Power deal keeps smelter alive

A revised contract between Meridian Energy and the owners of the Tiwai Pt aluminium smelter extends the smelter's operating life for at least another year from the start of 2017.

And from that date the smelter will pay a higher average price for power.

However, a provision in the contract renegotiated between Meridian and smelter owners Rio Tinto and Sumitomo in 2013 has been dropped which would have freed up 172 MW or 30 per cent of the smelter's electricity load from January 1, 2017, for Meridian to sell elsewhere.

The assumption was that Genesis Energy and/or Contact Energy, the generators with most to lose in stranded thermal generating assets if the smelter closed, would be incentivised to fill the breach. But intensive negotiations failed to reach a deal.

That was disappointing, said Meridian chief executive Mark Binns.

However, the opportunity cost to Meridian of continuing to cover that last 172MW of the smelter's load is substantially offset by back-to-back hedge contracts it has concluded with Contact and to a lesser extent Genesis.

Binns described the price agreed on for the 172MW as "more market-related" and "more in line with market expectations" than Meridian gets now.

"We had always said that we wanted a market price. I suppose a starting point for that would be what futures prices are and they begin with a 7 [$70 a megawatt hour]. We have been able to achieve a price that is less than that for the 172 [but] that, it could be argued, is getting towards market-type pricing," he told the Herald.

Contact in its contract with Meridian has agreed to cover 80MW for at least four and a maximum of 14 years from January 1, 2017, while Genesis Energy commits 50MW for two years.

The contract between Meridian and the smelter's owners runs until 2030 but the latter can give a year's notice of termination at any time after January 1, 2017.

New Zealand Aluminium Smelters chief executive Gretta Stephens said the agreement provided short-term security for the smelter and allowed time for market fundamentals to improve.

"Worldwide demand for high-quality aluminium is increasing through automotive and electronics manufacturers. If we can continue production at NZAS, we will be able to take advantage of this future market potential," Stephens said.

The contract with Meridian continues to provide for a higher power price if or when world aluminium prices recover.

But Stephens said the smelter's combined electricity and transmission prices were still not internationally competitive.

Reform of transmission pricing had never been more important as NZAS's delivered cost of electricity was one of the highest for an aluminium smelter outside China, she said.

Last year the smelter paid $64 million in transmission costs but proposed changes by the Electricity Authority to how transmission charges are set could cut that by $50 million a year, which would drop straight to the smelter's bottom line.

Read this morning's Meridian announcement here