The decision to close the Tiwai Point aluminium smelter is sad news — not only for Southland, but for the country.
But it also represents an opportunity. The question is whether it will be seized or squandered.
The smelter was built to provide a use for electricity from theManapouri scheme, a brilliant hydro resource but one located in the remotest possible part of the country.
For 50 years Manapouri and Tiwai have functioned as a machine for turning Fiordland's copious rainfall into US dollars. Lots of dollars. In the year to May aluminium exports were worth $1.1 billion. That income will be missed in a country which struggles to earn its living as a trading nation.
The 2600 Southland jobs directly or indirectly provided by the smelter will also be missed. But the job losses will not end there.
The release of the 13 per cent or so of New Zealand's electricity generation hitherto committed to the smelter is likely to accelerate the closure of thermal generating capacity elsewhere. The two remaining coal-fired units at Huntly and the Taranaki combined cycle gas plant are obvious candidates for early retirement.
But not immediately. Rio Tinto, Tiwai's 80 per cent owner, expects the wind-down of the smelter to take until August next year.
In its briefing to the incoming Minister of State-Owned Enterprises nearly three years ago, Transpower said it would cost around $600 million to remove bottlenecks in the national grid and enable Manapouri's output to reach the upper North Island, and that would take years to complete. That cost will ultimately fall on electricity consumers.
How has it come to this?
The prospect of Tiwai closing is hardly a new issue for the industry. Rio Tinto has been trying to sell since at least 2011.
That reflects a global environment of serious excess smelting capacity and depressed prices, which the Covid-19 recession has only made worse.
China in particular has invested heavily in smelters to the point where it now produces — and, to be fair, consumes — more primary aluminium than all of the rest of the world combined. Nearly 90 per cent of China's smelters rely on electricity from coal-fired power stations.
It is the main reason why the International Aluminium Institute reckons 61 per cent of global aluminium production relies on coal-fired power stations and only 26 per cent on hydro. The rest is largely gas-fired.
Before the Greens cheer the closure of Tiwai, they should reflect on the fact that the emissions intensity of global aluminium production will now marginally increase.
The smelter's financial viability has not been assisted by a transmission pricing regime which had it paying tens of millions of dollars a year for connection to lines and pylons erected 50 years ago. The recent outcome of the review of transmission pricing would have offered only limited relief.
But the real issue has always been the opportunity cost to Meridian Energy, or potentially other power companies, of supplying the smelter.
The essential commercial question has been whether there is a power price that is not too low for Meridian and not too high for Rio Tinto.
The answer evidently is no.
Modelling the price below which Meridian would be better off releasing the power it commits to the smelter to the national market instead is fiendishly complex.
It requires taking a view on which thermal generation plants would be crowded out and how often those plants are the marginal generators which set the wholesale price in any given half-hour period and so what the impact on average wholesale prices would be.
It would also involve estimating the extent and duration of any price separation between the South and North Islands for however long it takes Transpower to relieve the bottlenecks in the national grid.
Rio Tinto expects the wind-down of the smelter to take until August next year. Photo / Supplied
It would involve estimating the potential for the use of the soon-to-be-surplus power for industrial heat in the south, with Fonterra's plants an obvious candidate.
The fate of Tiwai Point in Southland is an ominous sign for Marsden Point in Northland. The refinery's owners, essentially the oil companies, are also undertaking a review of its future. The reasons are similar — a global glut putting the squeeze on refinery margins.
If the outcome is that the oil companies decide it would be cheaper to supply the New Zealand market entirely with imported refined product rather than poking crude oil through a relatively small and old refinery, that would also have negative implications for employment and the trade accounts.
But it would strengthen the public policy case for measures to encourage the electrification of transport and decarbonisation of the economy. Would that not be a better use of Manapouri's clean green electricity than using it to power the neon lights and dishwashers of Auckland?
Transition from internal combustion to electric vehicles would be neither swift nor costless.
The trade-off between the higher initial capital cost and lower operating costs of an electric vehicle would vary depending on how much time it spends on the move, rather than parked taking up space, tying up capital and depreciating.
Rolling out infrastructure for the fast recharging of batteries would cost money. Or, to put it another way, it would provide jobs.
It would take years for the existing vehicle fleet to be replaced and as that happened the fiscal revenue from petrol taxes and road user charges would need to be replaced. And there are end-of-life issues associated with lithium batteries.
That said, the Manapouri power station is the jewel in the electricity system's crown. Its fuel is free. Transmission issues aside, its capital costs are long amortised.
It is a resource too valuable to just fritter away.
