Brian Fallow: Manapouri's power best used at home

Free fuel, capital costs long paid for - Lake Manapouri's power scheme is a brilliant asset for this country. Photo / NZME

OPINION:

We need to talk about Manapouri.

What is the best use, from the country's point of view, of all that clean and green electricity generated there?

It is easy to forget what a brilliant asset the Manapouri scheme is. Anyone familiar with Fiordland knows it rains a lot down there: seven metres a year on average for the national park.

That delivers a lot of water to Lake Manapouri and thence into the Waiau River, apart from the portion that for the past 50 years has been diverted through a tunnel that drops it more than 200m in one go to sea level at Deep Cove, via some turbines. It is electricity whose fuel cost is zero and whose capital costs are long sunk.

Is the best use of that power to continue to export it, at a deeply cut price, embedded in aluminium ingots? The Tiwai Point smelter consumes about one-eighth of the country's electricity.

Would it be any less wasteful to export it as green hydrogen to help Japan decarbonise? Or would it be best used to help New Zealand decarbonise? We have kicked that can down the road for so long that it has assumed the dimensions of a 40-gallon drum.

The economics of the smelter have improved a lot lately.

But that is from the perspective of its owners, Rio Tinto and Sumitomo, whose interests are not to be confused with New Zealand's.

The smelter is a tolling operation. The New Zealand economy only benefits from charging for the value added here, in the form of the cut-price electricity, the labour of the smelter's workforce and some harbour dues for South Port.

It is irrelevant to New Zealand's GDP that international aluminium prices have doubled from the level that they wobbled around for most of the past 10 years, and from the level they were at when the smelter's owners announced in 2020 that they planned to close it in August last year.

It received a stay of execution until the end of 2024, courtesy of a lower electricity price (from already enviably low levels) in a new contract with Meridian Energy announced at the start of last year.

Since then the metal price has climbed a further 84 per cent.

No wonder, then, that two months ago NZ Aluminium Smelters chief executive Chris Blenkiron dangled the possibility that the smelter might continue past the end of 2024: "Rio Tinto does see a positive pathway for New Zealand's Aluminium Smelter (NZAS) to continue operating and contributing to the local and national economies beyond 2024".

That would also defer the hefty cost of environmental remediation of the Tiwai Point site.

And the relative equanimity with which the company has greeted indications that the Government plans to more than halve its free allocation of units under the emissions trading scheme — at a cost to the company, and benefit to the Crown, north of $60 million a year — is telling.

The Tiwai Point smelter. Photo / Gregor Richardson

But the question for the Government, which after all is still the majority shareholder in Meridian, is whether continuing the Manapouri/Tiwai nexus is in the national interest, given the opportunity costs involved.

For its part, Meridian in partnership with Contact Energy is pressing ahead with exploring the case for a green hydrogen plant. They have a request for proposals out.

Such a plant would use electricity from Manapouri to split water into hydrogen and oxygen so the former could be used as an "energy carrier" to be turned back into electricity in vehicular fuel cells. It could also provide an alternative to coal in the production of steel.

Prime Minister Jacinda Ardern sounds like a fan. In her opening statement to the current parliamentary term in February she said, "New Zealand is uniquely placed to become a world leader in hydrogen production using renewable energy, creating new export opportunities, high wage jobs and regional industries".

But the Parliamentary Commissioner for the Environment, Simon Upton, is among those deeply sceptical of that proposal.

In a letter two weeks ago to Energy Minster Megan Woods, Finance Minister Grant Robertson and Climate Change Minister James Shaw, Upton offers a trenchant critique of the idea on both environmental and economic grounds.

"The process of electrolysing water (splitting water into hydrogen and oxygen) is energy-intensive — between 20 and 30 per cent of the energy is lost when renewable electricity is converted into hydrogen," he said.

There are also losses associated with transporting the fuel to dispensing stations and then in converting it back into electricity to propel the vehicles.

"Once all these losses are added up hydrogen has an end-to-end efficiency of only 30 to 40 per cent. By comparison, battery electric vehicles have an end-to-end efficiency of around 60 to 70 per cent."

Given that, "it is hard to see green hydrogen competing with electric battery technology at scale for light vehicles, which account for nearly a quarter of our emissions".

In any case, Upton says a green hydrogen industry would rely predominantly on an export market to provide the scale investors would require.

But that would be likely to make it more difficult and costly for New Zealand to meet its climate change commitments, Upton argues. It would divert renewable electricity from the wholesale electricity market and potentially increase the price of electricity for end consumers above what might otherwise have prevailed.

Modelling by the Climate Change Commission found that releasing the power consumed at the smelter could lower wholesale electricity prices by as much as $20 a megawatt hour below what they would otherwise be for up to a decade.

Anyone contemplating investment in other renewable projects, or replacing coal or gas with electricity in industrial plants, say, would no doubt be grateful for some clear indication, and soon, of whether that is likely to happen.

While the cessation of aluminium exports would leave a hole in New Zealand's export receipts, if the power thereby freed up were used to propel vehicles it would reduce the country's oil import bill, which was more than $5 billion last year and is heading north.

As Upton says, "Recent events have once again revealed New Zealand's exposure to volatile liquid fossil fuel sources and potential exposure to supply disruption. Locking onshore energy production for export for decades to come denies New Zealand an opportunity to de-risk domestic energy supply."