Meridian, power company shares up as Tiwai stays open

If leave for the appeal is granted, the smelter's argument will focus on the interpretation of the Holidays Act. Photo / Supplied

• The smelter's owners have done a deal with Meridian Energy for continued supply of electricity.
• By signing, the smelter waives its right to terminate the existing contract with effect from January 201
• Short term job security for 800 staff employed at the smelter.
• Deal means power prices nationwide won't be affected

Electricity company share prices rose on news that the Tiwai Point aluminium smelter will remain open and run at full capacity at least until the end of 2017, even though Meridian Energy remains the sole supplier after other power companies proved unwilling to make much more than token gestures to supply the smelter.

Meridian shares led the charge, rising 6.4 per cent to $2.395 on the NZX, with Contact Energy up 3 per cent to $5.10, Genesis Energy up 3.5 per cent at $1.77, MightyRiverPower up 3.3 per cent to $2.85 and Infratil-controlled TrustPower up 2.2 per cent to $8.

Meridian's chief executive Mark Binns told BusinessDesk a new price for about 30 per cent of the aluminium smelter's electricity is "a hell of a lot better than the old price" it was receiving under the contract renegotiated in 2013, although it remains below market rates.

In an interview after announcing that Meridian would continue to supply New Zealand Aluminium Smelters for the full 572 Megawatts required to run the smelter at full capacity, Binns said Meridian was "getting short of, but closer to market pricing for that volume" as a result of intensive negotiations that saw a July 1 deadline for a restated contract extended to this morning.

Two key issues were at play: who would supply 172MW of the 572MW total smelter load into the future, since Meridian had the option to reprice that portion of the contract at this stage; and whether or not NZAS's majority owner, Rio Tinto, would choose to close the ageing smelter at Bluff, which employs some 800 people, accounts for around 10 percent of the Southland economy, and uses one-seventh of all the electricity generated in New Zealand.

Closure would result in an electricity glut at a time of low demand growth and would almost certainly prompt some high cost, thermal plant to close down.

Much of the improved outcome for Meridian is achieved through financial hedge contracts with other power companies, including up to 80MW from Contact Energy under a four to 14 year deal, and a two year 50MW contract with Genesis Energy. Several smaller contracts had been signed with other power generators, said Binns, taking cover close to the 172MW that Meridian had tried to lay off elsewhere.

The agreement provides short-term security for the smelter and allows time for market fundamentals to improve. Our combined electricity and transmission prices are still not internationally competitive.

NZAS chief executive Gretta Stephens

While Genesis had been widely tipped as likely to want to help keep the smelter open, its relatively small commitment suggests its chief executive, Albert Brantley, is willing to risk the smelter closing rather than bowing to pressure for very low prices compared to those paid by other industrial users. Industrial users can expect to pay around $70 to $75 per MW hour for bulk electricity, compared with around $45 per MWh under the smelter contract prior to today's updated terms.

The 50MW commitment represented "a positive outcome for all parties while maintaining our own flexibility," said Brantley in a statement.

The refreshed contract still runs to 2030, with Rio Tinto having an annual option to close or partially close the facility. The earliest it can make a decision to close is Jan 1, 2017, with the earliest possible closure date now Jan 1, 2018. It also gains a right to reduce its electricity demand to 400MW from April 30 2017, with one year's notice.

The new contracts were a "blend" of the old price for 400MW of supply and 172MW at a higher price, said Binns. The contract price also remains linked to the international price of aluminium and the New Zealand dollar exchange rate.

The smelter's production costs were estimated two years ago to be around US$1,700 per tonne. London Metal Exchange prices are currently at little under US$1,600 per tonne.

Binns said the smelter is thought to be operating at about break-even on current prices, following a sharp fall in the kiwi dollar against the US dollar over the last year.

Rio Tinto hopes to sell the smelter along with a clutch other ageing aluminium production assets in Australia, packaged together as Pacific Aluminium, although it has failed to find a buyer after more than two years on the market.

It is also thought to be reluctant to face the estimated $400 million cost of site remediation, were it to walk away from the smelter site, near Bluff, which has operated for more than 40 years.

However, NZAS chief executive Gretta Stephens said while today's agreement "crossed a hurdle" that gave "more certainty about our immediate future," it gave no assurance about the smelter in the long term.

"The agreement provides short-term security for the smelter and allows time for market fundamentals to improve," she said. "Our combined electricity and transmission prices are still not internationally competitive."

Both Meridian and NZAS are convinced they pay too much for transmission services from the national grid and are pinning their hopes on a substantial reduction in costs under proposals published recently by the Electricity Authority, which would share transmission costs more evenly across the country.

"All I would say is that NZAS are us are in the same boat on this one," said Binns. "We would be very disappointed if the EA did not go with user pays. Our expectation is that they will do the right thing."

Reform of transmission pricing had "never been more important" to the smelter than it is now, said NZAS's Stephens. "Last year alone, the smelter paid $64 million worth of transmission costs."

Under the most radical of the EA's proposals, that could drop to $10 million a year, although the proposal has caused political heat as the slack would be taken up in Auckland and in remote regional areas such as Northland and the South Island West Coast.

The smelter's owners renegotiated the smelter's electricity contracts in 2013, using the fact the government wanted to sell 49 percent of its three state-owned power companies as a bargaining chip to overturn a 30 year contract signed in 2007, prior to the global financial crisis and a collapse in metal prices.

Political reaction

Political parties welcomed the decision to keep the smelter open today.

Labour leader Andrew Little said it was "good news" for the 800 workers at the plant, and the Green Party described it as a "relief".

Mr Little said the certainty created by the decision was much-needed in a region which was feeling the pinch of falling dairy prices.

He said Government now needed to develop a broader strategy for the region, because the "prolonged and agonising" negotiation had highlighted that major provincial cities could not rely on "just one or two commodities".

Green Party energy spokesman Gareth Hughes said the decision provided an opportunity to develop a plan for "a post-Tiwai Point aluminium smelter world".

"As long as New Zealand doesn't have a clear alternative jobs plan, foreign companies like Rio Tinto can hold us to ransom and demand huge subsidies to keep their New Zealand operations open."

Government made a controversial $30 million payment to the Rio Tinto-owned plant in 2013 to keep it operating, which was described by critics as "corporate welfare".

Mr Hughes said New Zealand households and businesses were already subsidising cheap electricity for the smelter, and the Electricity Authority was suggesting a further $50 million in subsidised line charges for Tiwai Point.

Economic Development Minister Steven Joyce is travelling and could not be reached.

What's happened?
The smelter's owners have done a deal with Meridian Energy for continued supply of electricity. While nobody is delighted with the deal under the previous agreement the smelter had the right to terminate the existing contract today with effect from January 2017. By signing this variation this right has been waived.

What the deal over the Tiwai Point aluminium smelter means for workers?
In the short term there's more certainty for 800 staff employed at the and more than 2000 whose livelihoods are indirectly affected by the smelter. Bosses at the smelter say the deal will allow the smelter's three potlines to remain fully operational. They do warn there's only short-term security but it allows time for market fundamentals to improve.

What it means for the Southland economy
A lot. The smelter contributes $525million a year to Southland - about 10 per cent of economic activity.

What does it mean for power prices?
The smelter uses about 12 per cent of the country's power. If its owners had signalled they would walk away in two years the resulting glut could have led to pressure for power prices to fall. Status quo at the smelter means power prices won't move as a result although weak demand has kept a lid on the rises of the energy component of power bills for the last few years.

Read this morning's Meridian announcement here