Smelter deal - save some outrage, there may be something we're not being told

Wednesday, 20 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]

OPINION: On balance, it’s positive that a deal has been reached to keep the Tiwai Point aluminium smelter open until at least the end of 2024, even if that does come at the cost of slightly higher electricity prices.

But there’s no justification for the Government to now cut the smelter a special deal to reduce the transmission bill of about $60 million a year that it pays to national grid operator Transpower.

Almost as soon as the smelter’s majority-owner Rio Tinto first announced it was reviewing the future of the smelter in October 2019, the smart money has been on a compromise.

We now know that Rio Tinto’s assertion in July last year that it would close the smelter in August of this year represented just a temporary failure, or a step, in the negotiations.

* 'It's a very profitable smelter now', Meridian boss says after price beat-down

Keeping the smelter open until the end of 2024 now stacks up.

* Aluminium smelter deal - who caved?

The company had originally been seeking about a one-third reduction in its electricity costs, which it appears to have received in full from Meridian, as well as help from the Government to roughly halve its Transpower bill.

But if we take ministers and the aluminium smelter’s chief executive Stew Hamilton at their word, Rio Tinto’s announcement about its new deal with Meridian was independent of the talks that are continuing to take place around transmission pricing.

Hamilton has said there is “no expectation” as to what the outcome of the discussions about transmission pricing will be.

On the face of it, there therefore appears no reason for the Government to give the smelter a further helping hand by cutting its Transpower bill.

One way or another, electricity users or taxpayers would unquestionably be paying for any such discount.

The Electricity Authority had just spent 10 years working out how to fairly carve up electricity lines costs.

Energy Minister Megan Woods and Finance Minister Grant Robertson have said they are continuing to talk to Rio Tinto about its obligations to clean up the smelter and deal with its toxic waste after the smelter closes.

But it would make no sense for the Government to bribe Rio Tinto with a Transpower discount to persuade it to clean up the site.

For one thing, it is uncertain the smelter will close at the end of 2024, so for how many years would the Government be intending to provide the discount?

During a conference call on Monday, Meridian chief executive Neal Barclay talked up the chances of Meridian finding higher-paying customers from 2025 who might use its power to produce green hydrogen, replace industrial boilers, and to power data centres in Southland.

The data centre prospect looks good, but the other investments could be hard for anyone to stack up based on current commercials and carbon prices.

Secondly, a transmission discount for the smelter would open up a can of worms for the electricity sector which has just finished a tortuous 10-year process to work out how lines charges should be carved up among power users.

The smelter has estimated remediation will cost $256m.

There is no bespoke agreement on cleaning up the smelter site when it closes, but there are local and national laws setting out obligations.

But Environment Minister David Parker has indicated the company has obligations under both national and local environmental legislation to tidy up when it leaves.

If Rio Tinto is somehow able to legally avoid the full cost of the clean-up and the Government does have to step in to pay for some of it, then the sensible option would be for the Government to put that remediation work out to a competitive tender.

That way there is at least a chance that a Kiwi company might profit from any clean-up work that Rio Tinto was not willing to do of its own volition – rather than that work automatically going to Rio Tinto to do at the taxpayer’s expense.

If on the other hand the Government is considering a discount to increase the chances of the smelter staying open after December 2024, why offer that now, before it knows whether it is needed?

A lot could change by then.

For example, one of the front-runners for the OECD secretary-general vacancy, Cecilia Malmstrom, has reportedly been promoting the idea of tariffs on imports of products, including aluminium, from countries without strong carbon pricing, which could improve the economics of the green-powered Kiwi smelter.

Of course there may be suspicions that Rio Tinto agreed to keep the smelter open until 2024 based not just on Meridian’s offer, but also because it had a tacit understanding or even an agreement that either a Transpower discount or some other form of government assistance would indeed be forthcoming.

According to that theory, ministers might have wanted to mislead people into thinking the reprieve solely stemmed from Meridian’s offer because they knew that providing a government incentive to keep the smelter open was unpopular with the public.

Best to slip out the transmission discount or other assistance later, when the fuss about the smelter has died down.

I find that Machiavellian theory hard to believe, because as well as appearing cynical, it would seem foolish – it would be akin to kicking a can a couple of feet down the road so you can trip over it on your next stride.

How would the Government be able to explain why it was giving the smelter a helping hand when that wasn’t now required to keep the smelter open, if that is what actually transpires?

That is unless it has in fact already made some sort of firm commitment that it hasn’t been willing to disclose?

There is something odd going on with regard to how the Government is explaining its statements and actions, and Rio Tinto was quite precise in some of the language it used last week.

As mentioned, I have been a supporter of a compromise to enable an orderly exit of the smelter in a few years.

But if you on the other hand are enraged by the smelter staying open, it may be best to keep some of that outrage in reserve – my hunch now is it may be needed later.