Tiwai Point: Ratings agency S&P says deal a boon for New Zealand’s power generators

New Zealand Aluminium Smelters, Tiwai Point smelter at Bluff.

Ratings agency S&P Global says a decision by New Zealand Aluminium Smelters (NZAS) to sign long-term electricity supply agreements is a boon for the country’s power generators.

NZAS – majority owned by mining giant Rio Tinto – signed the deal with its suppliers Meridian, Contact and Mercury last week.

The deal includes a “demand response” clause, which means the power-hungry Tiwai Point plant in Southland can curtail production when the national power grid is stretched.

“The decision also provides certainty for industry participants for additional renewable investment,” Alexander Dunn, a credit analyst at S&P Global, said in a report.

“The continued operation of the smelter gives more time for the sector to improve transmission connections in a progressive manner.”

The previous supply contract was due to run out at the end of this year.

“NZAS’s decision to continue operations is consistent with our base case forecasts for rated issuers in the power sector,” the S&P report said.

“We expect all necessary approvals to be in place in the next few months.

“The result of the NZAS negotiation is by far the longest and [most] stable outcome for the electricity sector in some time.”

Contract agreements of up to 20 years to December 31, 2044, with Meridian, Contact and Mercury, would provide “solid and long-term demand visibility for the sector”, the S&P report said.

“We also believe the demand response provisions in the contracts will provide better dry year risk management for the market as a whole.”

S&P noted that NZAS currently constitutes about 12 per cent of New Zealand’s total demand load.

“With demand certainty, we anticipate industry participants will move to revisit and potentially amend capital expenditure [capex] plans.

“This could see an acceleration in commitments to new renewable projects as part of New Zealand’s electrification and broaden its decarbonisation goals.

“That said, we would expect rated issuers to manage any acceleration of capex prudently and within their current rating tolerances, particularly in light of increasing project costs.”

The share prices of all three generators rallied sharply on Friday on the back of the news.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.