9 Jul 2020

Tiwai Point smelter closure: What happens to the electricity sector

7:48 pm on 9 July 2020

The news that Rio Tinto is set to wind down the Tiwai Point Aluminium Smelter means change for New Zealand's electricity sector.

21586193 - a vibrant sunrise overlooking bluff aluminium smelter new zealand

Photo: ekays/123RF

The smelter makes up 13 percent of the country's electricity consumption, so when its contract with Meridian Energy is up in August 2021, the impact will be widely felt.

So what does the industry and experts on it think will happen?

Electricity Authority chief executive James Stevenson-Wallace said the future of Tiwai had caused significant uncertainty for the electricity sector.

"Now that Rio Tinto has confirmed the termination of their contract, we are keen to avoid further uncertainty for the industry as to how NZAS will approach the wind-down of operations.

"Given that Tiwai represents 13 percent of total electricity consumption, we expect the decision to impact on the timing of new build plans by generators and a range of operational decisions."

And Contact Energy has already indicated an example of that.

Chief executive Mike Fuge said it would put off investing in its Tauhara geothermal power station, a project it in June described as "shovel ready".

"Tauhara remains a fantastic project, however it is prudent to press pause for now. We need to factor in the impact of Covid-19 and the potential exit of NZAS and get a clearer picture of demand," Fuge said.

Stevenson-Wallace said: "From a transmission perspective, previous announcements by Transpower to address transmission constraints in the lower South Island will support greater capacity to export electricity from Southland should the aluminium operations cease.

"The exit of the smelter will mean that the transmission costs that they pay will be spread across all other transmission customers. The exit will also free up electricity that can be applied to other users which should contribute to short-term downward pressure on power prices after operations have ceased."

What Transpower says

Transpower general manager of grid development John Clarke said the company would continue to work on projects that could speed up the delivery of surplus renewable electricity northward.

"This is a priority for the organisation and work is already underway with the decision last week to complete the Clutha Upper-Waitaki Lines Project at a cost of around $100 million.

"Transpower will now assess whether there is an opportunity to progress this work even more quickly than currently planned.

"Transpower will also work with the electricity industry on other improvements needed to realise the full economic benefits to New Zealand from the surplus electricity. This work would cost another somewhere between $500-600m."

Stuff has previously reported that Transpower estimated it could take between five and eight years to complete work to efficiently distribute surplus power across the whole country.

'Fundamental shift'

Genesis Energy chief executive officer Marc England said the closure of Tiwai Point marked a "fundamental shift in the New Zealand electricity market".

"As a predominantly North Island generator, Genesis expects the immediate effects to be felt more by the larger South Island generators," England said.

"We see benefit for the New Zealand electricity market through the removal of a significant source of uncertainty. In the medium to long term, this presents a potential opportunity to accelerate electrification of industrial processes, especially in the South Island.

"As for all generators, we will need to further assess what the closure means for our generation portfolio long term."

More renewable electricity 'not that easy'

Massey University professor Emeritus Ralph Sims said in comments provided by the Science Media Centre that in a perfect world, closing Tiwai Point should "theoretically result in greater shares of renewable electricity, a reduction in greenhouse gas emissions, and cheaper electricity prices for all New Zealanders".

"However, it's not that easy," Sims said.

"We have an electricity market largely driven by profit motives; an emphasis on increasing supply rather than reducing demand from increased energy efficiency; and the challenge of designing an electricity system that will be reliable even when higher shares of variable wind and solar generation drop, or in dry seasons when hydro lakes are low...

"So, will New Zealand electricity consumers reap the economic and environmental benefits of having cheaper hydro power suddenly becoming available once the smelter starts winding down? I have my doubts."

But Massey University's Dr Anna Berka said the closure would result in a surplus of capacity, leading to "downwards pressure on market prices".

"In terms of emissions, this may be actually be a good development as the plant has been using up a lot of our low-cost hydrocapacity and this might let us close down Huntly sooner," the lecturer in management, entrepreneurship and innovation said.

Longer-term upside

In addition, University of Auckland adjunct professor Harvey Weake said in comments provided by the Science Media Centre: "While this will be a tough period for Southland, I see longer-term upside for New Zealand around a substantive gain in electricity storage.

"As New Zealand progresses towards 90+ percent renewable power from a mix of incremental geothermal and wind, New Zealand must increase electricity storage capacity to meet both short and medium term interruptible supply to cover both windless periods and droughts."

The most effective option would be having the Huntly coal power station as a standby, but it would eventually be retired, the adjunct professor in the faculty of engineering said.

Then, the country would have to "build another high elevation lake of around one billion tonnes of water, or build some other electricity storage facility to hold the equivalent of 500MW over 100 days. Either way, the solution will be very expensive," Weake said.

"This announcement effectively allows this decision to be deferred for a couple of decades as Manapouri becomes more integrated with New Zealand's strategic electricity storage."

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