Simon Terry: How to retain Tiwai Pt and unlock the power of Manapouri

Rio Tinto has ended the power contact for the Tiwai Pt smelter but still has the right to restore the contract any time in the next six months. Photo / Otago Daily Times

COMMENT

Rio Tinto's latest threat to close its smelter came with the news that it had terminated its power supply contract – something that had "never been done before".

However the company also has the right to 'un-terminate' the power contract any time in the next six months, with the supplier's consent.

So the termination announcement is about a six-month window, rather than the end of the road. The plot line the company's CEO declared on day one is that "the window is still available for a deal to be put on the table".

What Rio Tinto wants in order to keep the smelter open has also been made clear: a third off the power price.

The smelter's power supplier, Meridian, disclosed on day two that it had offered just that under a 10-year deal, and less of a discount for a four-year term.

If Rio Tinto is unwilling to commit for a decade, having got all that's available from Meridian for a shorter time, is it now hoping to secure a top-up from the Government – similar to the $30 million payment it extracted in 2013?

If so, then a textbook play for the company would be to fire up public concern in order to put pressure on the Government just before an election.

Much of the reportage so far has fitted with such a play – framing events more as an inevitable closure than another move in a long chess game that goes back to the 1960s.

So amid fear of a closedown, how can the Government best respond to protect the team of five million?

It would start by looking at how the smelter and the Manapouri power it runs on could be better used.

An ideal would be to have Manapouri power flowing to the highest-value use at any given time – with the smelter acting as a "swing producer" of aluminium.

Its most valuable use now is providing backup power for the grid in times when hydro lake storage runs low. A recent report proposed a new hydro storage scheme costing around $4 billion, on the assumption that Rio Tinto would not release enough Manapouri power at a competitive price. But now that door has been cracked open and the huge cost of the alternative can be better compared.

As new transmission lines under construction go live, they will allow for higher volumes of power to go north for grid backup. And when the lakes are full but aluminium prices are low, they would allow bigger blocks of Manapouri electricity to displace power stations using fossil fuel.

With each block of power that was redirected, smelter production would be adjusted in ways that allowed core aluminium customers to be kept supplied, the smelter workforce could remain a similar size, and carbon dioxide emissions would be significantly reduced.

Instead of a power contract structured to suit a smelter, there could be a contract structured to make the best use of the resources for New Zealand, including through any wind-down.

So what would a government do to give such arrangements the best chance?

A first move would be to take away one of the chess pieces that Rio Tinto should not have on the board during an economic crisis.

The company currently holds undue power through its ability to abandon the Tiwai Point complex and then deny anyone else the right to use those assets.

It hasn't threatened this, but the fact it is possible will be a major barrier to other companies considering how they could rearrange the pieces.

Simon Terry. Photo / supplied

The Government has already recognised a parallel threat: that shares in "our most strategically important assets" could be sold overseas at knockdown prices during a time of crisis.

In response, emergency legislation was enacted under Associate Finance Minister David Parker who said, "we need to minimise the possibility that cornerstone businesses in our productive economy are sold in a way contrary to our national interest".

Cornerstone businesses also deserve to be protected against an owner closing plant down and leaving it idle for strategic reasons, rather than selling it. The risk is higher in this case as Rio Tinto sees an excess of smelting capacity globally, and there are site contamination clean-up costs of $256 million.

While new rules may take some time to develop, the Government can meanwhile make it clear to Rio Tinto that if it lets the contract termination go final early next year, it will not be allowed to hold back a new company from using the smelter's plant at a fair price.

• Simon Terry is executive director for the Sustainability Council of New Zealand.