Electricity Authority makes 'urgent' move to block cheap Tiwai smelter power deal

Thursday, 18 August 2022

The Tiwai aluminium smelter has agreed to reduce its electricity use if the system is under stress.

The Electricity Authority has blocked power companies from entering into large power contracts with customers “unless certain conditions are met” in a major, surprise intervention in the power market.

The “urgent amendment” to the Electricity Industry Participation Code impacts contracts of more than 150 megawatts and means power companies would not be able to strike a new power-supply deal to allow the Tiwai Point aluminium smelter to stay open beyond the end of 2024, without its approval.

The authority’s market policy manager, Andrew Doube, noted that it estimated last year that households were on average paying up to $200 more than they should for electricity each year because of the smelter’s current power contract.

The smelter is believed to paying its major supplier, Meridian Energy, a low-ball price of about 3.5 cents per kilowatt-hour for power, and Doube said that had the effect of maintaining demand and keeping wholesale prices high.

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Deborah Hart, chairperson of the Consumer Advocacy Council, which was established by the Government this year to represent the interests of consumers and small businesses in the power market, said she was “really pleased” by the authority’s move.

Her concern was that cheap power for smelter meant higher prices for everyone else, she confirmed.

“We absolutely support what the authority is doing. It sends a very clear message to the generators that they must not settle on contracts that disadvantage residential and small business consumers.”

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The authority said in a statement that the intervention on Thursday would “protect consumers from potentially paying more than they should”.

“While the authority did not definitively determine that the Tiwai contract was inefficient it considered … a timely and targeted intervention was required,” Doube said.

“This is all the more urgent given the recent announcement that New Zealand Aluminium Smelter is seeking to negotiate a new deal with generators when its current contract expires at the end of 2024,” he said.

Electricity Authority spokesperson Sean Martin said the smelter’s power contract was the only contract that was above 150MW and that would therefore need the authority’s approval to be renewed.

But it was possible that other new power deals, for example contracts to power large data centres or ‘green hydrogen’ plants could also be caught by the rule in future, he said.

The authority said its rule change would be in place for nine months, while a “proposed permanent amendment is consulted on”.

The smelter’s majority owner, Rio Tinto, has been approached for comment.

Meridian said in a statement to the NZX that it would work through the detail of the amendments and a consultation paper released by the authority and indicated it would make a submission.

Contact Energy is also involved along with Meridian in helping to power the smelter.

Its chief executive Mike Fuge confirmed on Monday that negotiations had now started with smelter, which would need a new power contract if it was to remain open beyond its current scheduled closure date at the end of 2024.

Market speculation prior to the authority’s intervention suggested that a new power contract could be struck at a price in the region of 6 to 8 cents per kilowatt-hour.

Under the authority’s urgent rule change, no supply deal over 150MW could be agreed unless the buyer was able to on-sell any unused electricity, the “net value” of the contract was positive, or the authority cleared the contract.

The smelter currently has a contract for about 572MW.