Economy

A smelter-sized headache for Labour

In his series on the big 8 questions for 2020, Bernard Hickey looks at whether Rio Tinto will shut down the Tiwai Point smelter, which would transform the economics of the electricity sector and give the Government a big political headache.

Last year Rio TInto announced it would decide by the end of this March quarter whether to close its Tiwai Point aluminium smelter at Bluff with the potential loss of 1,000 high paid jobs, tens of millions in tax revenues and heavy welfare and adjustment costs that Government would have to bear.

Really? It argues the smelter is loss-making with its current electricity and transmission costs, which it says are inflated because it effectively subsidises other users of the grid.

Rio Tinto wanted the Government and the Electricity Authority to accelerate and improve the regulator's ongoing Transmission Pricing Review so the prices are fairer and lower for the smelter, which is relatively closer to its main power source at Manapouri.

But that would mean higher prices for other users further away, including most domestic power users and some other industrial users.
Some think Rio Tinto is bluffing and has too much invested. It would also shave to spend a lot to shut down and clean up the plant, as well as lay off the workers.

Others are not so sure. Rio Tinto sent a closure preparation team to Bluff in October and plenty of investors think there's a real chance of a withdrawal. Find out more here in my piece from October last year.

Deja vu all over again? - We have been here before. Rio Tinto extracted a $30 million payment out of the previous Government when it threatened to leave in 2013, just as the Government needed stable prices to float 49 percent stakes in Genesis, Mercury and Meridian on the stock market. The payment was against Treasury advice and many within Government don't want to be bullied again into paying.

Energy Minister Megan Woods has said it's unlikely the current Government would pay, but hasn't ruled anything out, in part because coalition partner New Zealand First doesn't want the hit to regional New Zealand and export revenues.

Although Winston Peters is no fan of the transmission pricing review shift to higher costs for Northlanders, West Coasters and many consumers in the North Island and some parts of Canterbury.

Winners and losers - The 51 percent state-owned Meridian Energy and the NZX-listed Contact Energy would be the biggest losers, given they own the hydro power stations in the South Island. Other power generator/retailers, including the 51 percent state-owned Genesis and Mercury, would be hit by lower profits if Rio TInto's power had to be dumped onto the market.

But there are plenty of consumers who'd love lower power prices and green activists would like to see Tiwai Point reduce power demand in a way that would allow Genesis' Huntly gas and coal-fired power plant to be finally closed to reduce carbon emissions. Tiwai Point uses 14 percent of New Zealand's power and Treasury has estimated a 10 percent power price fall if the supply was fed into the grid. Explore more here in Marc Daalder's explainer from October.

There's so much power right at the bottom of the South Island that Transpower is having to beef up its lines over the hills in Otago and Canterbury to get it into the National Grid.

Meridian and Contact are helping Transpower spend $100 million this summer to get that work done. There would be another $500 million of work needed to beef up the Cook Strait cables to get the power up to Auckland. See more on that here in my explainer from December.

Unintended consequences - One argument against closing Tiwai Point on climate change grounds is that the aluminium supply taken out of the market would simply be replaced by coal-powered plants in China.

Rio Tinto also argues the particularly pure aluminium smelted at Tiwai Point is used to make lighter electric cars.

Key dates to watch

March 31 - The end of the quarter for the announcement

April 1 - The date for consumer power price announcements. Some fear a big one-off increase in prices for voters because wholesale prices have been high over the last year due to some gas outages and transmission upgrades. That would put political pressure on the Government in an election year to allow a shutdown that might reduce wholesale prices, although the fear of a profit hit might also encourage the gentailers to pump up prices or not pass on the wholesale price drop.

The answer? - There is a real risk of a closure, but most see the most likely outcome is some sort of smaller deal sharing the pain between Meridian and the Government and saving face for Rio Tinto, along with some sort of earlier Electricity Authority accommodation on transmission pricing.

Single digit tens of millions would be my guess. It would be better money spent that some of the same tens of millions coming out of the $3 billion Provincial Growth Fund. A final word: The boy who cried wolf was eventually eaten by the wolf when the villagers gave up listening to him.

This was the third in the series on Newsroom Pro of 8 Big Questions for 2020.

1. Will Labour win a second term?

2. Will Donald Trump be re-elected and should we care?

3. Will NZ let Huawei build any part of Spark's network?

4. Will the Government appoint an Auckland Light Rail builder?

5. Will NZ conclude a trade deal with the EU?

6. Will Rio Tinto shut down Tiwai Pt?

7. Will NZ regulate Big Tech?

8. Will NZME buy Stuff?

Get it early – This article was first published on Newsroom Pro and/or included in Bernard Hickey’s ‘8 Things’ morning email of the latest in-depth business and political analysis. Get it early by subscribing now or starting a 28-day free trial.

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