Treasury says smelter closure would reduce emissions and delay new investment

Closure of the aluminium smelter at Tiwai Point would likely put off investment in new generation and could bring forward the closure of the Huntly Power Station (pictured), Treasury says. Photo / Doug Sherring

Closure of the Tiwai Point aluminium smelter could "significantly" reduce emissions from electricity generation, but Treasury warns the impact on power bills is uncertain.

On October 23, Rio Tinto said it was conducting a strategic review of its New Zealand operations, raising the possibility that the smelter, New Zealand's largest electricity user, could close.

Rio Tinto, the Australian mining giant, owns almost 80 per cent of the smelter. Ahead of the announcement, New Zealand Aluminium Smelters (NZAS) sought to meet with Energy and Resources Minister Megan Woods, as it prepared to push publicly for lower electricity and transmission prices.

Documents released under the Official Information Act show Treasury officials told Woods and Finance Minister Grant Robertson that closure of the smelter would have "significant effects on the national economy", with the potential for more than 1000 job losses and a significant drop in electricity demand.

Treasury expected a fall in wholesale power prices, although mainly in the South Island, because constraints on the transmission network meant it would get the excess electricity demand north.

"Transpower would need to make additional [or] earlier investments in transmission capacity to improve capacity of the lines linking Manapouri and the national grid, upgrades to the HVDC link between the North and South Island, and various other grid upgrades to remove capacity constraints."

The costs "will ultimately be recovered from consumers, and may partly offset a drop in the wholesale electricity price".

In the meantime, additional water would be spilled from hydro stations while wind farms would spend periods spinning without generating electricity.

The move would positive environmental impacts, beyond the emissions caused in the smelting process, as existing electricity generation was shut down.

"An NZAS closure has the potential to significantly reduce greenhouse gas emissions from the electricity sector, particularly to the extent that it is likely to bring forward the expected decommissioning of coal and gas fired generation at Genesis Energy's Huntly station, and potentially Contact Energy's Taranaki Combined Cycle Plant."

While closure could push down wholesale prices and could hasten moves by industrial users to generate process heat from electricity, Treasury suggested that it was not clear whether, or for how long, household consumers would pay less for electricity.

"Whether lower electricity wholesale prices will be passed through in full to consumer retail prices, and how long such a change will persist is uncertain," Treasury wrote, adding that a report from the Ministry of Business, Innovation and Employment was that if the smelter was to close, up to 1000 megawatts of new generation capacity would be delayed for years.

"MBIE's modelling indicated that the main effect of closing the smelter is to materially reduce the need for new generation capacity to be built," from the time the smelter closed.

The impact on Southland's economy would be significant. The smelter employs close to 1000 employees and contractors.

Unemployment in Southland was among the lowest in the country at 3 per cent, meaning many workers would find other jobs, "however replacement jobs may not be of the same skill or salary level" as the smelter.

Beyond the smelter itself it was "very likely" there would be additional redundancies, with NZAS claiming to spend $49m a year "locally".

In 2012, Treasury advised the Government that any request for assistance "should be rejected, because it would result in a significant transfer of value from New Zealanders to ... Rio Tinto shareholders".

This year, the advice was far more measured. While officials acknowledged a fall in aluminium prices over the previous 18 months, the drop was described as "normal [fluctuations] for commodity goods" which "should be managed by the firms engaged in commodities trade".

"Given Rio Tinto is forecasting a recovery in aluminium prices, we suggest that they should be the ones to support NZAS through the period of low prices".

As well as pointing out that NZAS' employee costs were lower in 2018 than they were in 2012, Treasury said the corporate structure of the smelter meant maximum benefit was captured by the owners.

As a tolling operation, NZAS never takes legal ownership of the aluminium, minimising any profits.

"Rio Tinto has the ability to engage in transfer pricing to shift value from NZAS to Rio Tinto, and ensure that the NZAS operation yields low to no profits," Treasury said.

"Effectively this means that Rio Tinto captures a majority of the value-add from NZAS, rather than the national economy."