Rio Tinto says 'nonsense' in electricity code a barrier to saving Tiwai Point smelter
Tom Pullar-Strecker05:00, Jan 14 2020
STUFF
The debate over the future of the Tiwai Point aluminium smelter is entering the home straight.
Mining giant Rio Tinto believes there may be a way for the Government to help lower the costs of the Tiwai Point aluminium smelter near Bluff, but it appears that could require a rule change.
The smelter, which directly employs 793 Southlanders, is being reviewed by its 80 per cent owner, Rio Tinto, with a decision on whether to retain, scale-back or close the plant expected by the end of March.
New Zealand Aluminium Smelter (NZAS) chief executive Stewart Hamilton told the Electricity Authority that it had asked Energy Minister Megan Woods to work with the Electricity Authority, Transpower and government officials to see whether the "prudent discount" policy in the country's Electricity Code could be applied.
The prudent discount policy is to designed to encourage Transpower to offer a discount on transmission charges, in situations where businesses can show it would be cheaper for them to build their own power lines than to continue to pay for the existing shared infrastructure.
Hamilton said NZAS was using only 2 per cent of the electricity grid to source its power, most of which comes from Meridian Energy's Manapouri hydro scheme 150 kilometres away, but it was paying for 7 per cent of the costs national network under existing price rules.
NZAS chief executive Stewart Hamilton makes the case for intervention to save the aluminium smelter in October.
"Economically, the business case would stack up that it would be cheaper for the smelter's owners to build generation and other lines bypassing the existing grid assets than to continue paying current charges," he said.
But Rio Tinto's Australian-based energy director Lesley Silverwood said the rules governing the prudent discount policy were "very, very specific".
In order to request a discount, applicants had to be ready to put a proposal to their board for a major investment that would bypass the grid, she noted.
The rules also state that proposal must be "technically, operationally and commercially viable and have a reasonable prospect of being able to be successfully implemented."
"We are a part of the backbone of the grid. There is no way on earth we could get permission to build a duplicate line through to Manapouri so that is just a nonsense," Silverwood said.
The rules governing prudent discount arrangements in other countries were "more pragmatic", she said.
ROBYN EDIE/STUFF
The Treasury believes many displaced workers could find work elsewhere in Southland, though not necessarily on the same pay.
Woods said the Government was continuing to engage with NZAS as its strategic review continued.
"NZAS can present a business case for a prudent discount under the current Electricity Code to be considered by Transpower and the Electricity Authority.
"At this stage I understand the Electricity Authority is not considering a change to the Electricity Code relating to the prudent discount," she said.
The smelter's electricity transmission costs had risen from $40 million in 2008 to $65m last year, Hamilton told the authority in its oral submission just before Christmas.
Those costs could fall to about $60m next year and by a further $11m from 2024 as a result of a separate industry-wide pricing review.
But he said "for the owners of the smelter that is seen as too little, too late".
ROBYN EDIE/STUFF
Energy Minister Megan Woods says the Government is continuing to engage with the smelter, as its strategic review continues.
Silverwood said Rio Tinto believed the smelter was adding a lot of value to New Zealand, benefitting electricity companies.
"The only problem we have is that ... it is not coming back to the parties that are making the investment in the infrastructure and that is just not acceptable to our owners."
Vector chief executive Simon MacKenzie accused the smelter's owners of "amnesia" in November, saying the complaint that it was paying too much for transmission needed to be seen in the context that it was paying only about 5 cents a kilowatt-hour for power itself, which is about a quarter of the price paid by consumers.
JOHN HAWKINS/STUFF
It would make economic sense for the Tiwai Point smelter to bypass Transpower's lines connecting it to the Manapouri hydro scheme, rather than to continue to pay current charges, the smelter believes, but it agrees that is not a realistic option.
Hamilton rejected that criticism, saying that pricing was "a wholesale discount like you would get from any industry".
Separate to the prudent discount appeal, the smelter was also seeking to reduce its power charges by a "about a third", he said.
Meridian spokeswoman Polly Atkins said its negotiations with Rio Tinto were confidential.
"They are talking to us as well as a number of other parties as part of their strategic review," she said.
Hamilton told the authority that about 90 per cent of smelters in the world paid less for their power than it did.
Rio Tinto subsequently clarified – as it had done earlier to Stuff – that the 90 per cent figure applied outside China to electricity supplied to smelters from hydro power stations, which only power 27 per cent of total aluminium primary production globally, and not to the cost of all power.
But when non-hydroelectricity-based production was included, the figure was still 83 per cent, the company said.
"The cost of power for aluminium smelting in New Zealand is expensive."
The review of the smelter was being formed "on the basis of an operation which has been losing money for the last 12 months", he said.
NZAS' statutory accounts filed with the company's office showed the company reported a net profit of $220m in 2018.
But Rio Tinto has said a better measure of smelter's true financial performance is the "underlying profit" of its Pacific Aluminium subsidiary.
That underlying profit was $22m in 2018 – down from $75m the year prior, and $54m and $56m in the years before that.
Those figures will understate the smelter's performance because 20 per cent of NZAS' profits go to its other part-owner, Japan's Sumitomo Chemical Company.
Rio Tinto said in a statement that it was not yet in a position to release the 2019 financial performance of Pacific Aluminium (PANZ) as its accounts were being finalised "however we are expecting PANZ to report a loss when the results are published".
The Electricity Authority did not cross-examine Hamilton during the oral submission on the smelter's profitability, the rationale for urgency with regard to pricing relief, or Hamilton's statement that 90 per cent of smelters paid less for power.
Chairman Brent Layton appeared to criticise media coverage of the closure review and sympathise with Silverwood's view that there was a "very simple narrative" that electricity prices in Auckland would fall if the smelter closed.
"What I am telling you is what you see in the newspapers and what the industry thinks is not the same," Layton told the submitters.
Treasury advised Woods and Finance Minister Grant Robertson in October that if the smelter did close, it would expect "reduced wholesale electricity prices over the medium term" and that many of the "displaced workers" would obtain new employment within the Southland region.
"However, replacement jobs may not be of the same skill or salary level as those with NZAS," it said.
Treasury suggested Rio Tinto might be in a position to move profits from the smelter overseas, because most of the alumina it smelted in New Zealand was supplied from its own refineries in Australia.
"While NZAS is technically independent, we do not consider it to be a true separation.
"This is primarily because Rio Tinto has the ability to engage in transfer pricing to shift value from NZAS to Rio Tinto, and ensure that the NZAS operation yields low to no profits.
"Effectively this means that Rio Tinto captures a majority of the value-add from NZAS, rather than the national economy," it said in its advice.
Rio Tinto announced in mid-December that aluminium from its Tiwai Point smelter and its hydro-powered Bell's Bay smelter in Tasmania had been certified as being "responsibly produced" by the Aluminium Stewardship Initiative (ASI).
Chief executive Alf Barrios said the certification would mean its customers could meet "the growing demand from consumers for sustainably sourced materials".
Hamilton told the Electricity Authority that producing a ton of aluminium at Tiwai created two tons of carbon emissions, as opposed to 20 tons for aluminium produced in China.
But Silverwood told the Electricity Authority customers were not prepared to pay for the "added cost" of producing aluminium in New Zealand.
(20min delay)