Government offered to help Rio Tinto build business case for transmission discount

Tiwai Point aluminium smelter. Photo / Supplied

After years of battling in vain to lower its transmission charges for the Tiwai Point aluminium smelter, Rio Tinto appeared to make swift progress after its global head of aluminium flew into Wellington to lobby ministers.

Alfredo Barrios, one of the global mining giant's top executives, travelled from Montreal to meet Finance Minister Grant Robertson and Energy and Resources Minister Megan Woods on December 16.

The following day, Barrios wrote to Robertson and Woods to warn closing the smelter remained "a compelling option", but thanking them for what he took as promise to help build its case for a discount, documents released under the Official Information Act reveal.

"We acknowledge your suggestion … that the best avenue to explore relief from very high transmission prices is via the existing Prudent Discount Policy and look forward to your official confirmation of this," Barrios wrote.

"As we mentioned to you we have explored this option without success in the past and welcome your offer to make the relevant officials and Transpower's leaders available to assist us in building a business case to qualify for a Prudent Discount in order to secure a transmission price which better reflects the service we receive."

Yesterday in Wellington Rio Tinto met with the Electricity Authority (EA) to discuss the possibility of lower transmission charges, in a meeting believed to have also included Transpower, senior energy officials and many of New Zealand's major electricity generators.

The Commerce Commission was said to be aware of the meeting, but did not respond to a request for comment.

The meeting came around a month after the EA announced it now proposed to change a key policy which could potentially save Rio Tinto tens of millions of dollars a year.

Woods said on Thursday that she had made it clear to Barrios that ministers did not have a role in EA decision-making.

She acknowledged a role in the meeting happening, saying "we thought it would be a good idea for them to have a meeting with the regulator".

When Woods responded to Barrios she offered to help set up meetings on the matter, asking for officials to be "kept at arm's length from the design and advice on a potential "uneconomic" project and any matters of commercial confidentiality". Her letter did not acknowledge or dispute any of Barrios' letter.

Rio Tinto said it meets with the regulator frequently. A spokeswoman for the mining company refused to discuss the meeting beyond confirming it was happening.

Woods appeared to believe the meeting was material to Rio Tinto's operations in New Zealand. "This is a meeting that's happening because people need clarity of what is going to happen with the smelter."

Energy and Resources Minister Megan Woods. Photo / File

The Prudent Discount Policy is available to electricity users who can prove they could save money by setting up their own connection to the national grid at a lower cost than it pays in transmission charges to Transpower, the grid operator.

However the discount has never been available to Rio Tinto because it is not considered feasible that the company would ever be able to get permission to duplicate the line from Manapouri, which is situated in the Fiordland National Park, itself part of a World Heritage Site.

In 2016, and again in early 2019, the Electricity Authority rejected extending the rules around the Prudent Discount Policy, despite Rio Tinto's pleas.

But in February, the EA had a change of heart, specifically citing the plight of Rio Tinto, acknowledging that the cost of bypassing the grid in pristine wilderness would be "prohibitive".

This came several months after Rio Tinto warned it was undertaking a strategic review of its New Zealand operation - a near 80 per cent shareholding in the smelter - raising the possibility of closure.

The news kicked off a heavy lobbying effort including repeated public warnings it could close if it did not get tens of millions in annual savings on transmission and electricity costs.

The EA now proposes allowing users to apply for a discount that would reduce charges to the "standalone costs" of supplying its transmission charges.

Opponents of the change immediately warned that providing the discount to Rio Tinto would simply spread the costs to other users, as the cost of operating the transmission network remains the same.

Vector chief executive Simon Mackenzie warned the EA's proposed changes would leave other consumer footing added bills, as a time when a Government-ordered report highlighted the extent of energy hardship in New Zealand.

"We find it intriguing that changes to the prudent discount policy to benefit Rio Tinto are magically being prioritised in EA consultations at a time when Tiwai is undertaking their 'strategic review'."

The long running review of transmission pricing is inherently political. In 2016 and 2017, Winston Peters, then the MP for Northland, repeatedly attacked the EA's earlier proposals which would have required Northland consumers to pay around $10m a year in additional charges.

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Strategic review

The meeting came less than two months after Rio Tinto announced it was launching a strategic review of its New Zealand operations, explicitly raising the prospect of the smelter closing.

Producing highly pure aluminium for specialist uses, the smelter directly employs close to 800 people, while Rio Tinto claims the smelter supports close to 1000 jobs.

Rio Tinto owns just under 80 per cent of the smelter. For years it has complained that it faces among the highest input prices of any of its global smelters in the world, despite being built close to the Manapouri Power Station, which owners Meridian Energy has said is one of the most efficient and profitable generators in the world.

It also complains that the methodology for calculating how the cost of transmission is shared among consumers is unfair, with the smelter situated close to its principal power source, but required to pay for upgrades to the grid in the upper North Island which provide it with little or no benefit.

The mining giant has not been afraid to use its power to extract concessions. During the former National Government's attempts to partially sell three state-owned electricity companies, it pressured the Government for lower electricity and transmission charges.

While Treasury advised the Government to stare the mining company down, ultimately National elected to write Rio Tinto a cheque for around $30m, as it was concerned the uncertainty would cloud the sales process of Meridian, New Zealand's largest electricity generator.

When the review was announced the Government immediately ruled out financial support.

Rio Tinto, in turn, said in November that it does "not want a subsidy from the government" but "a fair price for transmission going forward".

Analysts have argued that the odds of the smelter are closing, due to both improving trends in aluminium pricing, Tiwai Point's electricity coming from renewable sources, and the high cost of remediating the site when it eventually closes.

Forsyth Barr analyst Andrew Harvey-Green said in January that Rio Tinto would arguably be better to pay someone $200 million to take the operation off its hands, rather than close it.

On Monday, New Zealand Aluminium Smelters, the Rio Tinto subsidiary, reported an underlying loss of $46m in 2019, which it blamed on "consistently lower and volatile aluminium prices, coupled with uncompetitive energy prices". In 2018 it reported an underlying profit of $22m.

Closure a 'compelling option'

Barrios', a Spaniard who holds a PhD in energy economics from Cambridge University, spelled out Rio Tinto's position on the viability of the smelter in grim terms.

He said he came to Wellington to outline "the realities behind the strategic review of New Zealand Aluminium Smelter (NZAS) which is facing one of the highest costs of power and transmission paid by a smelter anywhere in the world."

He did not believe the conversations about the smelter were progressing towards a solution which would keep it open. "Ultimately I am concerned that the path to closure is still a compelling option and this would impact jobs and the economy."

Later, he appeared to warn the Government to started preparing now for what would happen if the smelter, which close to 1000 people rely directly on for employment, would close.

"With closure a very real option for our smelter at Tiwai Point, we would also like to request your help regarding the orderly transition for our people, and for Southland. In addition, as NZAS is New Zealand's largest single electricity consumer, closure would also have significant impact on the energy market and policies.

Rio Tinto has raised the possibility of closing the Tiwai Point smelter. Photo / Supplied

"We would welcome your suggestions on the best government agency and officials for us to work with to identify mitigations for the impact on our people, the region and the New Zealand electricity system.

"We note your mention of the 12-month termination clause in our contracts with Meridian but we need to know now from the New Zealand government the best way to phase closure to minimise impacts, as this will be factored in the closure study aspect of the strategic review if we decide to close the asset."

Large parts of the letter, meanwhile, were framed around finding a solution, which Barrios said could benefit both it and other major industries in New Zealand.

"I am also concerned about industry in general in New Zealand and how we can support an energy policy which protects and creates jobs and contributes to the decarbonisation of the economy."

He said smelters in other countries with abundant hydro-generation had competitive electricity costs.

"NZAS in a similarly abundant nation has some of the highest power costs, making it almost impossible for it to compete internationally.

"In countries like Canada and Norway, energy policies support the use of natural resources to create jobs and wealth for its citizens."

"We would welcome a conversation about how this can be achieved in New Zealand while contributing to the decarbonisation of the electricity grid and support of the economy."

Barrios complained that holding different conversations with different parts of the electricity system was not suitable, implying the ministers had offered to broker an event which spanned government, Transpower and generators.

"We can't have this conversation with the grid operator and owner, generators and policy developer separately and welcome your suggestion of facilitating a workshop in the second half of January 2020.

"To have all the decision makers in the same room focused on the future of New Zealand's energy policy and consumption, we believe would be a very positive step."

Treasury disclosed late last year that Meridian had already offered improved terms to Rio Tinto, while the company had already confirmed it was prepared to talk to the smelter about ways in which it could operate in such a way to respond to wider pressures on the grid, such as shedding load when demand was high or supply was constrained.

"Our team at Tiwai Point can certainly contribute expertise on how the smelter can act as a battery in the electricity system by providing firming and power modulation into the grid."