Smelter wise to energy realities

By BRIAN FALLOW


The Manapouri power station is the jewel in the New Zealand hydro-electric system's crown.

Huge volumes of water drop through a mountain from Lake Manapouri to sea level at Deep Cove.

But it is remote. So Comalco's aluminium smelter was built at Tiwai Pt near Bluff to provide it with a relatively local market. For 30 years, the Manapouri-Tiwai nexus has been a machine for turning Fiordland rain into export dollars - lately, about $1 billion a year.

Comalco does not own Manapouri, however; Meridian Energy does. Comalco buys electricity from Meridian at a price linked to the average spot price over the previous year.

That price has been climbing and the power-supply contract runs out in 2012.

Early talks on renegotiating it have already begun.

But, as an alternative, Comalco says it is seriously examining the possibility of building its own power station in Southland, burning local lignite or imported coal, to supply Tiwai.

On the surface, it is a crazy idea.

After all, electricity represents about half of the smelter's operating costs.

The Kyoto Protocol will soon come into force. It is all about moving towards having energy prices which tell the environmental truth and the truth is that high-carbon fuels - such as those Comalco is considering - are the most climate-damaging way of generating electricity.

How, then, can that be a viable basis for ensuring the smelter stays in business for another 25 years?

But a closer look tells a different story, and reveals much about the complex interaction between energy policy and climate-change policy.

Comalco is in the preliminary phase of negotiating a greenhouse agreement with the Government's Climate Change Office.

Negotiated greenhouse agreements (NGAs) are an option for large emitters whose international competitiveness would be at risk if they were subject to the carbon tax the Government plans to introduce in 2007.

To get a full or partial exemption from the tax, the emitter has to agree with the Government on a pathway that would take it to world's best practice in greenhouse-gas emissions for comparable plants.

Agreeing on the comparator group, the source of the relevant benchmarks, is crucial. Professor Barry Welch, the independent expert appointed to advise the Climate Change Office, has identified 12 smelters with similar technology and of a similar age to Tiwai.

Consuming carbon anodes is an essential part of the chemistry of the smelting process. The Tiwai smelter's own emissions of greenhouse gases have fallen 41 per cent since 1990 (Kyoto's baseline year) and by 50 per cent for every tonne of metal produced.

That may give it limited scope for further reductions.

"We would expect to be close to world's best practice for that cohort [of comparable smelters] but we will have to wait and see," said Comalco chief operating officer Tom Campbell.

But on-site emissions are only one dimension of Comalco's greenhouse problem. The other is much harder to quantify.

Without an NGA, it would be exposed to the impact of the coming carbon tax on wholesale electricity prices. The spot price is the price of the most expensive power needed to satisfy demand in any half-hour period. If that is from a gas-fired plant, or even worse a coal-fired one, which has to recover its carbon tax, it would flow through to the price Comalco pays for what is already its most expensive input.

"The Government is aware of the issue and trying to work through proposals on how it might deal with that. The need to do that is well recognised," Campbell said.

This would seem to raise a credibility issue when the company talks of a dedicated coal or lignite-fired power station. If a carbon tax intermediated and, to some degree, diluted through the wholesale electricity market would put Comalco's international competitiveness at risk, surely a dedicated power station burning lignite or coal would be worse?

"I accept the point," Campbell said, "but there is no other fuel for us to consider. How that fits with a carbon tax or how that fits with an NGA at this point remains to be seen."

New Zealand was heading to a supply/demand crunch in electricity.

"We would much rather be part of a solution to that than part of the problem, as we are now seen. And, if we are to be part of the solution, that means we have to be involved in building some new generation. That might involve some wind generation down at Tiwai but realistically, that can only involve less than a third of our requirements. For the other two-thirds, the only possibility in Southland is thermal."

A dedicated power station meeting all of the smelter's load would free a lot of power for the rest of us. It consumes about 15 per cent of New Zealand's electricity output.

So the first question in terms of whether such a power station makes environmental sense is: what would happen otherwise?

Would it mean more thermal generation elsewhere?

Contrary to the general view, the greenhouse emissions associated with burning lignite near the mine would be comparable with imported black coal, Campbell argued. Southland lignite has a higher calorific value or energy content than the brown coals that provide most of Victoria's electricity. They are drier, too.

Factor in the methane produced from black coal mines and the energy required to transport coal and it is a wash.

Southland lignite is a plentiful resource. While there are hopes of finding new natural gas fields, they have not been found yet. We know the lignite is there.

And, unlike imported liquefied natural gas, its price would not be subject to the vagaries of an international commodity market - in which New Zealand would be a minnow - or to a volatile exchange rate.

Then there is the "leakage" argument. If the smelter were to close, the demand for the aluminium it produces would not disappear. It would be met by smelters somewhere else, such as China.

During the past three years, the growth in aluminium smelting in China has been greater than all the smelting capacity in Australia and New Zealand, and it is powered by coal-fired power stations.

Smelters in Australasia are the most energy efficient in the world. Since 1990, Comalco has been able to reduce the amount of electricity required to produce a kilogram of metal by about 8 per cent.

"The risk of leakage is the premise that underlies the policy of negotiated greenhouse agreements. The Government does not want to lose major industries and it is even more insane to lose major industries if the result is an increase in global emissions."

Although a lot of energy is required to produce the metal, a lot may also be saved by using it in preference to heavier alternatives.

Vehicle manufacturers are using more of it to take advantage of its favourable strength-to-weight ratio in order to reduce fuel consumption.

"For every 100kg replaced in a car, the savings in fuel efficiency will reduce its emissions over the life of the car by about two tonnes of carbon dioxide - even allowing for the higher emissions involved in the smelting stage," Campbell said.

"That may not sound much but there are many millions of cars in the world."

All of this amounts to a prima facie case not to dismiss the Comalco-lignite option out of hand.

"Carbon tax is an extremely complicating factor if we do go down this path of self-generation. Clearly, it is something we need to talk to talk to the Government about," Campbell said.

"But New Zealand needs new generation someplace."

Southland might be the best place to build that generation.

"The smelter is a $1 billion export industry. I would be surprised if the country would like that to go away."