The aluminium smelter is the victim of a broken contract and the electricity market
Any rational debate about the smelter needs to answer two major questions: was it right for Muldoon to break the power supply contract and to what extent has our dysfunctional electricity market contributed to the decision to close it down?
It had long been recognised that Lake Manapouri has a hydropower potential of about 700 MW but it needed a major load close to the power station to justify building the underground station, long tailrace tunnel and the transmission lines needed to send the remaining power to the North Island.
An aluminium smelter at Bluff was an obvious solution and Comalco, an Australian company, agreed to build the hydro station and the smelter. The government agreed to this but, shortly after, Comalco discovered that it could not finance both the smelter and the hydropower station. The government then agreed to build the power station and supply electricity at cost +10 per cent. An agreement was reached and the government proceeded to build a power station with four machines supplying the smelter and added an extra three machines to provide low cost power to New Zealand. The agreement benefited both parties.
Several years after the smelter was commissioned then prime minister Robert Muldoon abrogated the power supply contract and imposed a 300 per cent power price increase on Comalco. Breaking the power supply contract has had serious downstream consequences for New Zealand because several major investments in wood processing etc foundered because the overseas financiers no longer trusted the New Zealand government to abide by any power supply contracts that it had signed.
When the electricity industry was privatised, the smelter negotiated power supply contracts with Meridian and other generators. It is understood that these contracts had a fixed-price for the majority of the power with the remaining power sold at a price related to the previous year's average wholesale (spot) price. The spot price has steadily escalated for the last 10 years or more and increased the cost to the smelter. As result, and in spite of the low real cost of generation from Manapouri, the smelter has had to pay prices in excess of the prices it pays for power from coal-fired power stations supplying its overseas smelters. In the end Rio Tinto was unable to negotiate a satisfactory price and decided to shut down the smelter.
One consequence of this decision is that high quality aluminium produced in New Zealand from renewable energy will be replaced by lower quality aluminium produced overseas by burning coal. If the extra emissions are taken into account they would be equivalent to Huntly power station running flat out 24 hours a day. At the present CO2 price of $32/tonne this amounts to $115 million per year.
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Another consequence of the shutdown is the $600 million cost of transmitting most of the smelter power to the North Island. As it will take several years to install an additional Cook Strait cable and upgrade associated transmission lines, a significant proportion of this power will be spilled for four years or more. If the average spill is 100 MW at the present price of about $100/megawatt-hour, the loss to the economy is about $80 million per year – $320 million for four years.
The conclusion is that the smelter is being shut down primarily because the New Zealand government broke its power supply contract. Since then the smelter has been charged a price several times the cost of generation. If the smelter shut down much of the power that it is using now would have to be spilled: this power has no economic value.
Shutting down the smelter will cost:$600 million to get the power to where it can be used;
$60 million pa of transmission charges that the smelter currently pays that will be paid by the consumer; $320 million cost of extra spill; 2600 jobs that will be lost at an estimated cost of $20 million pa.
Over 20 years all this will cost $2.5 billion. Then add the carbon cost of $2.3 billion to give a grand total of $4.8 billion.
On the plus side, there might be a reduction in average power price over the next 20 years of two cents/kWh – $1.6 billion against $2.5 billion. Huntly power station will still be needed in dry years but there will be a reduction in the region of $20 million per year in the cost of its emissions of carbon dioxide – $400 million against $2.3 billion.
It seems to be quite clear that the economy will benefit substantially if the smelter continues in operation. The necessary reduction in power price can be achieved by setting a much lower price for the power that would be spilled if the smelter did not use it.
• Bryan Leyland is a power systems engineer with 60 years of experience in New Zealand and overseas.