Mercury's new $256m power station: Why it's not sweating on any power glut if Rio walks away

Mercury is starting on its first foray into wind generation. Photo / Suplied

Mercury Energy chief executive Fraser Whineray says the threat by Rio Tinto to close its Southland aluminium smelter is sabre rattling but concedes the company will at some time pull out of the plant at Tiwai Pt.

Mercury begins work on a large wind farm today which Whineray says would still be economic, even if Rio walked away.

Rio wants lower power prices from Meridian Energy and its announcement it was reviewing operations here walloped all generators' shares with Mercury stock tumbling last week by 9 per cent to $5.05 at end of trading on Friday.

Mercury will start siteworks today following a ceremony at Turitea, southeast of Palmerston North, and spend $256 million on the wind farm. It's the company's first foray into its own wind project and the first large scale addition to the country's generation in five years.

Whineray said Rio's stance was "deja vu" all over again.

Periodically Rio would try to enhance its arrangements which was "core business" for smelting around the world.

Mercury CEO Fraser Whineray. Photo / Ted Baghurst

"Normally a power company is owned by the state and it's a negotiation around jobs with the nation state," he said.

Rio's New Zealand Aluminium Smelters uses about 13 per cent of the nation's power and not only argues its electricity prices are high but it is forced to pay transmission costs for infrastructure it doesn't use. The Government here says it will not subsidise the smelter again after forking out $30m in 2013.

Enerlytica analyst John Kidd says Rio was paying broadly half wholesale prices that other big users were. He said the power play was timed to exploit maximum leverage ahead of what could be a volatile year in the electricity market.

Whineray says Rio is probably bluffing this time.

"There's a lot of sabre rattling going on in Australia around their smelters - we would find it pretty incredible if they turned off here in favour of a brown coal plant in Australia given the way the world is going."

Rio chiefs would need to be "pretty brave" to face shareholders concerned about environmental, social and corporate governance (ESG) requirements.

Whineray, who will next March go Fonterra as chief operating officer, questioned whether Rio was serious this time about leaving but said "at some point" it would happen.

"We would prefer that to stay on but at some point the terms become challenged."

His company had a long-term investment strategy and the first stage of Turitea was part of that.

"We're committed to building this - we're very comfortable."

The electricity market was suffering stress at the moment with thermal fuel and plant reliability issues. Spot prices had been on a 13-month run of elevated spot prices about $115/MWh, he said.

This reinforced the need for more renewable plants with the increased shift away from gas and coal generation.

"You can't go to Bunnings and fix this in the weekend if you want to play catchup with the electricity market. We have to think in the long term interests of New Zealanders."

If Rio pulled out there would be unsettled few years because of the need for new transmission to shift the vast bulk of electricity further north.

But then the market could be better off.

The Tiwai Pt smelter is the country's biggest single power user. Photo / Supplied

"I think the market resets — it takes some time to do that — then we move on without this ever-present threat of the smelter sabre rattling every three years or so."

Mercury has Waikato River hydro plants, geothermal stations, some small scale solar and from the end of next year, wind.

''We're well placed because we don't have to turn off any thermal all in the [upper half of the] North Island so we have some great advantages in respect to that scenario.''

The first stage of Turitea will involve the installation of 33 Vestas turbines – each with 3.6 megawatt capacity – at the site on the Tararua Range. The turbines are expected to deliver about 470 gigawatt-hours of electricity annually and will earn Mercury about $30 million a year, assuming an average generation price of $75/MWh.

There is scope to add a further 27 turbines.

"At some time during the lifetime of this investment that smelter may not be there. We've thought about that in the business case and how quickly the market may be able to reset itself."

Right now spot prices were "well ahead" of the business case.