The owners of the aluminium smelter at Tiwai Pt in Southland have long complained that the way transmission pricing is calculated treats the operation unfairly. Photo / Supplied
The owners of the aluminium smelter at Tiwai Pt in Southland have long complained that the way transmission pricing is calculated treats the operation unfairly. Photo / Supplied
Rio Tinto's announcement that it was doing a review that could lead to the closure of the Tiwai Pt aluminium smelter sparked alarm.
Well over a billion dollars was wiped off the market value of electricity generators in the hours following, as investors considered the prospect of a sharp dropin demand.
Invercargill MP Sarah Dowie warned that Rio Tinto's announcement, combined with other troubles hitting the region meant Southland "will be destroyed".
Meridian Energy, which supplies Tiwai Pt from the nearby Manapouri Power Station - a large hydro station built to supply the smelter - pointed out that New Zealand's largest electricity consumer also enjoyed the lowest electricity price.
Meridian chief executive Neal Barclay said that the announcement will not have been made lightly given the impact on staff and the Southland community, but closing Tiwai was not a simple proposition.
"Rio Tinto is a huge global mining company, a major emitter [of pollution], that's making a lot of noise about cleaning up its operations," Barclay said.
"It would be a major call for them to close a smelter that produces some of the cleanest and purist aluminium globally."
Barclay said the fact that Tiwai Pt is fed entirely by renewable electricity - most are fed in large part by electricity from coal - meant that he believed Tiwai Pt's competitive position "will only improve" as the world starts to price carbon emissions.
Meridian pointed to Rio Tinto's estimate that closing the smelter could then require a $256 million clean-up.
"I'm not saying they won't do it, but they do have a few headwinds in terms of that decision," Barclay said.
Despite warning that it will not "bend over and write a cheque" to Rio Tinto, or "take one for the team" by slashing prices for the sake of the wider generation sector, Barclay said there were areas where Meridian was willing to negotiate.
Rio Tinto's news prompted cynicism, with suggestions that seeking periodic bailouts was strategic.
In 2013, the National-led Government was sufficiently concerned about the viability of the smelter that it wrote the company a cheque for $30m.
At the time, Finance Minister Bill English made it clear that Rio Tinto should not come back for more.
Energy Minister Megan Woods made it clear that the position of the Coalition was the same as it was under National.
"There will be no more financial assistance from taxpayers for Rio Tinto," Woods said less than an hour after news broke.
As straightforward as that sounds, writing a cheque is not the only thing the Government could be asked to do.
Energy Minister Megan Woods. Photo / File
Representatives from Rio Tinto's operations, who have been refusing to answer questions on the issue for the past fortnight, have already met Woods and Meridian in recent weeks.
It appears the smelter has been arguing that not only does it need cheaper electricity, it needs relief on transmission pricing - the costs of running and operating the national electricity grid - which it has long argued treats it unfairly.
Despite getting electricity from Manapouri, a short distance away, New Zealand Aluminium Smelters has been charged transmission costs in some years of more than $70m, more than the book value of the lines that connect it to its principal supply.
This is in large part because when Transpower upgrades parts of the grid, Tiwai pays its share as a proportion of its electricity use.
To the smelter, this is grossly unfair. Most of the upgrades over the past decade have been in the North Island and give absolutely no benefit to the smelter.
Barclay said that everyone acknowledged that Tiwai was paying an unfair share of the upgrades.
One source claimed that an implicit part of the 2013 bailout was that the smelter was treated unfairly on transmission prices.
The current review of transmission pricing, still under way, proposes some relief for Tiwai, but much of this would not come until 2024.
For the time being, the Government is likely to allow the review to play out.
But it has not ruled out issuing a Government Policy Statement, which could push the electricity regulator to give regard to the impact on pricing for New Zealand's largest user.
The Transmission Pricing Review expected to be concluded early next year, around the same time as Rio Tinto is expected to complete its strategic review of its New Zealand operations.
Just months out from the next election, the Government could come under immense pressure to intervene, rather than risk being seen to make a decision that could cost thousands of jobs in a provincial economy.
