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Surplus power and asset sales

Written By: - Date published: 10:03 am, March 28th, 2013 - 55 comments
Categories: Economy - Tags: , , ,

Apparently Meridian Energy are saying that there is unlikely to be a renewal of the Tiwai Point power contract. As the Herald says

The bombshell disclosure has the capacity to upset the government’s plans to partially privatise state-owned electricity company MightyRiverPower.

Since Tiwai Point consumes about a seventh of the power produced by the country and we are already awash with surplus power as National’s plans for significant economic growth seem to always never come to fruition (the reverse does seem to be their area of strength). Not having this contract does rather limit the returns that investors will be able to realize for quite some time from purchasing shares. Which will reduce the share price and the value to the taxpayers (already minimal to negative) from any sale.

Good strategy by the local smelter company and it’s main shareholder Rio Tinto and Sumitomo Chemical Company.  Based on the Chicken Little approach to economic threats displayed by John Key, Steven Joyce, and Gerry Brownlee in the past, the pathetic bootlicking of Warner Bros executives over the Hobbit being a prime example, we can expect them to cave in and to shovel taxpayers dollars in their direction.

The timing makes this an all too familiar scenario for people interested in strategic leverage.

This morning’s announcement to the NZX comes ahead of a select committee appearance this morning by the chair and senior managers of Meridian at the commerce select committee, where it’s expected chief executive Mark Binns will outline more fully the implications of the stalemate.

But news that there may be no new electricity price agreement with New Zealand Aluminium Smelters carries huge implications for the electricity sector, which has struggled to grow in the last five years and would face a massive supply over-hang which could last years, were the smelter to close.

Coincidence. Yeah right… The only real question is in what manner this weak-kneed government will collapse.

Perhaps they should consider that this would be a good time to consider what alternative economic development could do with a surplus of electricity. Or just to look at shutting down some of the older power stations earlier. For instance Huntly power station which ..

The plant, as one of the biggest carbon dioxide greenhouse gas generators of the country,[5] contributing over half of New Zealand’s emissions of greenhouse gases from electricity generation,[10] has repeatedly drawn the ire of environmentalists and has been the focus of associated protests.[3] A 2006 government report outlining future climate change mitigation and energy policies was seen by the operator as a sign that the plant might have to be closed by 2015 under these plans, with around 10 years of design life still remaining. It was also noted that, apart from being difficult to replace as a source of power (due to New Zealand’s annually growing generation demand, especially around Auckland), such a decision would also be uneconomical for the foreseeable future, even if coal prices were to rise.[11]

 

55 comments on “Surplus power and asset sales”

  1. toad 1

    While it would be great to see Huntly shut down, there are considerable transmission infrastructure difficulties to be overcome in getting Manapouri electricity to the North Island.

    Not insurmountable, but still significant.

    • lprent 1.1

      Agreed. However in a long skinny country with significant power generation at one end and most of the population and industry at the other, we’d be better sinking funds into economic development there than into bailing out Rio Tinto’s sale plans. It has been a structural problem forever and putting the smelter down in the deep south was a kludge designed to get around that. The country as a whole reaps very small returns off that power from it’s current usage and the NZAS plant is steadily becoming uncompetitive from a productivity viewpoint.

      There is already a major set of upgrades going on in the transmission system because it is creaking already. Just needs an extension. It’d actually be pretty good as a economic stimulus as well.

      • Draco T Bastard 1.1.1

        The country as a whole reaps very small returns off that power from it’s current usage and the NZAS plant is steadily becoming uncompetitive from a productivity viewpoint.

        An article I read suggested that it had become un-competitive several years ago. That’s why Rio Tinto are trying to sell it.

    • Jenny 1.2

      While it would be great to see Huntly shut down…..

      Toad

      (It is amazing to me, how the Greens now qualify everything they say. Obviously getting ready for “responsible government”. Eager to show big business that they will be “a trusted pair of hands”.)

      Tiwai must be shut down

      The National government are arguing that we have to subsidise the profits of Rio Tinto Zinc (one of the biggest and richest companies in the world) to save jobs. No doubt the Labour opposition will fall for this argument and remain silent. Leaving the National government free to indulge in another piece of monumental corporate welfare, costing the taxpayer $millions.

      When the right start talking about “preserving jobs”, it is code for “conserving corporate profits”. Any jobs resulting, are a side effect.

      Every week we see the Nacts callous concern for jobs.

      …..there are considerable transmission infrastructure difficulties to be overcome in getting Manapouri electricity to the North Island.

      Toad

      There’s your jobs right there.

      Most developed countries are starting to realise that a rationalisation of the power grid is the next big step to making full use of renewables.

      As Lynn properly points out. Shutting down Tiwai, will allow us to shut down the coal fired Huntly Power Station.

      This would see New Zealand well on the way to becoming the first fully zero carbon energy generator. And a beacon for the world.

      The Greens need to have the courage of their convictions.

      If the Green Party are truly sincere in fighting poverty, (rather than just an electoral ploy). Then the Greens should be opposing this proposed piece of corporate welfare that will rob the government’s accounts.

      The Green Party need to come out strongly in opposition to any plans to subsidise the profits of Sumitomo with tax payers money. And openly demand instead, that the smelter be closed.

      Truth in Advertising

  2. Rich 2

    It isn’t a contract renewal. NZ Aluminium are looking to renege on or be released from their existing contract to take power from Meridian, which has several years to run. *If* there is a shareholder guarantee from RTZ/Sumitomo, which there should be, then they will be obliged to either buy the power and resell it, or compensate Meridian for any losses. (It’s quite possible that the government/Meridian was dumb and craven enough to omit such a guarantee, in which case RTZ/Sumitomo will probably just liquidate NZA).

    Even without a transmission upgrade, it should be possible to use Manapouri electricity off-peak in place of North Island generated power, which would conserve Waikato water and enable the retirement of some of the Huntly coal units. Whether this will actually work out in the pseudo-market remains to be seen (it’s to be regretted that Labour did nothing to change the daft pseudo-market system for allocating generation).

  3. China is the largest producer of aluminium in the world. Why would NZ try to keep this smelter open and compete with China.

    • lprent 3.1

      Precisely. The plant down at Tiwai was pretty good at the time it was built and upgraded. But these days the only thing that keeps it productive compared to other plants worldwide is the cheapish power.

      It is a long way away from the users of the product. A long way from the raw materials apart from power. The plant is destined to become more and more obsolete because there is no reason to upgrade it. Cut it now before it stops costing us too much. That was the decision that RioTinto came to in 2011. I think that “NZ Inc” should make that decision too

    • Rich 3.2

      One reasonable argument is that it’s better for the planet as a whole to produce Al from renewable electricity here than coal-derived electricity in China.

      • RJLC 3.2.1

        Interesting point, also interesting that I don’t see anybody disputing it in here.

    • DH 3.3

      “Why would NZ try to keep this smelter open and compete with China.”

      There are commercial reasons. Chinese smelters are overproducing and built up a stockpile of aluminium. The world price has fallen not because of reduced demand but because of oversupply; China is dumping stocks at cost or below. If it was just reduced demand the smelters would have cut back on production and the problem would have disappeared at least 1-2 years ago. It’s not that the Chinese smelters have lower costs either, they pay more for power than Tiwai does,

      Rio Tinto look to be wanting to wait the Chinese smelters out, they can’t keep running at a loss forever. The solar panel industry had the same issues and Suntech have finally just defaulted on some big debts, prices of panels will probably start going up again soon and the Chinese smelters will face the same fate if their competition don’t all close down first.

      I guess it still is a question of whether NZ wants to be involved in a trade war that we don’t really have much of a stake in. We’d be backing Rio Tinto by subsidising them.

    • jim 3.4

      Maggie the grade of allumminium produced at Tiwai is of the highest grade and is in high demand along with one other that i do not think is produced in China.

  4. geoff 4

    Tell the smelter to fuck off, give free power to the citizens. Bullshit capitalism can go fuck itself.
    The whole country is run like a farce, we’re all running around trying to chisel one another to try and get to the top of the heap. What a fucking joke.

  5. clashman 5

    Cue J Key doing a “deal” to keep this “important industry” running and of course to maintain wholesale electricity rates with his pet sale coming up.

  6. Dv 6

    I have just recieved my contact energy dividend. 2% before tax!!!!

    • toad 6.1

      And Contact’s share price took a hit this morning with the uncertainty over Tiwai Point. Buyers of MRP shares beware.

  7. Matthew 7

    According to Twitter, more corporate welfare right on cue !! I bet Key will come out & play the hero for saving the jobs, despite the fact that we the taxpayers might as well be paying their wages.

  8. Draco T Bastard 8

    I/S has a good breakdown of the whole shebang:

    The down-side: no-one will be building new wind-farms for a while. But that does give us time to get policy in place to direct new investment solely towards renewables.

    Obviously the shutdown of Tiwai Point would be bad for Southland. But there’s some silver lining to this cloud. And if it happens we are just going to have to make the best of it.

    Personally, I think closing the plant down would be the best option.

  9. ianmac 9

    I bet there will be a last minute compromise reached with Meridian reducing electricity charges.
    No Minister will be involved of course. No pressure involved. No emails. No Records.
    Sorry. The Agreement when reached is Commercially Sensitive.
    The Outcome will be an Operational Matter.

  10. Jane 10

    I agree that it might to be time to shut Tiwai Point down, maybe come to some sort of deal where they keep going for a few years while the grid gets rearranged to make efficient use of the extra capacity, am sure Tranzpower must have some plans stored away they can dust off. Would give us an increase in base capacity and the room to develop alternatives without the need to build more base capacity.

    The price Tiwai Point gets charged is pretty low isn’t it? So wouldn’t Meridian get a better price selling to the main grid? The extra capacity might drop the current overall retail price (I hope!) but if Meridian can get more than they do now wont that be better for Meridian?

  11. tc 11

    Suspicious timing on an issue that’s largely unchanged for years as the deal sucked when muldoon did it and it’s steadily gone south in the decades since.

    Weigh up the subsidies and you probably could’ve paid the entire workforce from it without the polluting smelter always with it’s hand out.

    This is all about getting MRP cheap as for NACT’s backers and JK’s banksta buddies so the card is played to this effect by the recently installed CEO and ex fletcherman Binns.

    Very clever, the nat’s will probably blame the opposition for ‘talking down’ MRP’s value and they’ll give Rio more money as well so their backers get it both ways.

    The con just rolls on and on and on.

  12. Ad 12

    Hoping for the shutdown of Tiwai Point is pretty callous. That’s several hundred direct jobs lost, a massive knockon effect into the Bluff, Invercargill and more broadly the Southland economy and its unemployment lines. It’s far worse than if Solid Energy were to die.

    Sure it may never come to that and there’s plenty more posturing to come. Who wants to take that risk with hundreds of dinners on tables, or not?

    The economic risk of smelter shutdown is to many hundreds of mortgages and small businesses in a highly fragile rural service economy.

    For the foreseeable future, the alternative would be all those skilled manufacturing jobs, and the employees and their skills, would fly off to Australia. Check out how many have already left in Gore or Westport. Almost 20% of those towns.

    For that kind of risk, that kind of defence of manufacturing, the state really should consider intervention.

    So careful what you wish for.

    • lprent 12.1

      Yeah, and I’m expecting to hear from Lyn when she reads my post. She is from there and worked in the smelter for a while.

      But it is the old issue. NZ put in a massive capital investment when I was a kid to get the smelter. More later on to extend it (I was involved in parts of that in the early 80′s). The intent was originally to help build some heavier industry around the smelter and what it produced. But really the return on it for the country is so low as a nation that we’d have been better off not building it.

      You notice the level of heavy industry in Invercargill? It kind of escaped me when I was down there. The usage of aluminium through the rest of the economy is bare to nothing. But we built not only Manupouri but also the Clyde dam at an immense capital cost to support it. Now it is just another dwindling industry. FFS the tech down there has made a bigger impact on the local economy. There are kids in Invercargill again..

      As much as it pains me to say it, the $40 million + making a travesty of our labour laws for the hobbit gave a better rate of return.

      But what could we do with some serious power surpluses. You know that they locate server farms next to old smelters because that way they can use the old power lines…

      • Ad 12.1.1

        Sure ain’t lost on me that one massive intervention, now largely run its course, would require another at least as big to fix. The worst intervention, I hope you’d agree, would be to do nothing.

        Any party up for the Southland ec dev plan yet? No one should encourage destroying the village to save the village.

        Probably a server farm repeats and extends the existing problem. There is no single solution. But New Zealand should protect its workers, plan for employment continuity, partner regional growth, and strengthen the economy. None in isolation. Agree?

        Redistributing the electricity benefit nationally is treasury-speak. Southland needs a plan not a plug hole.

        • Colonial Viper 12.1.1.1

          Any party up for the Southland ec dev plan yet?

          I think Shadbolt wanted another 0.5M cows down there.

      • Jenny 12.1.2

        I’m expecting to hear from Lyn when she reads my post. She is from there and worked in the smelter for a while.

        LPRENT

        I wouldn’t worry. Because she would know what a dirty filthy job and a vicious anti-union employer the smelter is. As well as trying to screw down the taxpayer they have been trying to screw down their workforce as well.

        These southland workers would be much better employed improving the grid. And help make New Zealand an example to the world.

        Truth in Advertising

    • Draco T Bastard 12.2

      If we had the manufacturing that used up the greater part of what the smelter uses then it would probably be worth keeping but 90% of what it produces is exported. That’s a great example of inefficiency – we import bauxite, smelt it and then export it again.

      Now, I’ve said that we should be doing as much as we can ourselves with our resources. In the case of aluminium that would mean developing the bauxite deposit in Northland and building a new smelter about a tenth of the capacity of Tiwai Point – also possibly in Northland although there may be efficiency gains enough to sail the bauxite down to Te Wai Pounamu. And the whole damn lot of it would be government owned and run as a cooperative.

    • Jenny 12.3

      @Ad

      I sincerely wish for the smelter to close.

      I also sincerely wish that the workers the workers demand and get the best redundancy and retraining package possible.

      This is where any government subsidy should go.

      (Rather that than paying out $millions of taxpayers money to prop up Sumitomo’ profits)

      • Blue 12.3.1

        I think the workers and their families may disagree with you. It’s likely that they would rather keep their jobs. Your concern for their welfare is truly touching.

        • Jenny 12.3.1.1

          So much faux concern for the workers. When the real issue is the benefit to Sumitomo. Blue, where is your concern for the tens of thousands of other workers dumped from their jobs, there livelyhoods taken from them?

          The workers and their families may disagree with me. However. Their best strategy now, if they care for their families, is to fight for the best redundancy agreementn and exit package they can get. Putting faith in Sumitomo to look after their interests will be a very bad bet.

          Meanwhile the climate debt mounts up and it is one all our grandchildren will be paying for the rest of their lives.

  13. feijoa 13

    I remember the protests to try and save Lake Manapouri from the dam
    Has it been worth it?

  14. jimgreen 14

    Jeanette Fitzsimons did a pretty good write up on this scenario last year

    http://www.nzherald.co.nz/energy/news/article.cfm?c_id=37&objectid=10831956

    • lprent 14.1

      That is an excellent article. In fact I want to reprint it because it is exactly what I’m thinking. It is a waste pouring power into te smelter the way that we have been doing.

      Anyone want to send me Jeanette’s email? lprent at primary.geek.nz

  15. Paul Campbell 15

    And ooh look guess who just blinked – of course a pending electricity surplus is just the sort of thing that’s likely to ruin the mighty-river-power float ….. suddenly the Tiwai folks are negotiating directly with the National Party rather than Meridian

    Just think what would happen if Tiwai did shut down …. suddenly we could shut down the coal fired power stations …. we’d be up to out navals in carbon credits …. power prices to ordinary people would drop, especially in the South Island …. local manufacturing industries would be come more competitive

    (and a down side wind energy would stop being viable for a while and we’d stop building it)

    • Draco T Bastard 15.1

      Just think what would happen if Tiwai did shut down …. suddenly we could shut down the coal fired power stations…

      It wouldn’t be suddenly – we’d need to spend a few months building the lines to supply the grid north.

      • Paul Campbell 15.1.1

        Don’t forget that Tiwai itself is is a carbon emitter – every tonne of Al made makes 2.4 tonnes of CO2

        • Draco T Bastard 15.1.1.1

          And how does that removes the need for putting in place the lines to take up the slack as we take down the coal fired stations?

      • Jenny 15.1.2

        We need to spend a few years building a proper dispersed intelligent grid. (with redundancies built in to protect against black swan weather and geologic events.)

        It is called mitigation and future proofing.

        Which political party would support this?

        • Draco T Bastard 15.1.2.1

          The Alliance
          Probably the Greens
          Wouldn’t be surprised if Mana would
          Democrats for Social Credit probably would to

          That’s about it.

  16. gobsmacked 16

    In an interview with Duncan Garner this afternoon, David Shearer appears to be in favour of giving Rio Tinto the cash.

    Q: “So you would be supporting the government on this?” A: “We need to be hands-on on this …”

    However, the entire interview is the usual Shearer waffle (why can’t interviewers stop and say: “Hang on, what does that actually mean?”). So he could be for or against or just a random noise-generator, it’s hard to tell.

    http://www.radiolive.co.nz/Audio.aspx

    Starts at 5.25 pm approx.

  17. geoff 17

    So after 9 hours of work I come home and find that, LPRENT was right on the money, this fucking corrupt National party is going to use taxpayer money to subsidise the smelter’s electricity price. All to protect the mighty river share price when they flog it off.

    http://www.radionz.co.nz/news/national/131495/govt-offers-to-top-up-power-cost-to-tiwai-point-smelter
    Here’s the whole thing:

    The Government is offering to subsidise electricity used by the aluminium smelter at Tiwai Point as state-owned electricity company Meridian Energy and the smelter have failed to reach agreement on electricity prices.

    State-Owned Enterprises Minister Tony Ryall says the Government has been in touch with the smelter’s owner, New Zealand Aluminium Smelters (NZAS), about the matter and is offering a modest amount to bridge the gap.

    “We’re prepared to help in the short to medium term to bridge a very small gap but I want to give you an absolute assurance this Government is not interested in subsidising a multi-national in the long term.”

    Mr Ryall would not give a dollar figure, saying it would be inappropriate to do so.

    Mr Ryall says the smelter company is a very tough negotiator but it does not have an advantage in negotiations.

    The smelter at Tiwai Point, in Southland, is New Zealand’s sole aluminium smelter. It consumes about 15% of electricity generated in New Zealand and exports more than $1 billion of aluminium each year.

    NZAS has been in talks with Meridian since August last year about renegotiating cheaper power prices to cope with a downturn in the aluminium market.

    Meridian told the stock market on Thursday there remained a major gap between it and NZAS on a number of issues which it believed were unlikely to be resolved.

    “We’ve gone to our bottom line,” said Meridian chief executive Mark Binns, “and we haven’t seen sufficient movement to give me confidence that we are going to reach an agreement. As I say, I hope I’m proved wrong.”

    Pacific Aluminium, the majority shareholder in NZAS, quickly responded by saying it believes a deal can be done and said more progress had been made in the past two weeks than in nine months.

    Mr Ryall said earlier the sticking point was longer-term prices.

    Labour Party leader David Shearer says it’s a desperate move, designed to prop up the Government’s partial asset sales programme.

    The Green Party says the Government’s partial asset sales programme has substantially weakened its hand in negotiations about the smelter.

    Green Party co-leader Russel Norman says it’s very clear the smelter company is using asset sales as a bargaining chip.

    Some analysts say a power price deal is crucial to the success of the Government’s partial privatisation plans, because the electricity freed up from the potential closure of the smelter could flood an already flat market.

    NZAS is 80% owned by Pacific Aluminium, which is owned by Rio Tinto. The other 20% of NZAS is owned by Sumitomo Chemical Company.

    • Draco T Bastard 17.1

      Mr Ryall says the smelter company is a very tough negotiator but it does not have an advantage in negotiations.

      Didn’t National say the same thing before negotiating with Warner Bros? And then gave them everything that they wanted plus use of the governmental limos?

      Labour Party leader David Shearer says it’s a desperate move, designed to prop up the Government’s partial asset sales programme.

      Perhaps he’s started reading the blogs?

      • Jenny 17.1.1

        Maybe Russel Norman should too. So far, the Greens have added nothing to this debate.

        Labour’s David Parker has been far more forthright.

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