Power company Meridian strikes new deal with aluminium smelter's owners to keep smelter going at least till 2018

The Tiwai Point aluminium smelter near Bluff has received another stay of execution.

State controlled power company Meridian Energy announced this morning it had struck another deal to extend the life of the smelter at least past January 1, 2018.

The announcement will come as a huge relief to the deep south of the country, and to the Government, which stepped in two years ago with a $30 million taxpayer-funded sweetener to the smelter's owners Rio Tinto. The will-it or won't-it close saga has been long running.

At the time two years ago when the Government stumped up with taxpayers' cash it was in the early stages of a partial privatisation process that ultimately saw it sell 49% of Mighty River Power, Meridian and Genesis Energy. Had the smelter closed at that time it would have had a massive impact on the Government's privatisation plans. The smelter consumes something like 13% of all of NZ's electricity so its closure would have an enormous effect on the whole electricity market.

In terms of the regional impact, the smelter employs about 800 people directly and its closure would be hugely felt in Southland.

Rio subsidiary New Zealand Aluminium Smelters said the new agreement was "good news" for the smelter workforce. Rio owns just under 80% of NZAS, while Japan's Sumitomo has just over 20%.

“We have crossed a hurdle today and now have more certainty about our immediate future,” NZAS Chief Executive Gretta Stephens said.

“The agreement provides short-term security for the smelter and allows time for market fundamentals to improve.”

Under the deal reached two years ago, Rio could have pulled the plug as early as January 1, 2017, but now that has been deferred by at least another year and with the possibility of the smelter running till 2030 under the current contract. The new deal states that the earliest Rio can give notice of termination of the contract is January 1, 2017 - but with a 12 month notice period from that date, meaning the earliest mothballing of the plant would theoretically be January 1, 2018.

Here is the announcement from Meridian:

Meridian Energy has signed a variation to the existing Electricity Agreement with New Zealand Aluminium Smelters Ltd (NZAS) following extended negotiations.

“It has been a complex and demanding negotiation, but this is a good outcome for Meridian,” said Meridian Chief Executive Mark Binns.

NZAS did have the right to terminate the existing contract today with effect from 1 January 2017, but by signing this variation, this right has been waived. The variation commits Meridian to cover the full 572 MW currently used at the smelter from 1 January 2017 at more competitive rates for the smelter than would have applied if NZAS chose to rely on the previous arrangement for the full 572 MW.

“This variation will give the smelter the flexibility to operate at current production levels for the full contract period should it want to and provide Meridian with an improved overall price for its electricity.

Although the smelter already had the option of a contractual volume of 572 MW from 1 January 2017 prior to this amendment, pricing had meant NZAS was incentivised to reduce to 400 MW from that date,” said Mr Binns.

“Meridian has always been clear that the contract structure entered into in 2013 was intended to incentivise NZAS to obtain 172 MW from other generators and allow Meridian to achieve market prices for this volume, which would be released from the contract.

Meridian’s view was that it was in the interest of other generators to provide that cover to NZAS. While Meridian is disappointed NZAS was unable to reach an agreement with other parties, it believes the new arrangement provides pricing for the 172 MW that is more in line with market expectations,” said Mark Binns.

Meridian and NZAS had agreed to an extension of the termination right from 1 July to 3 August, when it was clear that negotiations between NZAS and other generators were not going to be completed by 1 July.

“While other generators have differing views as to the impact of a smelter exit on their competitive position, Meridian has been able to gain sufficient support from some parties to warrant it covering this extra volume from 2017,” said Mr Binns.

Meridian is committed to cover Tiwai Point’s electricity usage at current production levels through to 2030, but NZAS retains all its termination rights from the 2013 round of negotiations, which includes a 12 month notice of termination that can be given any time from 1 January 2017.

Separately, Contact Energy said it had a agreed to supply some energy to the smelter. This is what it said:

Contact to supply a portion of Tiwai’s electricity

Contact Energy Limited (Contact) announced today that it has signed a financial contract with Meridian Energy which forms a portion of the electricity required by New Zealand Aluminium Smelters to operate its Tiwai smelter with the following key terms:
• 80MW
• Minimum of 4 years and a maximum of 14 years commencing 1 January 2017
• Provision of associated risk management from Meridian to Contact under certain limited circumstances

“We are pleased that we have been able to support the continued production of aluminium at Tiwai", said Dennis Barnes, Contact’s Chief Executive.

And here is the statement from Rio subsidiary New Zealand Aluminium Smelters:

NZAS power contract variation agreed

New Zealand Aluminium Smelters Limited (NZAS) and Meridian have today entered into a revised contract for 572MW until 2030, allowing the smelter’s three potlines to remain fully operational.

NZAS Chief Executive Gretta Stephens said this was good news for the NZAS workforce, Southland and New Zealand.

“We have crossed a hurdle today and now have more certainty about our immediate future,” Ms Stephens said.

“The agreement provides short-term security for the smelter and allows time for market fundamentals to improve.”

This revised agreement is the latest in a long relationship between NZAS and the owners of the Manapouri Hydro dam dating back to 1963. Over the past year, NZAS ran an exhaustive commercial process to understand if power could be secured from other generators; however, Meridian was the only one, as the owner of Manapouri, able to contract with the smelter to meet its energy needs.

The contract has ongoing flexibility to maintain or reduce the load, or terminate the contract from 2018 based on market conditions.

“While we’ve taken a positive step today, our combined electricity and transmission prices are still not internationally competitive,” Ms Stephens said.

Out of all external costs, Ms Stephens said reform to transmission pricing had never been more important as NZAS’ delivered cost of electricity was one of the highest for an aluminium smelter outside of China. Last year alone the smelter paid $64 million worth of transmission costs.

“We believe those who benefit from the infrastructure they use should pay for it, which is not happening now. According to the Electricity Authority’s options paper, NZAS pays more than $50 million every year for transmission infrastructure it receives no benefit from,” Ms Stephens said.

“Worldwide demand for high-quality aluminium is increasing through automotive and electronics manufacturers. If we can continue production at NZAS, we will be able to take advantage of this future market potential which is good news for Southland and good news for New Zealand.” 

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18 Comments

Exemplary behaviour when it comes to picking winners.

Andy will be angry this morning with this news.

So....this time our taxpayer funded $30,000,000 went to Meridian and not RioTinto to keep the price of electricity higher than it otherwise would be for New Zealand households?

“The agreement provides short-term security for the smelter and allows time for market fundamentals to improve.”

Just another extend and pretend measure that cannot reconcile global reality - Read more

short term security for Origin as its looks to sell out of Contact - more like..

http://www.afr.com/business/energy/electricity/origin-energys-rethink-on...

Investment banks have already been working on structures that could see the Kiwi generator and retailer dual listed in Australia and would see Origin sell down from its current 53.1 per cent holding.

The ditching of the overseas expansion plans also points to a lower growth story for Contact, which may make the holding of less strategic importance to Origin, one source said.

and just like that

Australia's Origin Energy has sold its Contact Energy shares to underwriters Macquarie Capital for $1.8 billion, ending months of speculation that it intended to exit. Origin's shareholding in Contact is expected to be onsold to a broad range of Australian, New Zealand and international share market institutional investors and New Zealand retail investors.

The sale will be complete by tomorrow , Contact said.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1149...

great that "sunset industries" like farming doesn't get $30M hand outs to it's practical side. Aluminium smeltering is far bigger bonus to all of NZ

If you want a cogent metaphor for the central bank enabled crack-up boom now underway on a global basis, look no further than today’s scheduled chapter 11 filling of met coal supplier Alpha Natural Resources (ANRZ). After becoming a public company in 2005, its market cap soared from practically nothing to $11 billion exactly four years ago. Now it’s back at the zero bound.

http://davidstockmanscontracorner.com/pop-goes-the-alpha-natural-resourc...

well the$30m investment to protect a $500m benefit for the Southland region(and 800 jobs) sure seems like value for money to me .esp as the current dairy downturn is likely to hurt the region..
still the gloom and doom merchants found on here will no doubt find a negative somewhere I guess..

It's Rio Tinto who tells us Bluff might go because of costs. We should not believe them. They will always make such a claim whatever the real story is.

Damn shame, i was looking forward to a good boost to the economy from our power prices falling a little bit closer to internationally competitive levels.

Not wanting to stick up for Rio, but are they expected to pay the same distribution costs as a factory in Auckland? it kind of doesn't seem fair to me if they do, given a very large portion of all power comes from the lower parts of the country.
They built the plant very close to a power plant in the South Island for no reason other than to save money on distribution costs of that power, so who is benefiting from that now? is the power company pocketing the savings they make on distribution to them, to subsidize everyone else that is miles away from any power stations like in Auckland?
My understanding is they get the power reasonably cheap, it would be interesting to know how cheap though, is it cheap enough to cover the fact that they have saved the power company on distribution costs by being almost right next to the power station?

'right next door'? It's 160km away from Manapouri.
Auckland is miles away from any power stations? It's got Huntley 90km down the road and a couple of large power stations inside the city itself

Now tell me, who's subsidising who?

Yes they do get cheaper electricity distribution costs/lines charges. The Electricity Authority has moved to more closely align users to the cost of infrastructure upgrades they need wrt lines charges. Some areas have benefited some have not. NZAS is one beneficiary.

If Auckland's population continues to grow and it needs expensive electricity distribution systems -DC links and so on, then it will be reflected in its electricity lines charges.

Rio might be paying more for it's power than before. You might deduce that from the mumbo jumbo press releases above. They need us more than we need them perhaps?

Can anyone explain way Rio should pay 50 million a year in distribution costs, when their plant is very close to the power station? And built there for that reason, so the distribution costs would be low, it seems to me the rest of the country is massively subsidizing Auckland businesses and no one batters an eyelid, even to the point of risking businesses in places outside Auckland

Currently transmission costs are based on power consumed.

Under the new electricity authority proposals announced last month, when asked a question from the audience as to the benefits to the smelter of one of their proposals - the CEO replied $ 50 m pa which translated means Auckland and North should pay.

The transmission charges - were the changes to go through - would be a huge benefit to the smelter and I'm guessing that's why they are keeping their options open.