New deal on smelter includes price cuts

Mark Binns says the reduced price the smelter will pay for electricity will help its international competitiveness. Photo / Simon Baker

Tiwai Point would also face a more abrupt closure if $1 billion-a-year exporter not viable.

Meridian Energy's renegotiated contract with the owners of the Tiwai Point aluminium smelter includes lower electricity prices and a potentially more abrupt closure, should the deal fail to preserve the viability of the $1 billion a year exporter.

Commercial confidentiality and the requirements of the Securities Act, in light of Meridian's forthcoming initial public offering, have limited the information available.

But Meridian chief executive Mark Binns said yesterday that 13 months of "robust" negotiation with New Zealand Aluminium Smelters (NZAS) had resulted in a reduction in the price it will pay for electricity, compared with the terms of the contract which came into effect at the start of this year.

"I believe it is a meaningful reduction which really assists the smelter in terms of its international competitiveness," he said.

Binns would not say how it compared with prices under the previous contract which applied until the end of last year.

But he confirmed the price was no longer linked to the average spot price on the New Zealand electricity market - a provision of the now-superseded agreement which recognised Meridian's opportunity cost in committing 40 per cent of its output to the smelter.

Indexation to the consumers' price index remains.

And Meridian continues to bear some of the metal price risk. The contract now allows for price increases should the New Zealand dollar value of aluminium on the London Metals Exchange rise above agreed levels.

"All I will say is they are levels which in normal times have been achieved. They are not out of the realms of possibility. There are two things that can help us: a lift in aluminium prices generally and a reduction in the New Zealand dollar against the US dollar," Binns said.

Throughout the negotiations Meridian had had to compare what it could offer NZAS with what it could make if the 14 per cent of the country's electricity output was made available to the rest of the country instead. That required modelling with a lot of variables, especially regarding competitors' responses and which older thermal generating plant might close.

"We are a lot more confident that general pricing will stay about current levels, as opposed to what might happen if the plant closed and wholesale prices reduced significantly," Binns said.

The new agreement allows NZAS to close the smelter as soon as January 2017, provided it gives 15 months' notice. The previous one is understood to have required a three-year ramp-down, possibly starting in 2016.

From 2017 it has to give only one year's notice of closure. Previously, if NZAS had shut the smelter without the required notice, guarantees to Meridian would have kicked in but they were not backed by its parents, Rio Tinto and Sumitomo Chemical.

Meridian now has guarantees from those companies until the end of 2016, and less valuable ones for the balance of the contract out to 2030.

From 2015, NZAS can reduce the volume of power covered by the contract by 30 per cent to 400MW. That would free up 172MW of Manapouri's output for sale to other buyers.

"That's a good thing from our point of view because we have obviously got a very hard-fought price.

"They most certainly have got a lot of negotiating power. If we get 172MW back in 2015 that will free us up to sell that power to customers at hopefully better prices."

It would not necessarily mean the smelter reduced its output proportionately. It would be free to buy electricity from other suppliers such as Contact Energy or Genesis Energy.

Asked about the ability to send Manapouri power north, Binns said that 80 per cent of it could flow north now without any further work being done on the national grid.

Raising it to 100 per cent would require work that would take two or three years.

"It is Transpower's decision. But all the consents are in place, all the landowner agreements done, so it's not as if a lot of pre-work has to be done."