29 Jul 2016

NZ's aluminium smelter keeps current power deal

6:10 pm on 29 July 2016

Electricity purchases for Southland's Tiwai Point aluminium smelter, which uses about one seventh of NZ's power and employs over 800 people, are to stay at current levels.

The smelter's majority owner, Pacific Aluminium, has declined an option to reduce the quantity it buys from Meridian Energy from 572 megawatts to 400.

Tiwai Point smelter

Photo: Wiki Commons

The deadline to exercise that option expired today.

The decision means the smelter will pay slightly more for its total quantum of electricity, since the 172 megawatts will be pitched at a higher price than the remaining 400 megawatts.

The old concessionary price will be kept for those 400.

That price has never been revealed, but was estimated by an analyst, Nevill Gluyas of First New Zealand Capital, at $48 a megawatt hour.

He put the 172 megawatts at $65 a megawatt hour, closer to the wholesale price for other companies.

If the smelter had exercised its right, it would have reduced its electricity purchases by 30 percent.

Positive sign for smelter's future?

There had been some speculation that the decision would give a clue as to Pacific Aluminium's long-term plans, as a cutback could have been a stepping stone to total closure.

The smelter has the legal right to close in 2018, with a need to give a year's notice, some time next year.

But Energy News editor Gavin Evans discounted that interpretation.

He said cutting back electricity purchases would have required the smelter to cut back on aluminium production, which would have made the economics of the plant even more difficult than they were already.

"It would have been a lot harder for them to operate with two [pot] lines instead of three, which is what they would have been doing if they could not find another supplier of the 172 megawatts," he said.

Mr Evans thought the real significance of the 172 megawatt get-out clause was that it gave Meridian Energy a way to spread its risks while allowing the smelter to look about for cheaper alternatives.

He said the smelter probably could not find a better offer and so fell back on Meridian.

'International competitiveness'

Pacific Aluminium was not commenting in detail about this but said the need to maintain the quantity of its production was an important part of its decision.

"We remain committed to running a three potline, 572MW operation, as running a smaller smelter under the same conditions does not improve the smelter's international competitiveness," it said in a statement.

The smelter uses about one seventh of all New Zealand's electricity and years of uncertainty over its future has made it very difficult for power companies to make proper plans for the coming years.

On the other hand, the smelter owner says falling aluminium prices has handicapped it and it has had to constantly improve efficiency to keep going.

The company's most recent annual report showed it making an underlying annual profit of $54 million, slightly less than in the previous year and tailing off markedly towards the end of the period.

Aluminium prices in London are currently about $US1600 a tonne, up from about $US1470 in January but still way short of the average for the preceding 10 years.

The future of the smelter is vital to Southland, where it contributes $525m annually to the local economy and hires 800 employees and contractors directly.

But any closure could ease electricity prices for New Zealand as a whole and lessen the amount of electricity produced by burning fossil fuel.

Get the new RNZ app

for ad-free news and current affairs