10 Apr 2015

'Nervous' wait for Tiwai decision

1:46 pm on 10 April 2015

The potential closure of the aluminium smelter at Tiwai Point in Southland could depress electricity demand for a decade, a government report says.

Tiwai Point came close to being shut down two years ago due to low aluminium prices but was rescued by a $30 million Government grant and an undisclosed cut to the price it pays Meridian Energy for its electricity.

power pylon

Photo: RNZ / Diego Opatowski

That rescue deal had an opt out clause; Tiwai Point was still entitled to close in 2017, but would have to serve notice by July this year.

Energy insiders believe the plant will stay open, but the possibility it will not means power companies are reluctant to spend money on new schemes.

The Ministry for Business, Innovation and Employment says demand for electricity could be depressed for nine years if Tiwai Point closes, making construction of new plant uneconomic.

Wellington energy journalist Gavin Evans said the countdown to July was leaving the industry feeling very nervous.

"The industry wants to see the smelter continuing operating at current levels," he said.

"I think there is a good chance that that will be the case.

"But if you have to sign cheques with very large numbers of zeros on them, it is just very difficult to make those decisons when you know there is still a risk coming in July. "

This problem comes as electricity companies pile up their dollars, only to find they have little to spend them on, except to give bonuses to their shareholders.

The gas industry is also being forced to take stock.

Late last year, it issued a report saying closure at Tiwai would reverberate through its own industry.

"If Tiwai were to exit completely, it is likely that demand for gas would drop by approximately 24 petajoules a year from current levels, the report said.

That is not because Tiwai point burns gas - it doesn't - but because hydro electricity no longer needed at the plant would go elsewhere, depressing the need for gas powered energy.

Risk persists

Labour Party energy spokesman Stuart Nash said he expected Tiwai Point will keep on smelting ore for another five years.

But he said no one dared make that assumption and invest millions of dollars while a risk persisted.

"There is uncertainty and that uncertainty will remain until Tiwai make a decision in July, which is not a particularly healthy place to be in," he said. '"When there is one plant that controls a sector to that level, that can create anxiety for the whole sector."

Meanwhile the Ministry for Business, Innovation and Employment has thrown its comments into the ring, saying demand for electricity could be depressed for nine years if Tiwai Point closes down completely.

Read the full MBIE report here (PDF file)

For much of that time there would be surplus capacity.

Smelter energy costs too high

Electricity Authority chief executive Carl Hansen told Morning Report if the smelter did close it could lead to cheaper electricity prices.

Any price drops would be the result of a simple supply and demand equation, he said. "It works very much in the same way as other competitive markets."

Mr Hansen said electricity retailers had been jockeying for position for two years to secure customers as uncertainty hangs over the smelter.

Gavin Evans said the situation was an unenviable one for the owners of the smelter.

"If you think about it from the owner of a smelter's point of view, the world is a different place from what it was two or three years ago," he said.

"Nobody is as confident about commodity prices as they were. Everyone wants certainty about this but they all rely on each other to provide that certainty."

Brian Leyland, an energy analyst, thinks Meridian Energy might be able to offer Southland's aluminium smelter even cheaper electricity than it already does.

He said Meridian could still make money selling to Tiwai Point, which takes about 17 percent of the country's electricity supply, even if the price it receives were to decrease.

Mr Leyland fears that if it does want to close Tiwai Point, Meridian Energy could have a tough problem on its hands.

This is due to the fact that power prices from other plants would be depressed because of the amount of electricity being dumped.

Meridian could therefore end up making more money by charging the smelter less.

Meridian declined to comment.