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Treasury relaxed over potential Tiwai smelter closure

Treasury relaxed over potential Tiwai smelter closure

First published in Energy and Environment on December 5, 2019.

Treasury’s advice to ministers on the potential closure of the Tiwai aluminium smelter is relatively upbeat about the benefits and says closure will have a relatively low economic impact with no significant policy response necessary.

The release of Treasury’s briefing comes as Meridian and Contact put up $10m to do the initial work to move power northwards from Manapouri if the NZ Aluminium Smelter unit was to close.

Treasury told ministers ahead of a meeting between NZAS and Energy and Resources Minister Megan Woods that the subsidiary majority owner Rio Tinto was going through a cycle where global aluminium prices are low relative to 18 months ago.

“These cycles should be managed by the firms engaged in commodities trade… We also note that Rio Tinto’s own outlook for the medium-term, forecasts growing demand for aluminium, and gradual recovery of prices as Chinese overcapacity is reduced. Rio Tinto’s assessment is that the ‘fundamentals’ for the aluminium market are still strong, and should see a return to higher prices over the medium term.”

It said while NZAS is technically independent, “we do not consider it to be a true separation”. Rio Tinto had the ability to engage in transfer pricing to shift value from NZAS to Rio Tinto, and ensure the NZAS operation yields low to no profits.

“Given Rio Tinto is forecasting a recovery in aluminium prices, we suggest that they should be the ones to support NZAS through the period of low prices.”

In the event of a closure of NZAS, officials said “we expect a relative low economic impact and do not consider any significant policy response will be necessary”

Major impacts of full closure would include:

• a loss of 990 jobs from NZAS and likely wider employment impacts for the Southland economy, though many of the displaced workers will be able to obtain new employment within the region;

• reduced wholesale electricity prices over the medium term;

• a delay in new generation capacity being built;

• a reduction in emissions from NZAS, and from the electricity generation sector due to earlier closure of thermal power stations e.g. the coal fired baseload generation at Huntly, or the Taranaki Combined Cycle gas plant;

• a reduction in approximately $164m - $180 million of industrial allocation expense under the Emissions Trading Scheme over the four year forecast period due;

• a corresponding reduction in revenue due to reduced surrenders of ETS units;

• a more significant impact on the Southland economy, and particularly on businesses that supply NZAS such as the Southland port;

Treasury said the impacts of a partial closure (i.e. the closure of just the fourth potline), would be minimal.

Ministers were told a full closure requires one year’s termination notice of the hedge contract with Meridian, and remediation of the site with an estimated cost of at least $290m.

The decommissioning of NZAS would have significant effects on the national economy, principally due to a reduction in the national peak demand by 575 MW allowing for a release of electricity supply or approximately 13% - 14% of national demand.

Were NZAS to close and release this supply Treasury expected:

• A drop in wholesale electricity prices, most notably in the South Island;

• A lesser drop in North Island wholesale prices until additional transmission is built to enable extra Manapouri generation to be delivered to the North Island

• Earlier retirement of high-marginal cost generation (particularly the Huntly generators) once new transmission is built; and

• Deferral of investment of around 1000 MW investment in new generation.

“Whether lower electricity wholesale prices will be passed through in full to consumer retail prices, and how long such a change will persist is uncertain.”

Treasury also outlined what it believed would happen with distribution, the impact of closure on greenhouse gas emissions and more detail on the economic impacts. These are covered in separate stories.

Treasury said it did not know what NZAS was seeking, but said Ministers had “no direct role” in the company’s contract negotiations with Meridian or the Transmission Pricing Methodology being reconsidered by the Electricity Authority.

First published in Energy and Environment on December 5, 2019.

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