Contact Energy warns power prices could increase following Rio Tinto's decision to close its Tiwai Pt aluminium smelter.

With the "disorderly exit" of 13 per cent of electricity demand, Contact says the necessity to spread transmission costs more widely to transport power further could push up prices.

Customers should expect to see an increase in transmission costs as the
the proportion of transmission costs currently paid by NZ Aluminium Smelter will be spread across them all.

READ MORE:
Rio Tinto announces plans to close New Zealand aluminium smelter in 2021
Covid-19 coronavirus: Tiwai Point reduces production in response to virus
Tiwai Point smelter closure not a risk to transmission pricing benefit
Rio Tinto reports $46.2m loss at Tiwai Point

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"The reality is that NZAS has subsidised transmission costs to consumers for years. Not only will those costs now fall to other customers, there will also be additional costs for the significant transmission investment from Transpower now needed to shift surplus energy from the lower South Island north to where it is needed," said Contact chief executive Mike Fuge.

Transmission through Transpower's grid makes up just over 10 per cent of power bills now.

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Rio's decision was to give 14 months' notice on its electricity contract with Meridian Energy was "very disappointing" after all commercial parties involved in dealing with the smelter, including Contact, had collectively delivered significant cost reductions for electricity.

"We've all had a strong desire to help secure the financial sustainability of the unique low-carbon smelter at Tiwai, and retain the 1000 high-paying jobs in Southland, plus the 1600 contractor and supplier roles."

Contact Energy warns it may have to spill water with falling demand for power in the South Island. Photo / File
Contact Energy warns it may have to spill water with falling demand for power in the South Island. Photo / File

He said he was disappointed to have played a part in delivering these savings for one of the greenest smelters in the world (as a result of it using renewable electricity) and to have such limited engagement from Rio Tinto.

"We urge Rio Tinto to seriously consider the offer for improved electricity supply and encourage them to consider what is right for Southland, for New Zealand and for their own global environmental commitments," Fuge said.

Contact would now accelerate mitigation options including the consideration of closure of the Taranaki Combined Cycle thermal power station at Stratford.

The gentailer also expects Transpower to expedite the build of the transmission grid and in this regard welcomes the commitment to the lower South Island transmission upgrade.

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He said that the smelter's departure will have a significant impact on the Southland economy.

"In addition, the decision will also result in an avoidable and significant increase in global emissions as production shifts away from NZAS to aluminium smelters powered by electricity generated solely from fossil fuels."

Before the excess power could be shifted north the surplus water currently being used to generate renewable energy in Southland will in large part end up flowing down the Clutha River.

Contact's "shovel-ready" Tauhara geothermal power station remained New Zealand's cheapest and most attractive option for new, renewable, base load electricity generation, but this may be deferred.

"Tauhara remains a fantastic project, however it is prudent to press pause for now. We need to factor in the impact of Covid-19 and the potential exit of NZAS and get a clearer picture of demand," he said.

Opportunities to decarbonise transport and accelerate the electrification of South Island industry away from a reliance on coal remained in focus.

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"One silver lining is that we expect today's news to be a catalyst for users to accelerate their shift toward low-carbon electricity — however, this transformation would be a slow burn and take much longer than 12 months."

Contact would update the market on any implications of the NZAS exit on the company's expected earnings and dividend.

"We're accelerating our mitigation plans to minimise the financial impact. Our portfolio of long-life renewable generation assets, flexible thermal assets and fuel contracts, and strong balance sheet provide the confidence we are well placed even in a lower demand environment," said Fuge.

Mercury says it is relatively well placed to respond to the decision to close the smelter, with all of its renewable generation assets in the North Island close to load centres and largely free of major transmission constraints as a consequence of reduced South Island electricity demand.

"Mercury is confident that the sector will adapt to the closure of the smelter, invest in new transmission and develop new electricity demand to rebalance New Zealand's electricity system."