Govt strives to broker a deal to save aluminium smelter and guarantee that 15% of NZ's power remains utilised

Govt strives to broker a deal to save aluminium smelter and guarantee that 15% of NZ's power remains utilised

The Government has stepped in to try and broker a deal in what appear to be deadlocked talks between SOE Meridian Energy and global mining giant Rio Tinto over electricity supply to Rio's Tiwai Point aluminium smelter near Bluff.

The smelter consumes something like 15% of New Zealand's power. If a deal cannot be struck and in a worst-case scenario the smelter closes, this has huge ramifications for the whole country's energy industry. Meridian was today indicating it doesn't think it can reach a new deal at the moment.

The issue also has huge ramifications for the Government's proposed partial sale of state assets. A sale of 49% of Mighty River Power is already on the starting blocks, with 440,000 Kiwis having registered interest in buying shares. Mighty River does not supply any energy to the smelter, but obviously the company would be affected if as much as 15% of the country's available power suddenly had to find another home. Meridian itself, which is much the biggest of the SOEs on the block, is also slated for a partial sale.

Meridian has been in talks with Rio subsidiary Pacific Aluminium, the majority shareholder of New Zealand Aluminium Smelters Ltd since July 2012, over potential changes to its existing electricity contract.

Meridian Energy chief executive Mark Binns said that his company had advised Pacific Aluminium of its ‘bottom line’ position.

“Despite significant effort by both parties there remains a major gap between us on a number of issues, such that we believe that it is unlikely a new agreement can be reached with Pacific Aluminium,” says Binns.

In the event no agreement can be reached, Meridian will seek to engage with Rio Tinto and Sumitomo Chemical Company Ltd, the shareholders of New Zealand Aluminium Smelters, who will ultimately decide on the future of the smelter.

Meridian signed a new contract with New Zealand Aluminium Smelters in 2007, after three years of negotiations. This current contract commenced on January 1, 2013 and remains unaltered and binding on the parties.

In October 2011, Rio Tinto announced it would restructure its worldwide aluminium business and said interests in six of its Australian and New Zealand assets (including the smelter at Tiwai Point) would be transferred into a new business unit called Pacific Aluminium, and sold.

State Owned Enterprises Minister Tony Ryall said the positions of Meridian and Pacific Aluminium were reasonably close in terms of the short to medium term electricity price, "but they remain well apart in the longer term".

“With this in mind, the Government has been in contact with Pacific Aluminium’s international parent company Rio Tinto this week to discuss helping to bridge the gap in their positions over the short to medium term, if this could be of assistance in concluding an agreement.

“In the meantime, we understand Meridian’s existing contract with Pacific Aluminium remains in place at least until January 1, 2016 with significant financial and other obligations beyond that.

“As we’ve said previously, all relevant information – including about the smelter electricity contract – will be reflected in the Mighty River Power offer document which is currently being finalised.”

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...ha ha the free market radicals stepping in to pick their favourites again.  I thought the market knew best...Nats picking winners.... How about providing the same subsidy for all out there..freezing works, local councils and the like could do with a hand with their power bills.....

The irony other being I assume that such intervention would not be acceptable under MOM.

It would seem that the aluminium smelter has become just like Fonterra, Aussie banks and Air NZ - Too Big To Fail.   

Spot on there Andy R....to fail...no,...but remove themselves from the economic landscape yes.........,Rio Tinto could probably dictate policy to a lot of Governments.
 Air N.Z. doesn't really register on the shit your pants scale anymore, they've leaned down a mite.

Convert the smelter into an Hydrogen producer and build our cars to run on hydrogen fuelled internal combustion engines !!

The problem stems on storing, transporting, and dispensing compressed hydrogen. Never mind the cost of building the cars.
Cheers,
HGW

So the govt is doing a deal in secret that will subsidise RIO at taxpayer cost, to ensure the govt reaps the loot when selling the SOEs...cos it needs to if the cost of the subsidy to RIO is to be paid for...tell me this is not a big stinking Beehive shaped pile of manure!

Meridian and Transpower will have to invest in more transmission capacity to get it to the North Island. Which may take some time.

Duplicate

Probably just brinkmanship on behalf of the smelter.  They have seen the governments weakness and willingness to cave under pressure before.  Eg the Hobbit, Sky City, ......
On the bassis that they are pushing, the smelter is worth nothing.  Any body have a cheap source of Bauxite?  China is the second largest producer of bauxite so should NZ and China set up a JV to buy the smelter (for a song)
Is there anything more profitable that we could be doing with the power?  Caving in and lowering the price would be the lazy easy way out.  But then again this goverment is not exactly gifted.

Rastus has it right.
 
Bleat on about free markets, give the idiot populace 'Nanny State' chants, but manipulate for all you're wortth. As with the 15mill taxpayers seeding og the Dunedin Stadium (read: public debt).
 
The joke is that they're between a rock and a hard place over this, and other issues, simultaneously, for the same reason. Short of feathering only some nests, rather than all nests, they have no goal, no policy, and probably no understanding. Same goes for Labour - after all, Tiwai was Hugh Watts proudest achievement.....
 
15% of our hydro would be a good thing to have right now. Not for hydrogen - that is merely a vector - but a bit of fossil-fuel displacement wouldn't go amiss. One could say tha energy is worth it's weight in gold, but it's actually more valuable than that. Things can be done without gold.

Not sure about your last pargraph PDK.  But I will take it you approve of the 'Hydrogen'  idea.  Yes it only is a vector - an energy storage.  But such a system would displace fossil fuel.
Nobody has solved the energy storage thing for cars yet.  They have been trying batteries for years without much outcome.
If there was an effective energy storage system (mains electricity to car) it would be a great thing.   Hydrogen and internal combustion maybe - just maybe.  And filling your care for about $5.00 a time just magic.
New Zealand has masses of renewable energy in wind yet to exploit.  And we are in a magic situation with the combination of hydro storage that can make it all work.  Ya don't want to be burning coal to get the electricity.
Also a problem to solve is the corporates who act within a system designed to screw the user.
Tiwai point effectively the new Marsden point.

KH- no, I think of hydrogen advocates as 'keep going as we are' clutchers at straw. I wouldn't share a vehicle with a tank of the stuff, nor a road with tankers of it.
Have a wee study of EROEI. Renewables-to-hydrogen won't keep a society going which can't already keep itself going with easy oil. Nowhere near it, and you have to increasingly maintain a never-bigger infrastructure even as you struggle.
 
Tiwai has always been subsidised by those who are grid-connected (I'm coming up 10 years out from under that) and probably by the taxpayer too, certainly before Rogernomics. You don't ship bauxite from Cape York to Bluff, smelt it, then ship it back to Aus (or wherever), unless the power is considerablt cheaper.
 
Time it went.

State Owned Enterprises Minister Tony Ryall said the positions of Meridian and Pacific Aluminium were reasonably close in terms of the short to medium term electricity price, "but they remain well apart in the longer term".
“With this in mind, the Government has been in contact with Pacific Aluminium’s international parent company Rio Tinto this week to discuss helping to bridge the gap in their positions over the short to medium term, if this could be of assistance in concluding an agreement.
 
I bet they do. A contango market for as far as the MOM energy forecasting horizon extends is a government must to claim a justifiable sale price of the generators etc.
 

If they are far apart in the long term them maybe the longterm answer is that we would be better off without the smelter.  That being so, then if there is no more profitable other option we would be better off progressively reducing the supply to the smelter as other demand grows.  This is far better than A, giving away power, B,selling a diminished value Meridian (or selling it at all) and c, then borrowing a whole heap of money to build more expensive, higher running cost power stations in the future.

well that's it then isn't it...! sell Mighty River and buy Pacific Aluminium....or oversubscribe Mighty River..and sell Meridian to Rio Tinto...or let the smelter go and convert the former smelter to a Giant dairy processing plant for the PRC to invest in.

Aluminium aka Frozen Electricity
Gee guys better use the electricity for a set of massive cloud servers..Call Kim not Rio
 
The reason Rio is playing hard ball is that commodity prices are dropping. We like Aust are suffering a silent recession where nominal and real GDP are twisted.
I.E. our incomes are dropping. Or think of how costs of everything from China has been low. Well its not that costs were low, rather incomes high. Now income is coming to match costs, rather than costs coming up...
What it means is - productivity must be found (not production) ie. more from less, not more from more.....
 

Henry,
Good points; and I especially like the idea re cloud servers. If the surplus electricity does become available, then there seem to be multiple opportunities, some of which do not work where all the electricity companies are independently owned:
1) Do a deal with Rio Tinto that is transparently at a price that is likely to be near an optimal price for NZ in total; in comparison with the following 3 options.
2) Find alternative major users; like your cloud servers. At least consider what electricity price such servers pay internationally.
3) Close inefficient or high carbon plants. (Difficult to do under the MO model)
4) Reduce the price to all consumers such that the market will look for and likely find uses for electricity to soak up the demand. The economy would benefit by the net savings in electricty costs; less whatever profits are made and kept in NZ by the electricity companies.
Noting both Tiwai and Bill English are from Southland, one suspects the answer will be a secret "commercially sensitive" deal that keeps Tiwai going.  I'm not sure how that squares with transparent prospectuses for the power companies to be sold, but it seems the government will press on regardless

StephenL - you're still back there aways, eh?
 
The economy? Profit?  What will the gained proxy buy?
 
Best thing is to own the energy-source. It actually does things. The proxy doesn't.
 
It's interesting how many people don't /can't understand the absolute limit of the underwrite.
 
 
 
 

PDK,
Still here, thanks.
Am not sure I understand your first question. On your second point, I absolutely agree that we should keep the power companies in NZ public ownership, (albeit to be run efficiently according to international banchmarks) if that is the point you are making. Apart from the fact that our monetary and fiscal settings are such that any money received for selling them just has to be blown off to foreigners in a short space of time, they are most definitely strategic assets practically and economically. Selling them reduces the long term wealth of New Zealand for sure.
If the proxy you talk of is either an aluminimum smelter, or a bunch of servers, or just general consumption, then I also agree it is not important at all to own those as a government.
I hadn't realised David Hargreaves had written a separate (very good) opinion piece on the smelter discussions when I wrote my point above, but I also very much agree with him that you have to be very nervous that the government overriding Meridien almost certainly means government subsidies, that such subsidies will likely be kept secret; and that those subsidies may well not be the optimal outcome for NZ as a whole in use of the surplus electricity. We will not be able to judge whether they are unless they are made transparent.
 

Very smooth. Very clever ..
The government has it's hands full selling MRP. Can't have the wholesale price of power dropping like a stone 1 month out from the MRP IPO. RIO waits for the most opportunistic moment to screw the Government and John Key. But then, why not. Who wouldn't. That's what happens when you play with the big boys. RIO will be saying to John Key. We are willing to pay $0.03 cents per kw/h. Ten year agreement. Take it or leave it. Offer is good for 10 days, after which we walk away, and announce to the stock exchange the cancellation of the contract. Watch the price of electricity go down as 15% of additional generating capacity hits the market.
 
Little Johnson has to hold the market up.

I think that a lesson has to be taught to overseas corperates that the NZ Goverment is not to be played with. Make them a fair offer based on good evidence of what they will pay elsewhere, and give them the 10 days to accept, or agree to comply with the allready negotiated existing agreement.If Fail to comply then show them the door and tellthem not to come back. "When one door closes another door will open
KevinR