sign uplog in
Want to go ad-free? Find out how, here.

Meridian to compensate NZ Aluminium Smelters if it uses less electricity at a time the system is under pressure and coal is keeping the lights on

Meridian to compensate NZ Aluminium Smelters if it uses less electricity at a time the system is under pressure and coal is keeping the lights on

Meridian has agreed to compensate the country’s largest electricity user - New Zealand Aluminium Smelters (NZAS) - should it voluntarily reduce its consumption a little.

The deal comes at a time New Zealand’s electricity system is under pressure, in part due to a lack of rain and the country’s main gas field nearing the end of its life.

The agreement between NZAS and Meridian takes effect today and will run through until May 31.

The level of compensation being offered to NZAS hasn’t been disclosed for commercial reasons.

It could see NZAS reduce its consumption by up to 30.5MWh per hour. This is equivalent to about 5% of the electricity supply it’s contracted to buy from Meridian.

Because NZAS uses around 13% of New Zealand’s electricity supply, changes of consumption are always notable. But the reduction allowed for in this instance won't be enough to free up a material amount of electricity for other users.

The owner and operator of New Zealand's electricity grid, Transpower, is taking extra steps to keep a close eye on the security of electricity supply.

It said the week to April 26 saw one of the highest year-to-date contributions from thermal generation (coal and gas). It supplied 22% of New Zealand's week-to-date electricity. Hydro saw one of its lowest year-to-date contributions to the mix, supplying 48%.

The stressed situation has already pushed wholesale electricity prices up way above what NZAS is paying, to the point some major users, including NZ Steel and Norske Skog Tasman Mill, have had to curtail production.

While NZAS's contract with Meridian insulates it from fluctuations in the spot market, it is already operating below capacity.

“We have already reduced load by around 6MW by not replacing pots which have been taken out of circulation during the normal cycle on the potlines, and we have also during this dry period, not restarted the 50MW Line 4, which was shut down during the level 4 lockdown last year,” a spokesperson said.

Cutbacks come at a bad time, as aluminium prices are high (select the aluminium chart below):

Semi-precious metals

Select chart tabs »

The 'Copper - US$ per tonne' chart will be drawn here.
Loading...
closing prices
Source: LME
The 'Copper - NZ$ per tonne' chart will be drawn here.
Loading...
closing prices
Source: LME
The 'Aluminium - US$ per tonne' chart will be drawn here.
Loading...
closing prices
Source: LME
The 'Aluminium - NZ$ per tonne' chart will be drawn here.
Loading...
closing prices
Source: LME

Should the pressure New Zealand’s electricity system is under worsen, Meridian may be in a position to force NZAS to curtail its consumption.

The companies have a contract that specifies Meridian can require NZAS to cut consumption when hydro storage hits rock bottom.

If this trigger point is hit, NZAS must manage its electricity consumption to achieve a reduction of 250GWh over 130 days.

This trigger point hasn’t been hit before although storage levels have been hovering close to this point for some weeks.

The deal struck between Meridian and NZAS today doesn’t gazump this ‘Smelter Demand Response’ arrangement.

But if the Smelter Demand Response is triggered, NZAS will be able to subtract any load reduction voluntarily made off the reduction it would be required to make. This arrangement has been made under a non-binding agreement.

See this piece of analysis for more on why the country's electricity system is under pressure and how this is costing manufacturers. 

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

25 Comments

A good example of how infrastructure under-investing impedes economic growth and impact incomes.

Cue for RBNZ to cut interest rates into negative territory in order to boost housing investment and curtail higher construction costs from material shortages.
The resultant 'wealth effect' will also counteract the sharp reductions in both manufacturing output as well as household expenditure on discretionary items.

Ya can't borrow your way to wealth advisor.

Actually we can.

Our empirical findings reject the canonical view that interest rates somehow affect economic growth, and in an inverse manner. To the contrary, long-term and short-term interest rates follow the trend of nominal GDP, in the same direction, in all countries examined. This suggests that markets are not in equilibrium and the third factor driving GDP growth is a quantity – as shown by Werner, 1997, Werner, 2012a in the case of Japan (namely, the quantity of bank credit creation for the real economy - i.e., for GDP transactions, as the Quantity Theory of Credit postulates; Werner, 2013a). Link

This is what Milton Friedman called the interest rate fallacy, and it indeed refuses to die. We can tell what monetary conditions are in the real economy, as opposed to financial liquidity, though the two can be linked, by the general level of interest rates. When money is plentiful, interest rates will be high not low; and when money is restricted, interest rates will be low not high. The reason is as Wicksell described more than a century ago:

[The natural rate] is never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low.

When nominal profits are expected to be robust, holders of money must be compensated for lending it out by higher interest rates. Thus, the same holds for inflationary circumstances, where nominal profits follow the rate of consumer prices. During the Great Inflation, interest rates weren’t low at all, they were through the roof well into double digits and higher by 1980. At the opposite end in the Great Depression, interest rates were low and stayed there because, as Wicksell wrote, the rate of profit was low and was expected to be low well into the future. High quality borrowers were given as much money as they could want while the rest of the economy was deprived of funds; liquidity and safety being the only preferences in what sounds entirely familiar. Link

12
up

Can anybody explain what Max Bradford actually achieved in 1998 apart from a convoluted cross legged industry, employing,lucratively for them, fat cat executives and boards of directors from Northland to Southland, and that has delivered to us, the hapless consumer, precisely the opposite of what was promised. While this government is on the subject of centralisation how about our electricity. Oh, but wait, the next National government sold em off. How can a modestly sized nation so comprehensively stuff up and over complicate administration of its principal energy source. Hells bells NZ is only as big as a USA city the size of Phoenix AZ.

Hells bells NZ is only as big as a USA city the size of Phoenix AZ.

But as long as the Eastern seaboard of the US

And the population of that Eastern seaboard is the same too?

And yet you and everyone else remember his name. Infamous.

Touché.

I'm open to offers of lower unit rates in return for lowering our power usage.

it is unfathomable that the entire country electricity wholesale and generation system depends on one foreign company.

We might need to drill holes in the Southern Alps and run pipes across from the West Coast to the major hydro lakes in Canterbury.

Perhaps not to the same extent as to what's need in the SI but its been done before in South Africa from a neighbouring state, lesotho. Mostly for water with a hydro component. It involved quite a few tunnels.
https://www.water-technology.net/projects/lesotho-highlands/

Isn't NZAS closing shop in 2024? Seems to have become more of a liability than an asset to the the nation, so maybe Mercury shouldn't be offering any incentives to keep them open. But Labour has painted us into a corner on this one.

The govt don't have a stick now. No difference between labour and National. Transpower need to up grade or build new lines to NI and maybe upgrade the dc link and convertor/invertor stations. Capital cost may be too high. Quite possibly no political will to coax the Electricty Authority into approving an upgrade scheme. EA is Transpower's watchdog and TP can't move without their blessing.

The government would be better off getting some more ready shovels.
https://www.rnz.co.nz/news/national/439872/toxic-waste-buried-at-tiwai-p...

Keeping the lights on and trying to save the Govt's political bacon

Close the smelter, build a Bitcoin mining farm.

Fun fact - NZAS pay 3.5c KW/h.

The typical retail customer pays 21c-35c KW/h, depending where they are in NZ

Right now, the spot price is between 42c (southland) and 92c (hawkes bay) KW/h

seems sustainable.....

Everyone got a generator ready for when the lights go out?

The world has been asking for inflation with huge monetary and fiscal policy, now it's comming we can hardly complain. We had years to accelerate energy projects but sat on our hands.

There are multiple wind projects currently being built our soon to start construction. Contact are building new geothermal power. Big investments happening right now, the gentailers are scrambling to get more renewable generation.

Had a look at Contacts website on this project. No mention of installed MW capacity. Also wonder if this project is economically viable without a carbon tax. I doubt it. Will still need Huntly burning coal for at least another two years if not longer. I sometimes wish for a big breakdown at Huntly just to show how dependent on it we are. Even if it is closed down gracefully watch out for the large electricity energy price jumps in the future due to a combination of unreliable renewables and the carbon tax.

Maybe when Huntly shuts down those Leaf labels of 'zero emissions' will be more legitimate.

The new geothermal station will be 152MW - this is baseline generation which will run 24/7. They have been running geothermal for years so I very much doubt it is dependent on carbon tax.

https://www.nzx.com/announcements/367535