Broker believes Tiwai smelter beat down Meridian on power price by 36%

Friday, 15 January 2021

New Zealand Aluminium Smelter chief executive Stewart Hamilton wants Tiwai to scale back up to work at capacity for the next four years. [File video]

Rio Tinto managed to beat down the price it pays to power the Tiwai Point aluminium smelter by more than a third, from about 5.5 cents per kilowatt hour to about 3.5c/kWh, Forsyth Barr believes.

The broker advised investors that the smelter’s majority owner was likely to seek to extend the electricity contract “beyond 2024”, indicating it thinks Rio Tinto hopes the smelter will stay open beyond that date.

Meridian and Rio Tinto said on Thursday that they had reached an agreement on power pricing – which Rio Tinto said was independent of any agreement from the Government to reduce the smelter’s Transpower transmission charges – that would see the smelter stay open until the end of 2024.

The smelter has agreed to buy 572 megawatts of power from Meridian, of which 100MW will be provided by Contact Energy, which Forsyth Barr said was 20MW more than the current Contact supply deal.

It estimated the new pricing would cut the smelter’s power bill by about $100m a year.

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If Forsyth Barr’s estimate is correct, the smelter would be paying about 12 per cent of price consumers pay for power.

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A price of 3.5kWh/hour would mean the smelter was paying only about 12 per cent of the standard rate of 29/kWh that Meridian charges residential customers for power.

Forsyth Barr forecast Rio Tinto would seek to extend the power contract in 18 to 30 months time – providing a window during which Meridian could seek alternative, higher-paying customers.

“It is in Meridian’s interests to have found alternative demand sources, such that it can enter any future negotiations requiring a market price for electricity,” the broker said.

“It is up to Meridian and Contact to ensure Rio doesn't still have pricing power in 2022-23 assuming it seeks a contract extension.”

The Government has said negotiations with Rio Tinto over both the price the smelter pays Transpower to carry electricity to the smelter and the clean-up of the smelter site, once it closes, are continuing.

A spokeswoman for Energy Minister Megan Woods would not say on Friday whether the Government was contemplating offering – or had already agreed to offer – Rio Tinto a break on Transpower transmission charges in return for it agreeing satisfactory arrangements for cleaning up the smelter site.

Nor would she comment on any rationale for using transmission pricing as a method for providing such an incentive.

She pointed to a December statement from Woods – made prior to Rio Tinto’s decision to extend the smelter’s operations – that said any arrangement to “assist Rio Tinto with meeting their electricity transmission costs” would require a firm commitment around remediation of the smelter site.