The announcement that the aluminium smelter will stay until 2024 is good news and bad news. Good because it is easy to show that the smelter is an asset to New Zealand Inc. Bad because it continues its hand-to-mouth existence.
New Zealand would be better off if the Government negotiated a long-term contract that would reduce the risk of dry year power shortages, mitigate power price increases and end the uncertainties that are hobbling the power industry.
The future of the smelter beyond 2024 is still under threat from steadily increasing power prices and transmission charges that bear little relation to the actual cost of transmission from Manapouri to the smelter.
Shutting down the smelter in 2024 is likely to cost the country: $600 million to get the power to where it can be used; the loss of $60 million pa of transmission charges that the smelter currently pays; and 2600 lost jobs at an estimated cost of $20 million per annum.
Shutting down the smelter would also increase world emissions of carbon dioxide because the low-emissions aluminium it produces would be replaced by aluminium from coal-fired smelters overseas. Valued at the current carbon price, this amounts to about $150 million per year.
A long-term contract should include an agreement that the smelter would update its technology so that it could operate down to 50 per cent load for long periods without loss of quality or other problems. This would effectively provide 40 per cent of dry year reserve energy.
The Interim Committee on Climate Change (ICCC) told the Government that the major problem with electricity supply in New Zealand is providing the reserve energy needed to keep the lights on in a dry year when hydro generation drops by about 10 per cent of annual demand.
At the moment, the coal-fired power station at Huntly is the major source of dry year reserve and it is likely to be needed even more in the future to back up increasing amounts of wind and solar power when the wind isn't blowing or the sun isn't shining.
The ICCC recommended storing gas instead of stockpiling coal for dry-year reserve energy because it would reduce CO2 emissions by 50 per cent. The Government's banning of gas exploration eliminated this option.
The Onslow pumped storage scheme could provide dry year reserve but it would be expensive and it has major engineering and environmental challenges. There is no chance of it being designed, built and filling its storage lake so that it can cope with a dry year by the Government's 2030 deadline for shutting down all fossil fuel generation.
Other dry year reserve options would be very expensive. For instance, sufficient battery capacity to cover 40 per cent of the dry-year need would cost about $200 billion, more than five times the total value of our power system.
If the smelter upgraded its technology, it could provide dry-year reserve at a very competitive cost and it would also be able to compensate for fluctuations in wind and solar power that can cause major price spikes and, at the moment, are often covered by inefficient high emissions open cycle gas turbines.
Entering into a long-term contract would also end the uncertainty that still plagues the industry regarding the future of the smelter. This is delaying the construction of new power stations and increases the dry-year risk. Several hundred MW of already planned and consented geothermal stations are on hold.
In 1960 Comalco was given 99-year rights to build the Manapouri power station and the smelter. Two years later, Comalco decided it was unable to finance the construction of the
power station and the smelter.
Comalco returned the Manapouri water rights to the Government in exchange for a power supply contract based on the actual cost of the hydro development plus a 10 per cent profit margin.
This was a good deal for New Zealand because three more generators were added to the power station that have supplied New Zealand consumers with low-cost electricity.
Several years later, Muldoon abrogated the contract and forced Comalco to pay a much higher price for power that made the operation only marginally profitable. His unilateral action killed several proposals for energy-intensive industries in New Zealand because their overseas developers no longer trusted the New Zealand Government to abide by any contract it signed. A major loss to New Zealand.
Providing the smelter with a long-term contract would reduce worldwide emissions of carbon dioxide, benefit the economy of Southland and New Zealand, mitigate the dry-year problem, and reduce the risk of blackouts and high prices.
• Bryan Leyland is a power systems engineer with more than 60 years experience in New Zealand and overseas.