Economy

Beware the Ides of March at Tiwai Point

Rio Tinto and the Cabinet are set to decide within weeks whether to close the Tiwai Point aluminium smelter or use taxpayer funds to keep it open. Marc Daalder reports from inside the smelter on a decision that could reshape our economy and climate change plans.

The Tiwai Point aluminium smelter is always running. For 49 years, the facility has operated continuously, rotating three shifts of workers through an array of buildings and potlines on its 100 hectare complex.

Although they make no noise and there's little flash - "if you see sparks, run," one worker tells me - the potlines are impressive by virtue of their size alone. Cavernous warehouses host hundreds of carbon anodes pumping electricity into bauxite minerals shipped in from Rio Tinto's Australian mines. The four potlines stretch for hundreds of meters and are constantly attended by a swarm of workers, checking dials, replacing burnt out anodes and harvesting aluminium.

Now, that may come to an end. The buzzing power lines transporting a continuous 572 megawatts of electricity from Manapouri power station may fall silent. The ships cruising into Bluff's deep-water harbour may stop visiting. Nearly a thousand employees may lose their jobs.

The smelter's future hinges on the decision expected from its multinational owners, mining giant Rio Tinto, by the end of March. Rio and its local subsidiary, New Zealand Aluminium Smelter (NZAS), have argued for years that they are paying too much money for improvements to the electrical grid hundreds of kilometers away. This, they say, is impinging on the smelter's ability to make money - it posted a $46 million loss for 2019.

Meanwhile, Energy Minister Megan Woods has sent signals indicating the Government is unwilling to repeat the $30 million handout the smelter received in 2013, although she has not sworn off a subsidy entirely.

Workers a political football

While high level discussions on transmission pricing dominate boardrooms, thousands of workers across Southland are anxiously awaiting the decision, with their livelihoods on the line.

"The scale and the importance of this business to Southland, without question, means that whenever it's in the headlines, for this issue, it's going to be causing concern for quite a few people in the community," said Graham Budd, the new chief executive of Southland's regional development agency, Great South. "Those people both directly and indirectly affected, it's stressful without question."

This year's review also goes a step further than on previous occasions the smelter has needed support.

"This is the first time they've actually gone into doing a formal review of the business. This is a different step than [in 2013]. This is a different and serious position that they're in, undertaking this full review," Budd said.

NZAS directly employs nearly 1,000 people. Photo: Marc Daalder

That means thousands of jobs are on the line. "There are approximately 2,260 full-time equivalent jobs, created directly or indirectly by the smelter - the direct workforce as well as the indirect, supply chain jobs. [Closing the smelter] would clearly, significantly impact our workforce and also undermine some business confidence."

"We estimate there are around 52 businesses that are key suppliers [to the smelter] and that's really $50 million of direct supply business. Clearly, all of those businesses would be affected and severely compromised, I'm sure, all in varying ways."

"Overall, the smelter contributes $400 million to the Southland economy, which is about 6.5 percent of Southland's GDP each year. Export revenues are around a billion dollars."

Dean Addie, a board member for Great South and the chief executive of an Invercargill-based electrical engineering firm that contracts for NZAS, agreed with Budd's analysis. "Tiwai is a major contributor to Southland and New Zealand’s economy," he said.

"Through direct and indirect employment Tiwai contributes to the livelihood of approximately 3 percent of Southland’s and 6 percent of Invercargill’s population. If you consider the families of those people then the number is even higher."

"If Tiwai was to close the city of Invercargill would take a backward step that, quite frankly, would not be recovered. We would see house prices fall dramatically across the province and likely some being foreclosed on by the banks. It would be the last person out, turn off the lights."

Fight over paying for grid

The core of the Tiwai Point dispute is transmission pricing. As it stands, the cost of operating and maintaining the national grid - as well as constructing new add-ons - is evenly distributed across the country, based on how much power a consumer uses.

NZAS consumes about 12 percent of the country's electricity and therefore pays around 12 percent of the transmission charges. This is despite the fact that almost all of Tiwai's power comes from Meridian Energy's Manapouri power station in Fiordland, through lines purpose-built to supply the smelter.

Take, for example, recent upgrades to grid infrastructure in Auckland and Northland. Although Tiwai Point receives no benefit from these investments, it has subsidised them to the tune of tens of millions of dollars.

"There are very few people - if any - who argue that NZAS are not paying too much for transmission. In reality, NZAS have been subsidising New Zealand homes and businesses for years," Meridian chief executive Neal Barclay said last week.

Massive power lines connect Tiwai Point to Manapouri power station, 150 kilometers away. Photo: Marc Daalder

NZAS chief executive Stewart Hamilton has previously said that the charges for infrastructure the smelter doesn't use amount to almost $200 million over the past decade. In 2017, the smelter estimated it would pay $72 million in transmission pricing for the year. By 2019, that figure had fallen slightly to $64.5 million.

Since its formation in 2010, the Electricity Authority has seen reforming the transmission pricing methodology (TPM) as one of its key missions. An early proposal for TPM reform, released in 2016, was lambasted by Winston Peters for hiking power prices for Aucklanders and regional New Zealand while giving NZAS relief to the tune of $21 million a year.

After returning to the drawing board, the EA produced its current proposal in mid-2019. Although it bears a strong resemblance to the 2016 draft - keeping the high-level idea of a user-pays system in which people pay for the grid upgrades that benefit them - it softened the blow for consumers and lowered Tiwai's discount. Under the new plan, the smelter would pay $11 million less for transmission pricing each year.

While that could make a difference, NZAS says the crucial problem is that the new TPM will kick in far too late - some time in 2024. "Rio Tinto continues to encourage the Authority to progress its TPM review with the utmost urgency, though Rio Tinto can no longer rely on the review to deliver appropriate and timely relief from very high transmission charges for NZAS," the smelter's owners wrote in an October submission to the EA.

"For us, that's too little and too late," Hamilton told Newsroom in October.

Electricity costs, environmental impact at stake

Critics of the smelter, after conceding it pays too much for transmission pricing, argue that the sweetheart deal it pays for electricity generation helps offset this.

According to Electric Kiwi CEO Luke Blincoe, the smelter purchases its electricity from Meridian almost at cost. "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.

Despite this, the smelter has asked Meridian to help shoulder the burden of its high transmission prices. Barclay told reporters and stakeholders on Wednesday that NZAS had asked for a one-third reduction in its combined generation and transmission costs, which he told BusinessDesk was "totally unrealistic and we’ve told them that right from the outset".

If Tiwai closes, these lower wholesale rates could be passed on to consumers around the country. According to a 2012 Treasury report, the Ministry for Business, Innovation and Employment found that wholesale electricity prices would have dropped by 10 percent for the period from 2015 to 2030 had Rio Tinto left New Zealand at the time.

The environmental impact of freeing up 12 percent of the country's electricity generation would be mixed. On the one hand, the Treasury found a 2012 closure "may bring forward the expected decommissioning of the coal and gas fired Huntly units 1 to 4, which produces between 20 percent - 50 percent of the sector’s total emissions".

Five-year freeze on new wind farms

On the other hand, with the electricity from Manapouri redirected into the national grid, new renewable sources of electricity might be delayed. The Treasury report said a closure of the plant would result in a five-year freeze on building new electricity generation infrastructure like wind farms. That would be a saving from deferral of investment of around $2 billion, but could also put a road-block in the way of a 100 percent renewable electricity system.

Tiwai produces some of the world's lowest-carbon aluminium. Photo: Marc Daalder

The closure would also bring up the question of emissions leakage - when greenhouse emissions increase in one country because of a lesser decrease in another. Tiwai produces some of the world's lowest-carbon aluminium, because it is run entirely off hydro-generated electricity. The smelter's only emissions are those created during the production process, and they make up about 0.8 percent of New Zealand's annual emissions.

If Tiwai shuts, those emissions will just be produced by a new smelter somewhere else in the world, which would open to fill the gap in the market. Moreover, such a smelter could well be powered by coal-fired electricity generators, leading to a net increase in emissions.

What's likely?

With a mixed environmental impact, a number of complex issues and intertwined electricity market issues and thousands of jobs on the line, the Tiwai Point decision won't be easy to make. Commentators have by-and-large argued that Rio Tinto won't close the smelter - from a New Zealand perspective, it makes no sense.

Meridian's Barclay cautions against assuming Rio Tinto is making its decisions from a New Zealand perspective, however. He points to the "totally unrealistic" request for a one-third reduction in costs as evidence of this.

"NZAS makes some of the purest aluminium in the world and because it's based in New Zealand, it's basically operating off of renewable electricity, so it's some of the more renewable aluminium in the world. When we look at their actual operations - and this is just our view, they know their business better than ours - we think that they're breaking even, maybe slightly cash positive," Barclay told Newsroom.

"So, it looks like it's profitable, they're making a unique product, why wouldn't they continue to operate? What we don't know is how that particular smelter fits within the overall Rio Tinto portfolio. They're dealing with the global situation in terms of the demand for aluminium and so they may make decisions to close down some of their smelters in the interests of the overall portfolio."

The head of Rio Tinto's aluminium projects, Alf Barrios, visited Wellington in January and met with Energy Minister Woods. Woods declined at the time to characterise their discussions.

Woods maintained in a statement to Newsroom that the Government will "not be intervening on [NZAS'] behalf".

"The Electricity Authority has a long-standing Transmission Pricing Methodology review, which I informed NZAS was an independent process and more correctly explored with the EA. Given that the New Zealand Aluminium Smelter is a significant part of the Southland and national economy, as well as the electricity system, I suggested at a meeting with NZAS they meet with relevant, interested parties to explore options," she said.

"I have repeatedly made it crystal clear to NZAS in several meetings that I will not be intervening on their behalf and the right course of action is to speak to the relevant authorities who are the decision makers."

In the meantime, amidst worker anxiety and an electricity market holding its breath, the potlines at Tiwai Point keep running, the employees continue changing shifts and 572 megawatts of electricity is still buzzing through the massive power lines stretching 150 kilometers from Manapouri power station.

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