S&P warns of potential risk to electricity generators in the event of a closure at Tiwai smelter

Thursday, 24 October 2019

NZAS chief executive Stewart Hamilton makes the case for intervention to save the aluminium smelter in October.

The threatened closure of the Tiwai aluminium smelter would result in an over supply of power generated in the South Island and could lead to cheaper power prices, ratings agency S&P says.

On Wednesday Rio Tinto announced it is considering closing the New Zealand Aluminium Smelter near Bluff as part of a strategic review of the facility.

The smelter accounts for about 12 per cent of New Zealand's electricity consumption. If the smelter reduced production or closed there would be surplus electricity generation, particularly in the South Island.

S&P said additional investment would be need in the national grid to distribute power from the South Island to the North Island.

'This would result in lower electricity prices in the South Island over the short term, and could take at least two to three years for the market to normalise.'

It also issued a warning to electricity generators pending a strategic review of the smelter's future.

Rio Tinto said given current market conditions and with high energy costs, it expected the aluminium industry would continue to be unprofitable.

Following the review's announcement, more than $2 billion was been wiped off the value of power companies.

* Rio Tinto considering closing Tiwai Aluminium Smelter

* New Zealand aluminium industry committed to a low carbon future**

Rio Tinto is considering closing down the New Zealand's Aluminium Smelter (NZAS) at Tiwai.

Electricity retailers' share prices all dropped after Wednesday's announcement.

Genesis Energy share price dropped from $3.28 a share on Tuesday to $3.07 on Thursday, Contact Energy's from $8.45 to $7.76, Meridian Energy from $5.38 to $4.99 and Mercury Energy from $5.44 to $5.04.

S&P predicts that the smelter's closure would affect supply and demand, effecting electricity generators.

It warned Genesis Energy and Contact Energy could face higher risk due to their reliance on thermal generation.

Meridian Energy and Mercury NZ were likely to be less affect because they generated their electricity entirely from renewable resources like wind and hydro power stations, S&P said.

The smelter has enjoyed cheap power from the Manapouri hydro station since 1971 according to the Electricity Authority.

Electricity retailers were this week reluctant to speculate on potential price drops.

In a statement Rio Tinto Aluminium chief executive Alf Barrios said the company intended to hold discussions with the Government and energy companies to explore options and identify economically viable options.

'The aluminium industry is currently facing significant headwinds with historically low prices due to an over-supplied market. This means that many aluminium providers are reviewing their positions.

About 1000 people work at the smelter, including contractors.

However, Rio Tinto is required to give a year's notice to Meridian Energy on any reduction or termination of the smelter's electricity supply contract.