New Zealand was always a odd place to have a aluminium smelter. The only natural advantage we had was a untapped hydroelectricity capacity at the bottom of the world. Thousands of kilometers from raw material sources. Tens of thousands of kilometers from the major markets.
Over time we developed our internal markets and other potential uses for that power. But not much for aluminium being produced in our deep south. Which means that as producers further north closer to customers developed the power resources, the end product became relatively cheaper and the margins for above production costs in NZ got tighter.
From BusinessDesk “Window still open for Tiwai Point – NZAS boss” (paywalled)
Controlling shareholder Rio Tinto today said it has given notice to terminate its contract with electricity supplier Meridian Energy, which ends at the end of August next year. That was the outcome of a nine-month strategic review of the business, which was meant to have been wrapped up at the end of March, but dragged on when the covid-19 pandemic turned the world on its head.
This time it looks pretty real. There was a strategic review by the NZAS and their owners after a 46 million dollar loss last year. But the problem is structural inside the market place.
The smelter was optimistic about the outlook in 2018 when it reopened its fourth pot line after a six-year spell and took on more staff in an effort to improve the viability of the operation, but has since struggled with a combination of low aluminium prices and high prices for alumina, a key input to the smelting process.
At the same time, it complained about the cost of energy, including transmission pricing. While the Electricity Authority’s recent decision for Transpower to adopt a user-pays model on the charges to access the national grid operator, shifting about $10 million of costs to other users, NZAS said that’s not enough to keep the operation viable.
The ANZ commodity price index this week showed aluminium prices rose 6.4 percent in June, but were still 10.9 percent lower than the prior year. And while economist Susan Kilsby said aluminium pricing was on an upward trend for now, she noted strong Chinese production will lead to increased stock levels in an environment of relatively subdued demand and could lead to those gains faltering later in the year.
It is extremely hard to see how doing anything with electricity prices will help. It will just make supporting the smelter further distort our own electricity market, and doesn’t seem likely to stop an inevitable closure. And New Zealand as a whole could use more available usable generating capacity. The smelter uses more than 13% of our total generating capacity.
The index price for residential power has more than doubled in real terms since 1999, and shows no signs of reducing its climb. For all of the excuses used over the years with the transfer pricing between industry and residential, the transmission issues, and so forth – the fact remains that the unit cost of power in NZ is steadily rising. This is reflected in the final residential power most strongly because that is a purely market driven.
That reflects that while our population is rising, especially over the last decade…
Our generating capacity mix has changed, but our overall capacity has not.
Those power prices can only come down if more generating capacity is either added, or is released to more productive uses. Of course this will probably mean more investment into transmission lines taking power to Canterbury.
These days the inter island power linkage is a two way process. As an overview…
The HVDC link provides North Island consumers with access to the South Island’s large hydro generation capacity, which may be important for the North Island during peak winter periods. For South Island consumers, the HVDC link provides access to the North Island’s thermal generation capacity, which is important for the South Island during dry periods. Without the HVDC link, more generation would be needed in both the North and South Islands. In addition, the HVDC link is essential for the electricity market, as it allows generators in the North and South Islands to compete, putting downward pressure on prices and minimising the need to invest in costly new generating stations. The HVDC link also plays an important part in allowing renewable energy sources to be managed between the two islands.wikpedia
Freeing up the low cost hydro power generation to reduce the demand spikes in the whole of NZ electricity market should reduce the price spikes that are currently pushing the prices up in NZ to levels that are well above the OECD averages and costing the country as a whole very heavily.
Once the immediate issue has been solved, then we can have a look at why there is a market distortion that prevents the timely addition of capacity with the increase of population and economic growth. The ever increasing cost of electricity in a country endowed with potential capacity is a major productivity drain. So far the experiment of the deregulation of electricity supply in NZ looks more like an excuse to take profits from scarcity rather than something that fuels our economy.
The only real issue with the smelter leaving is how to soften the economic blow to Invercargill, Bluff and Southland as their economy restructures..