This story was originally published on Newsroom.co.nz and is republished with permission.
The potential closure of Tiwai Point has brought to the fore questions about the price of electricity, and whether the smelter owners are holding 1000 jobs hostage in hopes of a handout or a better deal.
ANALYSIS: Rio Tinto's announcement on Wednesday morning that it was undertaking a "strategic review" of its stake in the Tiwai Point aluminium plant sent stakeholders scrambling on what was already expected to be a busy day, with Auckland's SkyCity Convention Centre on fire for more than 24 hours and a controversial vote on the End of Life Choice Bill set for the late afternoon.
The combination of the fire and Rio Tinto's news caused a 1.5 per cent drop in the S&P/NZX 50.
The smelter is operated by NZAS, 80 per cent owned by Rio Tinto and 20 per cent by Japan's Sumitomo Chemical.
The review, which Rio Tinto stressed would also investigate the possibility of closing the plant, was prompted by losses over the past 12 months and what NZAS says is unreasonably high costs for transmitting electricity.
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Transmission pricing is fees charged to power users that cover the price of transmitting electricity through the grid and the cost of further investing in the grid.
As it stands, these costs are evenly distributed throughout the country, meaning that people all over New Zealand pay for expensive investments in Auckland's energy infrastructure and the price of transmitting electricity from generators in the South Island to North Island hubs like Wellington and Auckland.
The Electricity Authority (EA) has twice tried to reform this system. Its first attempt, in 2015, was disastrous. It came under a barrage of criticism from New Zealand First leader Winston Peters and consumer advocates before TrustPower, the Tauranga-based generator-retailer, found several numerical irregularities in the regulator's cost-benefit analysis.
When the analysis fell apart under further investigation, the EA then took the Australian consultancy firm which had produced the report, Oakley Greenwood, to court to recover the $350,000 or so it had spent.
Its second attempt to fix transmission pricing methodology (TPM) has been more successful. In July, the EA released a watered down version of its 2015 reforms, proposing a user-pays style benefits-based pricing system which would see customers only paying for the investment that benefits them.
However, this time there would be a temporary cap on how much costs could change for industrial users, meaning that Tiwai Point and South Island generators won't see as great a benefit as they would have under the older proposal.
Since Tiwai Point gets its electricity almost entirely from South Island-based Meridian, the tens of millions of dollars it pays in transmission pricing each year don't benefit it at all.
"You look at the money we've been paying for transmission over the last 10 years, we have distributed over $200 million in transmissions over that time for infrastructure that we won't use and don't benefit from," NZAS chief executive Stew Hamilton told Newsroom.
Nonetheless, Hamilton said, the new system won't be in place soon enough to make a difference.
"The current transmission pricing review would see transmission prices reduced from about $50 million a year down by about $11 million a year, but it wouldn't take place until four years time, probably five. For us, that's too little and too late."
Energy Minister Megan Woods on Wednesday said that the TPM review was an independent process being carried out by a regulator and that she wouldn't get involved to speed it up.
While it's hard to argue that NZAS is getting a raw deal on transmission pricing, critics have pointed out that that is at least partially made up for by the deal it gets on the rest of its electricity costs. Meridian provides electricity to Tiwai almost at cost, according to Electric Kiwi CEO Luke Blincoe.
The plant uses about 12 per cent of the electricity consumed in New Zealand every year.
"The smelter is subsidised by New Zealand consumers and I think we should just be really clear about that," Blincoe said. Meridian can afford to offer such a good deal to Tiwai because it ups the price for residential users and wholesale retailers like Electric Kiwi, Blincoe argues.
Hamilton said that NZAS "contributes to New Zealand $450 million a year, which involves electricity and transmission charges. In New Zealand, you've got generators that are making record profits and you've got a smelter that is losing money."
"We're not saying that generators should not be making money but we think that values should be fairly distributed," he said.
Blincoe said that residential users pay around four times more per megawatt hour than Tiwai does.
If Electric Kiwi was offered electricity at the same rates as Tiwai, it would be able to provide "significantly lower prices to consumers than they're seeing now," Blincoe said.
If Rio Tinto were to leave, consumers would see their power bills drop, he said.
"They shouldn't be worried about the threat of Rio Tinto leaving. I just don't think the threat is necessarily a bad thing."
While Woods downplayed the seriousness of Rio Tinto's announcement, Hamilton emphasised that the smelter really was at risk.
"Look, this is a commercial review that's absolutely normal practice for a commercial entity to be undertaking," Woods told reporters.
"The strategic review is quite serious. It's more significant than our previous discussions around the ownership. It's the first time that Rio Tinto has announced a strategic review of its interests in the smelter," Hamilton said.
He said there was a real possibility that Tiwai would close.
Blincoe wasn't worried about that possibility. "The smelter's got to stand on its own two feet and that just needs to play out," he said. "New Zealand energy prices aren't high in global terms so if it's not viable with a subsidised energy price in New Zealand, then you question [why it's subsidised]."
This isn't the first time that Rio Tinto has threatened to pull the plug on Tiwai and the repetitive pattern has lead critics to frame the latest announcement as extortion or hostage-taking. At the moment, it seems the Government won't give in, with Woods refusing to push forward the timeline for the TPM review.
When asked by Newsroom about the likelihood of the Government bailing out the smelter like National did in 2013, she said such action was "highly unlikely".
"The New Zealand Government has had a clear position since 2013 under the Key/English Government that there will be no more financial assistance from taxpayers for Rio Tinto, which is already supported by Meridian for the power it uses. This hasn't changed," she said.
Hamilton emphasised repeatedly to Newsroom that some form of relief was needed, as the smelter had lost money over the past twelve months. However, that wasn't because of increasing transmission prices, but because the global aluminium market had seen a downturn.
"The price of aluminium has reduced by 25 percent over the last 18 months," he said.
"We note Rio Tinto's own assessment is that the fundamentals for the aluminium market are still strong, and should see a return to higher prices over the medium term," Woods said.
Nonetheless, Hamilton insisted that the real culprit was transmission pricing, not the global market for aluminium. "The aluminium market has an impact on our financial position at the moment, but we have to look at what is required to reach [profitability] and one of the significant costs to the smelter is the price of transmission," he said.
Tiwai directly employs 1000 workers in Southland and pays out close to $500m annually between employee salaries and contractor payments.
However, economist Benje Patterson told Newsroom that Invercargill is better prepared to absorb the hit than in previous years.
"For Southland, it would be quite a big blow to the area. Tiwai employs a lot of people who have very good working conditions and much higher than average pay, but also the smelter procures a lot of services from the broader community," he said.
"The one thing that I would say is that Invercargill's going through a period of time where it's actually experienced quite a bit of growth. Quite a lot of people have been moving there, the population has been expanding. So, if Tiwai were to close, the broader backdrop is not as bad as it has been in the past, in previous times that it was suggested that Tiwai might close."
Nonetheless, the threat of loss of jobs in the regions has already garnered political backlash. Winston Peters seemed to gently push back on Woods' refusal to entertain a bailout, saying "I think everyone would agree the Government does have a role in ensuring the heaviest exporting province in the country gets a fair go".
Fletcher Tabuteau, New Zealand First's spokesperson for energy, reiterated this point. "At the end of the day, the smelter is a consumer too, consuming 13 per cent of the country's electricity supply, employing 900 plus Southlanders, and keeping it going is good for New Zealand, in particular the Southland Region," he said.
"I just want to acknowledge how tough this will be for Southland. We're talking about a thousand jobs. For a community like Southland, that's big," National Party leader Simon Bridges said.
National's energy spokesperson, Jonathan Young, joined Bridges in blaming the Government's oil and gas exploration ban. "The Government's poor electricity policies have been the catalyst for these wholesale price increases, with the short-sighted oil and gas ban forcing prices up due to the tightness of our domestic supply of natural gas," Young said.
In addition to concerns around electricity pricing and economic development, the potential closure of Tiwai raises a host of environmental questions. Activists have long worried about the impact Tiwai has on the environment.
Greenpeace energy campaigner Amanda Larsson told Newsroom that "For years, the large power companies have used the threat of Tiwai's closure as an excuse to keep burning coal at Huntly and to delay building new renewable energy like wind and solar".
Hamilton denied this, saying that Tiwai closing would have a negative overall impact on the environment. Because it relies largely on renewable energy, Tiwai produces some of the cleanest aluminium in the world, Hamilton said.
Coal-smelted aluminium from China has a carbon footprint five times larger than that made at Tiwai. Hamilton also said that if Tiwai closed, energy companies would delay or void plans to build more wind farms because of the decreased electricity consumption.
However, environmental activists point out that the heavy consumption of electricity by Tiwai puts increased pressure on the grid, forcing New Zealand to rely more heavily on fossil fuel-generated electricity.
Meridian told stakeholders during a conference call on Wednesday that Rio Tinto would announce the result of its review in February or March of 2020. If it makes a decision to close, the plant's contract with Meridian allows it to do so with just a year's notice.
It could also reduce its electricity usage from 572MW to 400MW with the same amount of notice under the contract.
Meridian said that if it decided to terminate the contract, Rio Tinto would "incur significant remediation costs, recently estimated by NZAS to be in the region of NZ$256 million".
This story was originally published on Newsroom.co.nz and is republished with permission.