, because it would result in a significant transfer of value from New Zealanders to PA and Rio Tinto shareholders."

Much of the concern for the government at the time was the impending stock market launch of Meridian Energy, the 51 percent state-owned power company that supplies NZAS with electricity. An announcement that Rio Tinto would be pulling out would hit Meridian hard. Now that Meridian is on the stock exchange, that concern is lessened, although a closure of Tiwai Point would still reduce dividends for both the government and individual Kiwi shareholders.

The primary cost to the government that Treasury identified was not associated with the jobs that would be lost. Instead, it was an estimated $200 million in investment in the electricity grid to reroute power from Tiwai, where it would no longer be needed, up to the North Island. As the state-owned Transpower owns and operates the national grid, this bill would be the government's to foot.

Lastly, electricity prices are expected to drop if Tiwai departs, because the plant uses about 12 percent of New Zealand's electricity each year. A sudden influx of electricity supply would lower the price of power and correspondingly lower revenue from GST on those transactions.

The costs for keeping the smelter in New Zealand are unclear. In 2013, the government paid out $30 million, but the situation is worse for Rio Tinto now, with a global slide in the aluminium market and the smelter posting a loss over the previous 12 months.

Alongside that, the Government has subsidised Rio Tinto's participation in the Emissions Trading Scheme. Stuff found that the multinational, which reported a net profit of $21 billion last year, would receive $1 billion in free carbon credits from the Government if it stays until 2030.

Southland impact unclear

While Treasury noted that the "short-term negative effects on the Southland economy could be significant", it also argued that the region's growth - averaging 1,000 jobs annually over the previous decade - meant it would absorb most of the hit if given time.

Nonetheless, the Government balance sheet would take a slight hit from the cost of welfare and support for the laid off workers and reduced income taxes if they picked up jobs that paid less.

"It's not just going to be the risk of paying unemployment benefits for some people for a certain period of time, it's actually more going to be the transition costs," said economist Benje Patterson. "In a situation like this, you'd expect the Government would look towards some extraordinary form of assistance, potentially to help people with retraining or in some situations to move regionally in New Zealand."

Patterson compared the situation to when tariffs protecting the car assembly industry in New Zealand were removed in the 1980s. "The government did allocate some extra assistance to help with that, it was limited, but there was some there," he said.

"There's many people working at Tiwai that are very highly skilled so they wouldn't necessarily be looking at the same job opportunities that are opening up in Southland at present."

Environment and consumers could benefit

For years, the large power companies have used the threat of Tiwai’s closure as an excuse to keep burning coal at Huntly power station. Photo: Lynn Grieveson

Another major issue with Tiwai Point is its environmental impact. Under the current arrangement, the smelter uses enough electricity to keep New Zealand reliant on fossil fuels for electricity generation. However, Treasury found in 2012 that if the plant closed, "it may bring forward the expected decommissioning of the coal and gas fired Huntly units 1 to 4, which produces between 20 percent - 50 percent of the sector’s total emissions".

Alongside that, the emissions produced by the smelter itself - a 2008 estimate by Rio TInto said that NZAS generated 0.8 percent of New Zealand's emissions - would be removed.

"For years, the large power companies have used the threat of Tiwai’s closure as an excuse to keep burning coal at Huntly and to delay building new renewable energy like wind and solar. All of these things keep power prices high for regular people," said Greenpeace NZ's Amanda Larsson.

Tiwai Point produces some of the cleanest aluminium in the world because of its use of New Zealand's largely-renewable electricity system ...  If Tiwai closed, dirtier aluminium could fill the gap in the market.

However, there could be some unintended consequences. The 2012 report said a closure of the plant would result in a five-year freeze on building new electricity generation infrastructure like wind farms. That would be a savings from deferral of investment of around $2 billion, but could also put a road-block in the way of a 100 percent renewable electricity system.

Moreover, Tiwai Point produces some of the cleanest aluminium in the world because of its use of New Zealand's largely-renewable electricity system. Coal-smelted aluminium from China has a carbon footprint five times larger than that made at Tiwai. If Tiwai closed, dirtier aluminium could fill the gap in the market.

Consumers could also stand to benefit from Tiwai closing down. According to the 2012 Treasury report, MBIE found that wholesale electricity prices would have dropped by 10 percent for the period from 2015 to 2030 had Rio Tinto left New Zealand.

A waiting game

The Government is reluctant to make any move on Tiwai until it hears the results of the review that Rio Tinto announced in October. Energy Minister Megan Woods told reporters after the announcement that a subsidy like the $30 million ordered by John Key was "highly unlikely", although she didn't commit to not giving in.

"The New Zealand government has had a clear position since 2013 under the Key/English government that there will be no more financial assistance from taxpayers for Rio Tinto, which is already supported by Meridian for the power it uses. This hasn’t changed," she said.

Woods also refused to ask the Electricity Authority to speed up its Transmission Pricing Review, the implementation of which could save Rio Tinto $11 million a year. However, it currently won't be in place for four or five more years, which NZAS says would be too late.

In the meantime, Treasury officials are no doubt cranking the numbers and weighing up the value of 1,000 jobs, GST on electricity and Transpower investments against the price of a subsidy, high consumer power costs and the environmental benefits of Tiwai shutting up shop.

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