Tiwai certainty welcome, but concerns about $2 billion subsidy

By Marc Daalder of

The big build-out of renewable power that will be sparked by the new Tiwai Point deals is certainly a boon.

Analysis – A decade-long “will-they-won’t-they” game at the bottom of the South Island has come to an end, with the Tiwai Point aluminium smelter inking 20-year power deals with Meridian, Contact and Mercury.

That puts an end to the speculation as to whether Southland’s largest single employer and the consumer of one eighth of the country’s electricity supply will close up shop, at least for another generation.

The most recent saga began in 2013, when the smelter owned by multinational mining company Rio Tinto threatened to pull out and earned a $30 million cash payout from the government to stay until 2017. In 2019, Rio Tinto announced a “strategic review” of the smelter’s future, before announcing the next year it would close in August 2021.

That closure was then kicked out to the end of this year, when Tiwai secured a sweetheart power deal from Meridian to stay open. The price of electricity in that deal, while confidential, was so low it meant every household in the country paid an extra $200 a year to subsidise it, the Electricity Authority determined.

In 2022, the smelter began making noises about possibly extending its stay. As Newsroom reported last year, it wrote to ministers suggesting it saw a path to remaining open for another 15 years. That has now been extended to 2044, granting welcome certainty to Southlanders, the energy market and successive governments sick of brinksmanship.

Tiwai’s massive electricity demand meant that, if it did close, it would free up more than one eighth of New Zealand’s power supply. The uncertainty around its fate led potential generators to delay investing in new renewables. While new generation has started to come online, that will likely surge now that the smelter will be here for at least another 20 years – a period over which New Zealand’s total power demand could increase by two thirds.

The other energy market impact is the confirmation that the deals with Contact and Meridian include demand response provisions. When power supply is tight, due to a dry year or other circumstances, the smelter has agreed to reduce its usage by up to 185 megawatts. That’s equivalent to three quarters of the power generated by one of the Huntly Power Station’s coal-fired turbines.

“When our demand response is called on, it effectively means New Zealand will have to burn less coal at Huntly, ultimately reducing New Zealand’s carbon emissions,” Chris Blenkiron, the smelter’s chief executive, said Friday morning. “We believe this is one of the largest single site, long duration demand response agreements, in terms of percentage of national grid, anywhere in the world.”

He added the deal effectively made Tiwai the country’s largest battery.

There are important local implications as well. The smelter employs around 1000 people directly and estimates its indirect effects support another 2200 local jobs. Rio Tinto said Friday that it contributes $400 million to the Southland economy each year, making up 6.5 percent of the regional GDP.

Then there are the climate questions. The big build-out of renewable power that will be sparked by the new deals is certainly a boon. It shifts the gear on New Zealand’s transition to a low-emissions economy.

The smelter itself is a different question. While its power supply is fully renewable (allowing it to sell its aluminium at a premium), the process by which alumina is smelted into aluminium does produce carbon emissions. In 2022, the smelter emitted 600,000 tonnes of carbon dioxide, close to 1 percent of the country’s total greenhouse gas emissions.

Labour’s climate spokesperson Megan Woods said the government needs to ensure Tiwai invests in decarbonising its processes. The subsidies for decarbonising industry that Labour put in place could have done that, she said, but they were scrapped by the new government as part of the Mini Budget last year.

There’s also another, more technical, climate issue. Like all large emitters which export products, the smelter receives a certain number of carbon credits for free, under a process known as industrial allocation. This helps ensure it can compete on international markets against competitors that don’t face a carbon price like the one imposed by New Zealand’s Emissions Trading Scheme.

Large polluters get this free allocation as a result of their greenhouse gas emissions – Tiwai got 605,000 credits in 2022, for example. That’s slightly more than it actually emitted, due to a phenomenon called over-allocation that has since been corrected.

But large electricity consumers, which presumably face a carbon price via their power contracts, also get special allocation. In 2022, the government determined Tiwai’s power contract was at such a steep discount it actually faced no carbon price, so this allocation was set to zero.

The new deals are considered by analysts to charge the smelter a higher, fairer price for power. The key question is whether this will see the smelter’s electricity allocation restored. In 2020, it earned nearly a million carbon credits – worth tens of millions of dollars – via this source.

Campaigners at the Don’t Subsidise Pollution organisation, which opposes industrial allocation, estimate a restoration of the smelter’s 2020 electricity allocation would be worth $60 million next year. That would rise over time as the carbon price increases, totally nearly $2 billion over the 20 years of the power deal.

“The Minister for Climate Change and Associate Minister have both said they are not a fan of subsidising large multinationals to pollute – but without a plan to reform industrial allocation, that’s exactly what will happen,” campaign spokesperson Alex Johnston said.

“There’s a place for low-carbon aluminium production in a clean energy future for Aotearoa, but there’s no place for subsidising of ongoing pollution. Putting resources into helping heavy industry further decarbonise, or simply just making them pay the full carbon price is what is needed both for a safe climate and a thriving economic future.”

Climate Change Minister Simon Watts suggested no final decision had yet been made on the smelter’s allocation.

“The industrial allocation [Tiwai] receives under the Emissions Trading Scheme will be confirmed after the Ministry for the Environment undertakes a formal review of the contracts,” he said.

This story was first published by Newsroom

According to the news on Radio New Zealand

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