Aluminium smelter cuts production amid fresh power warnings

Friday, 7 May 2021

The Tiwai Point aluminium smelter had hoped as late as last week that lake levels would recover before it had to cut production.

The Tiwai Point aluminium smelter has agreed to reduce its electricity usage by about 11 megawatts by cutting its production in return for compensation from Meridian, amid fresh warnings over the continuing power market squeeze.

The cut comes on top of an earlier 6MW cut and will reduce its energy consumption to 555MW.

The smelter is the latest in a line of industrial power users that have curbed production amid what threatens to be a slowly unfolding power crisis triggered by low rainfall, gas production problems, and a long period of relatively low investment in new power generation.

John Harbord, chairman of the Major Electricity Users Group, said on Friday that businesses that were looking to re-hedge electricity in the second half of this year were facing hedge price increases of “up to 100 per cent” compared to last year.

“Some energy-intensive companies simply cannot afford hedge prices that high. Further job losses are likely, with our regional communities likely to be the hardest hit,” he said.

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Hydrological conditions in the South Island are now very close to the point where Meridian could require the Tiwai Point aluminium smelter cut consumption by 80MW, or 14 per cent, from peak, to 492MW.

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Energy Minister Megan Woods told Parliament in April she was taking the situation in the electricity market very seriously.

Lake levels and forecasts on Friday appear just a day or two away from the point where Meridian could contractually require the smelter to slash electricity consumption by a further 63 megawatts, to 492MW, over the next 130 days in return for compensation.

The power company reached an agreement with the smelter last week that established a framework for the smelter to make the smaller, voluntary cuts of up to 30.5MW, also in return for compensation, but cuts did not kick-in immediately.

A spokeswoman for the smelter’s majority owner, Rio Tinto, said the 11MW cut that had now been made this week had been achieved by turning off some of the smelter’s pots but would not result in job losses.

The production cut comes with aluminium prices sitting at US$2511 (NZ3487) a tonne, their highest price since August 2011.

NZ Steel and the Norske Skog paper mill in Kawerau also reduced production in response to high wholesale prices last month, and Harbord partly blamed the closure of the Whakatāne Mill in March on the electricity market.

Refining NZ, another big power user, declined to comment on Tuesday on the impact electricity and gas prices were having on its business.

Spot market electricity prices peaked above 50 cents a kilowatt-hour on Tuesday morning when Fonterra added its voice to calls for market changes, saying in a submission to the Electricity Authority that the electricity market was “complex and opaque” and no longer fit for purpose.

The Electricity Authority mounted a defence of the electricity market last week, saying it was well-regarded internationally and was “doing the job it is designed to do, reflecting lower levels of supply”.

Harbord said members of the MEUG had discussed the EA’s statement at their monthly meeting last week and indicated they had not been won over.

“Individual MEUG members were of the view that the commentary read like an ostrich with its head in the sand, pretending everything is okay and that New Zealand has it good compared to other countries,” he said.

Harbord has previously argued that generators are almost incentivised to keep the market “on the precipice of shortage”.

He said he was aware of another MEUG member that was operating at a loss because of high electricity prices.

“As they put it to us, they haven't closed because it costs too much to close down the plant and they might never re-open. But they cannot keep operating at a loss forever.”

A spokeswoman for Energy Minister Megan Woods said she was awaiting advice that she asked for from the EA last month on whether the wholesale market was operating as it should.

She has also sought advice from the Ministry of Business, Innovation and Employment.

The aluminium smelter separately announced on Friday that its chief executive Stew Hamilton was resigning to take up a position with power company Mercury.