Comalco gets good conduct tax break

The future of Comalco's Tiwai Pt electricity smelter has been assured, at least until 2012, by a deal between the company and the Government that will exempt it from the carbon tax due to come into effect in 18 months.

In return, the company will have to spend tens of millions of dollars in capital investment to reach and maintain world's best practice in energy efficiency and greenhouse gas emissions.

Tom Campbell, chairman of New Zealand Aluminium Smelters, the 79 per cent-owned Comalco subsidiary which operates the smelter, said: "We are a few per cent away from world's best practice and to close that gap is challenging. It's not a gimme."

He said the carbon tax would have cost the company between $60 million and $70 million a year, imperilling its survival.

The smelting process produces carbon dioxide as an essential part of the chemical reduction occurring in the pots.

The company had already reduced its emissions substantially from 1990 levels in the course of a major upgrade in the late 1990s.

"We have still got a little bit to do. It's like the law of diminishing returns - the last little bit is harder to do than the first big bit," Campbell said.

The bigger impact of the carbon tax, however, would be on the price of the electricity Comalco buys under its contract with Meridian Energy. It represents about 15 per cent of national electricity consumption.

Although most of the power the smelter consumes flows from Meridian Energy's Manapouri hydro-station and involves no greenhouse gas emissions, the price it pays under its take-or-pay contract with Meridian is linked to the average price on the spot electricity market over the previous year.

The spot price in any half-hour period is set by the most expensive power needed to satisfy demand in that period. That is increasingly likely to be a gas-fired or coal-fired power station and, from April 2007, the costs of that generation will include the carbon tax.

The agreement concluded with Comalco includes an algorithm to offset that windfall effect on Meridian and the corresponding rise in Comalco's costs. Electricity is an aluminium smelter's largest operating cost.

The deal announced yesterday is the core of a negotiated greenhouse agreement (NGA) with the Government. An NGA is an option open to large enterprises whose international competitiveness would be at risk if subject to the carbon tax.

The aim is to avoid "leakage". If the smelter were to close, the demand for the aluminium it produces would not disappear, but be met by smelters somewhere else, such as China.

As the power for those smelters is likely to come from coal-burning power stations that would increase global greenhouse gas emissions, not reduce them.

"It's the most important part of the document for us," Campbell said.

"It's the part which lays down the the targets and the mitigation from the tax we get as a consequence of that, the milestone and how it will be measured."

So far, only two NGAs have been concluded, with New Zealand Refining and miner OceanaGold.

Among the other companies the Climate Change Office is negotiating with are ACI Glass Packaging, Carter Holt Harvey, Fletcher Building, Norske Skog Tasman, New Zealand Steel and cement company, Holcim.

What are NGAs?

* Negotiated greenhouse agreements exempt a company from the impact of the carbon tax in exchange for moving to world's best practice in emissions for the gases blamed for global warming.

* They are only available to firms whose international competitiveness would be threatened by the tax.

* Comalco's will be the third after the Marsden Pt refinery and gold miner OceanaGold.

* Aluminium exports topped $1 billion in the year ended July.