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The opportunity cost

Written By: - Date published: 4:33 pm, August 14th, 2013 - 32 comments
Categories: assets, energy, jobs - Tags:

National spent $30m of our money to save (some of) the 800 jobs at Tiwai Point (for an extra year). People have reasonably pointed out that’s the a lot of money for not much – especially when government agencies are routinely destroying jobs by sending work overseas over contract prices that save far less. But what about the broader picture: did the Nats consider the opportunity cost?

Let’s say Rio Tinto didn’t get its paper bag full of our money. Let’s say it then decided to close Tiwai Point as soon as possible (about 2 years under the old contract). That would obviously mean large job losses in Bluff and Invercargill. It would also mean that the transmission lines would be installed so that all Manapouri’s power could flow into the national grid.

Once Tiwai closes, the cheapest power in the country would flood the market (Tiwai currently demands about 14% of our total electricity but at the lowest demand periods, it’s closer to a third). The expensive fossil fuel baseload plants like Huntly would close. Because the current market power price is set by the price of the most expensive unit and because most of our power is quite cheap apart from that fossil fuel shit, it would mean a dramatic reduction in wholesale electricity prices. By the time that flows into retail and commercial prices, you would expect it to be on the order of a 10-20% reduction.

Consider that the country currently spends nearly $6 billion a year on electricity (and Tiwai only $250m of that despite consuming 1/6th of the power). Knock 10% off the price of power, effectively what NZ Power aims to do, and you save power consumers about $600m a year. That’s $600m that businesses can spend on plant and employing people rather than on electricity, and that households can spend on other things or invest in businesses.

And, as a nice bonus, you’ve turned off the most greenhouse polluting power stations and the smelter, which is also a major greenhouse polluter.

So, what does that all add up to? How many jobs get created in the wider economy if Tiwai closes? How much does households’ health benefit from cheaper power? These are all beyond my ability to calculate but they’re the kind of considerations you damn well hope the Government took into account before it cut a cheque for $30m.

Unfortunately, I suspect they didn’t work up the opportunity cost to the country of not caving to Tiwai’s blackmail. Why? Because the country’s interests don’t enter into it. For National, this was all about putting a band-aid in place so the Meridian sale could go ahead – ‘stabilising the electricity market’ Bill English called it without mentioning he was stabilising electricity prices higher than they would otherwise be.

32 comments on “The opportunity cost”

  1. fender 1

    That’s it in a nutshell really. National have nothing but contempt for “mum and dad”.

    • fender 1.1

      It’s a wonder there aren’t rules around artificially influencing the share price just before floating them.

      • The problem is that rules would have to be set by a prior government and thus unless they were entrenched they wouldn’t have any real effect to bind future governments. The best way to bind a government on this would actually be to put it in a trade deal, ironically, but those can still be broken or amended. Even a broad agreement in the UN around these things doesn’t really bind governments from this sort of conflict of interest or corruption, to be honest.

  2. Tamati 2

    Common sense would have been to pay $37,500 (30m/800,000) out to each of the redundant employees. (Could exclude some of the higher paid senior management.)

    • Jenny 2.1

      That $30million of our money has been given to this $billion multinational company, with no sign it will ever be returned to this country. Money that rightly belongs to us. And the smelter will close anyway in 2017. Making 800 workers redundant.

      There is one way that money could come back to New Zealanders.

      An immediate union drive should be launched on the what I understand to be a mostly non-union site.

      The selling point will be that on getting a majority of the 800 workers into the union. That the union promises to start an industrial campaign for a redundancy package no less than the $30million gifted by us to their boss be used to go on top of whatever redundancy package, (if any) they may have already.

      Fair, sensible, achievable.

  3. Jared 3

    I somewhat think you are underestimating the complexity and length of time it would take to upgrade the Cook Strait DC link, they are in the process of upgrading it at the moment and it still only provides power for the Wellington region largely. It would require upgrading most of the North Islands grid (and a number of new inter island cables), but I guess that doesnt make for a good story right?

    [actually, power usually flows North to South these days and the inter-island flows are much smaller than they used to be because of the big factory closures in the Nth Island, new Nth Island generation, and increased demand from dairy and irrigation in the Sth Island. Closing Tiwai would turn that around to the traditional South to North flow, but the Meridian and Transpower bosses have said it’s nothing the system can’t handle – the only major new investment would be connecting Manapouri to Benmore. JH]

    • Molly 3.1

      It makes a good place to start. Especially given the lack of movement on climate change and resilience planning for NZ.

      Limited thinking and no investigation along these lines when making these one-off spending decisions is going to cost NZ more in the long-term. James is right.

    • Satty 3.2

      The new link HVDC pole 3 is already commissioned:
      New HVDC pole 3 commissioned

      I don’t think there are any major further enhancement planed, apart from new cable for pole 2 to add a couple of hundred MW to the existing 1,000 MW capacity.

  4. tricledrown 4

    Tamati what about the $476 million that meridian are handing over to Rio Tinto robbing NZ taxpayers of dividends and lowering the value of meridian !

  5. Plan B 5

    or we could cut the cable and all that power could stay in the south.
    in the south we need cheap electricity , insulated homes because it is simply much colder
    also cheap power will bring jobs
    so please do not improve the cook straight cable on our account

  6. tricledrown 6

    Transpower is already upgrading the national grid to cope with increased demand

  7. tracey 7

    Did I hear a report recently about moves to tax or charge for sunlight to get something from those going solar. Might not have been nz… might have dreamt it

    • Lan 7.1

      “Sunlight captured is Natural capital”! Consumers can value that, but this government does not believe in the idea of Natural Capital so don’t fret over taxes. But one can put a proper taxable economic value on discounted power donated to Tiwai from hydro-over the years. What tax has been paid? Just today similar economic sums include opportunity costs of coal in ground in Huntly (90+more layoffs) apparently now to be replaced with “cheaper” coal from Indonesia; or that to be obtained from the free-for-all big hole (just like in Australia) dug in the Denniston Plateau by a WEST AUSTRALIAN COMPANY – also claimed more “cost effective” and without tunnels and associated risks of explosions etc. Such smart “economics” skills in this resource allocation? Or not. Kiwi electrician killed in what sounds like poor isolated work conditions in a WEST AUSTRALIAN MINE today – went for the big pay too from a good job in Auckland. Hope work conditions are better in the Denniston mucking up our 100% pure Kiwi conservation land.

  8. Ad 8

    - Destroy Bluff and much of Invercargill
    – Snuff out what remains of Huntly
    – For the chance that jobs might be increased elsewhere on something else.
    And this in the month that the National government is sucking hundreds of jobs out of Dunedin (Hillside, NZPost, AgResearch, Health etc), killed the Solid Energy plant for lignite, and is in fact having trouble with the only industry in Southland that will get them into sustained economic recovery in any reasonable horizon: dairy.

    Surely only Aucklanders and Treasury wonks talk out loud like this?

    Why not actually discuss an economic recovery plan for Otago-Southland, not sounding off like some seriously cynical shit?

    • Molly 8.1

      Detroit had the same attitude about maintaining their car industry jobs at all costs. Failure to look ahead meant more pain for all involved in the end.

      Looking ahead, and talking about resiliency includes discussing how the impact can be minimised, and how jobs and communities can transition.

      • Ad 8.1.1

        Just spell that out then. As if Huntly or Bluff or Invercargill or Westport aren’t a whisker away from Detroit already. Unbelievable.
        Spell out where all these replacement jobs come from. Preach it loud to the unemployment lines that result.

        I don’t care what term you have for it.

        Seriously the people who would put Southland’s jobs and many more on a pyre of vanity that thinks electricity prices will ever ever go down rather than actually make happen a real plan – are the worst and most cowardly armchair doodlers.

        • Jenny 8.1.1.1

          As if Huntly or Bluff or Invercargill or Westport aren’t a whisker away from Detroit already.

          ad

          Indeed. The extractive industries have done little or nothing for these places. Huntly particularly. Despite hosting three large coal mines and a coal fired power station Huntly has been deemed a WINZ black spot riddled with unemployment poverty and crime and underdevelopment. Apart from wages. None of the coal industry’s money has gone to this community.

        • IrishBill 8.1.1.2

          Last year WWF commissioned BERL to look at shifting Southland to a low carbon economy: http://www.wwf.org.nz/?9301/New-economic-report

          It’s not comprehensive but it shows there’s already a good foundation for a good regional economy without the smelter. The key will be transitioning it properly rather than just waiting for the smelter to leave and then having to drag the economy out of a hole over a period of years.

          • Ad 8.1.1.2.1

            Helpful link thank you.

            It’s a report that recommends growing nuts, organic farm produce, and pine trees for a lower carbon future. Which is admirable as a narrow goal.

            Manages to avoid discussing the only industry likely to get the south out of trouble, and its the only major industry with real value added potential: dairy.

            • Draco T Bastard 8.1.1.2.1.1

              Dairy, as it’s presently configured, is unsustainable. You don’t get yourself out of a hole by digging deeper.

              • Ad

                Agreed if dairy remains in its predominantly commodity trade mode and rivers remain under-regulated or policed. It won’t.

                But sustainability is not the only measure of success. There are others such as:
                – Are there any retail shops left?
                – Will my kids stay or even return here?
                – How many years will it take me to get a house deposit together?
                – Is the regional tax base getting better, or worse?
                – How many salaries over $100,000 are there per capita in the region?

                Again, I don’t have to like it, but the dairy industry is the only industry with chance of getting affirmative answers to any of those, and is the only likely saviour of Southland.

                What does one do with a smelter and plant nearly 1km long? What would Jim Anderton do?

                • Colonial Viper

                  Welcome to capitalism. As a political economy it has few peers.

                  Where our natural world is turned into a resource and commodity to be transformed into cowshit

                  In exchange for little electronic increments to little electronic bank accounts.

  9. fambo 9

    “Opportunity cost” is a far too challenging economic concept for this government. Its basic economic model is 1980s style asset stripping.

  10. Slowly 10

    Has anyone thought of the exported manufacturing jobs that might return , if the excess Electricity was supplied to them at a competitive rate while recreating work for NZers.

  11. vto 11

    Essentially, it costs the country to have the aluminium smelter here.

  12. Bearded Git 12

    They didn’t give Rio Tinto a cheque for $30 million. Between them, the government and Meridian gave RT a cheque for at least $100 million when the renegotiated power price (back to the price of the previous contract) is taken into account.

    We will never know how much the reduced electricity price cost us because Meridian refuse to reveal this. I don’t think state owned companies should be allowed to hide behind “commercial sensitivity” in cases like this where they are effectively doling out vast amounts of the New Zealand public’s cash to multinationals.

    • Bearded Git 12.1

      This link from the Dom Post today helps to explain my post above and explains National’s agenda, as if the entire nation hadn’t already worked this out!

      http://www.stuff.co.nz/dominion-post/business/9039551/Government-agenda-drove-Tiwai-payout

    • Draco T Bastard 12.2

      I don’t think state owned companies should be allowed to hide behind “commercial sensitivity” in cases like this where they are effectively doling out vast amounts of the New Zealand public’s cash to multinationals.

      Commercial Sensitivity should not exist when the contract is effectively between the people of NZ and a business because the people of NZ need to know the details to make an informed decision.

  13. Tracey 13

    Thanks for the link bearded one.

  14. tricledrown 14

    Ad hoc policies why can’t every region get the same treatment.
    Another broken promise Shonkey promised Hey wouldn’t
    be picking winners Hey would leave it to the markets.
    Well he’s keept his promise he’s only been backing loosers.
    SCF Tiwae Sky city

    • Ad 14.1

      If different regions did not have different needs there would be no need for regional economic development at all.

      Did you know that only Auckland, Bay of Plenty, Canterbury and Waikato are the main local authority areas with population growth? The rest are static or shrinking and will be foreseeably?

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