How Tīwai Point aluminium smelter just became NZ’s biggest battery

The NZAS smelter at Tiwai Point, in Southland. Photo / Supplied

The future of the Tīwai Point aluminium smelter has been assured for two decades after its owner, NZAS, signed a 20-year contract with its power suppliers.

The agreement - which took 18 months to negotiate - includes a “demand response” deal to make more electricity available for the country when it may be required in times of high demand.

By NZAS agreeing to cut back production when the system is stretched, Tīwai - which consumes about 12 per cent of New Zealand’s power supply - has become its biggest battery.

Meridian, which with Contact Energy and Mercury supplies the plant, said the agreement took many years of hard work to negotiate.

A sword of Damocles has been hanging over the Southland smelter for the past four years, creating uncertainty for Southland, its economy and the national power grid.

“It’s a good day for New Zealand and a good day for the globe as we continue to produce green aluminium in this country,” Meridian chief executive Neal Barclay said.

The smelter’s majority owner, the Ango-Australian mining giant Rio Tinto, has a reputation for playing hardball when it comes to negotiating deals for its power-hungry plants around the world.

“We have seen a dramatic change in attitude from NZAS and Rio Tinto, and that’s been very pleasing,” Barclay said.

The announcement saw Meridian, Contact Energy and Mercury’s share prices rally, and gave the share market a boost.

Harbour Asset Management portfolio manager Shane Solly said the deal provides greater cashflow certainty for the power companies.

It would also support generators’ capital expenditure decisions, along with their earnings and dividend growth potential.

“It’s an unequivocally positive outcome for NZ Incorporated, Southland and investors in New Zealand electricity generators/retailers – which is a large proportion of the New Zealand population because most KiwiSaver funds invest in these shares,” he said.

Yesterday’s announcement has been a long time coming for Tīwai , which employs 738 people and injects an estimated $400 million into the Southand economy a year.

Meridian, which runs the nearby Manapouri scheme, is the main power supplier for the plant, followed by Contact Energy and Mercury.

“Over the last couple of years we have put in a lot of effort and, to be fair they (NZAS) have done the heavy lifting- managing the arrangement not just ourselves but also with the other generators and key stakeholders,” Barclay said.

The more than half-century-old plant’s future came into sharper focus when NZAS cancelled its contract in 2020.

Meridian then managed to extend that to the end of 2024.

“Now the sector can push for development of renewable energy in particular with a much higher degree of confidence,” Barclay told the Herald.

There are already around $3 billion worth of renewable energy projects in New Zealand under way, with Meridian responsible for about half of that.

Barclay said the announcement meant more certainty for future projects as New Zealand heads towards its goal of decarbonising in 2050.

The national grid is mostly powered by hydro stations, but the system still heavily relies on coal and gas-powered generation for backup in times of drought.

“It means that we can continue to build renewables and rely less on thermal fuels like coal and gas during those dry periods,” he said.

Every megawatt that the smelter does not use in times of low lake levels means a megawatt of coal and gas that the country does not have to burn.

Details of the deal were confidential.

Neal Barclay of Meridian Energy. Photo / Supplied

“What I can say is that the pricing is fair,” Barclay said.

“It will underpin a sustainable smelter for the next 20 years.

“It will provide Meridian shareholders a reasonable return, but I think it’s fair in the context of what other users of electricity pay for power now in this country,” he said.

Under the terms of the deal, Meridian will pay an annual fee to NZAS for the right to ask the smelter to curtail production.

When NZAS is called on to cut back, it will get paid for every megawatt it does not use.

Negations had four sticking points.

The first was the term of any agreement.

“We could not continue to live with the one-year termination clause. That was always going to end in tears as it did in 2020, so the commitment of the smelter to a 20-year term was really quite a breakthrough.”

There are term clauses around the 10-year mark, but the nature of provision means that it can’t be used as a negotiating ploy when it comes to renegotiating contracts.

“The second was we needed the smelter to understand that they needed to work more in sync with the whole sector, and dry-year risk was the main area.

“It’s a big issue that we needed to manage and they have come to the party very strongly in this respect,” Barclay said.

The third point was remediation of the site at Tīwai and the fourth was the actual power price.

The Tīwai smelter will make up to 185 megawatts (MW) of electricity available to the national grid in times of severe shortage as a result of a new set of demand response contracts concluded with energy generators.

This is the equivalent of about 20 to 25 per cent of the energy which the former Lake Onslow pumped hydro project was modelled to be required to have produced on average.

“As a very large user of electricity, NZAS recognises the impact we have on the demand for electricity in New Zealand,” chief executive Chris Blenkiron said.

“Making up to a third of our supply available to help New Zealand is something we are happy to do to make sure that we play our part in the wider energy sector and help to keep the lights on,” he said.

Blenkiron said Tīwai had become New Zealand’s largest battery.

“When our demand response is called on, it effectively means New Zealand will have to burn less coal at Huntly, ultimately reducing New Zealand’s carbon emissions,” he said.

“We believe this is one of the largest single site, long duration demand response agreements, in terms of percentage of national grid, anywhere in the world.”

Blenkiron said the potential demand response of up to 185MW was about the equivalent of the energy supply needed to power nearly a quarter of a million households.

Key elements of the deal are:

• Twenty-year power arrangements through three energy generators, replacing the single contract with Meridian Energy.

• A portfolio of contracts with Meridian Energy, Contact Energy and Mercury Energy will provide a volume of 572 MW required to run the three potlines at the smelter.

• Separate contracts with Meridian and Contact will enable up to 185 MW of dry-year demand response to be made available.

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