The Tiwai sign at New Zealand's Aluminium Smelter (NZAS) site at Tiwai Point. Photo / Gregor Richardson
The Tiwai sign at New Zealand's Aluminium Smelter (NZAS) site at Tiwai Point. Photo / Gregor Richardson
Shares in the country's listed power companies regained a little of the ground lost almost two weeks ago on the announcement of the closure of the Tiwai Point aluminium smelter.
After initially knocking $2.8 billion off the market value of the five generator-retailers, investors have since been trying to gettheir heads around what happens next.
Meridian Energy and Contact Energy – the largest generators on the South Island – were always going to be the most affected with the stocks down almost 12 per cent and 15 per cent respectively at the close of play on Friday.
The challenge for investors is that, just as with the smelter's closure, the questions for the industry now are more about timing and sequencing than the bare choices themselves.
All the major players have ensured they had options for just this event. Some gas and coal-fired plant will shut, and some new generation development deferred. But when, in what order, and to what extent? Flexibility remains key.
The smelter's closure will take national power demand back to levels not seen since the late 1990s.
While the plant accounts for about 11 per cent of national power demand, it represents more than 30 per cent of the current South Island load. The smelter operates 24/7 and can account for up to 55 per cent of South Island demand in any particular half-hourly trading period.
As one energy industry exec said last week, until that surplus power from Meridian's Manapouri station and Contact's Clutha system can actually get north "it's largely a South Island problem".
Longer term, both Meridian and Contact have attractive low-cost renewable generation options. Meridian had been close to an investment decision on its Harapaki wind project north of Napier – a 160-megawatt project it can deliver at less than $65 a megawatt-hour.
Contact has only reluctantly deferred a decision on the $600 million Tauhara geothermal development it's been working up as a long-term base-load option.
But near-term it looks to be a little more challenged than Meridian.
Its Roxburgh and Clyde dams on the Clutha River account for about half its typical renewable generation and each lie south of the national grid constraint Transpower is planning to fix by increasing line capacity through to Twizel.
By contrast, Meridian's more southerly Manapouri station is only about 38 per cent of the firm's total portfolio. It's also the country's lowest-cost hydro plant and comes with a bit more storage flexibility than Contact's Clutha system.
As Contact chief executive Mike Fuge observed on July 9, until Transpower completes the Clutha-Waitaki transmission upgrade in 2023, most of the surplus hydro-power in Southland "will in large part end up flowing down the Clutha River".
Finance Minister Grant Robertson, with Energy Minister Megan Woods , during their press conference, over the closure of Rio Tinto's Tiwai Point smelter. Photo / Mark Mitchell
But nothing is static. There will be regional impacts as the electricity system tries to adjust to the loss of the Tiwai load, giving different players different options.
All the electricity generators will suffer through lower power prices from mid-2021 as more than half the smelter's former supply makes its way north, but even that will be felt unevenly.
Electricity futures for late 2021 on both islands initially dropped more than $20 a megawatt-hour. They have since recovered a little but the discount between South and North Island contracts has widened to closer to $30/MWh, from $20-ish.
North Island prices are also signalling increased volatility. The summer and winter prices at the Otahuhu price reference point diverged markedly last week to roughly double the $10 seasonal spread that existed before the July 9 announcement.
While the weaker demand outlook prompted Contact to "press pause" on Tauhara, heightened volatility could be a boon for Contact's gas-fired Taranaki Combined Cycle plant.
Meridian
Rather than shutting early as some analysts have suggested, it may run through to 2023 as previously planned.
Meridian may no longer require a swaption contract with Genesis Energy to cover its South Island dry-year risk, but North Island winter demand hasn't gone away.
That leaves a role for some of the North Island thermal plant operated by Genesis, Contact and Todd Corp's Nova Energy, and Meridian chief executive Neal Barclay acknowledged the company would probably still look for contracts to manage peak-time North Island risk.
Recent gas delivery issues at Pohokura, the country's biggest field, may also support retention of the both coal and gas capability Rankine units at Genesis' Huntly power station.
In the meantime, Meridian is starting work testing demand for bulk supply contracts from the surplus electricity it will have later next year.
It's also been looking at initiatives to help smooth the power flow north on the Cook Strait cable, including a 100 MWh battery in the North Island at a cost of around $70 million.
"It's a bit of a no-brainer from a commercial perspective and it creates additional flexibility for us," chief financial officer Mike Roan told investors.
