Reform proposal 'big blow' to Tiwai aluminium smelter

Monday, 30 September 2019

The Tiwai Point aluminium smelter may end up paying millions of dollars less in electricity transmission costs, but its boss is far from impressed.

Submissions close on Tuesday for the Electricity Authority's proposal to reform the transmission pricing methodology that determines how charges are set to recover the costs of operating the national electricity transmission grid.

The proposal will result in the Tiwai smelter's transmission costs being reduced by about $11m, but not until 2024.

NZAS chief executive Stew Hamilton has indicated the reduction is too little and too late.

**READ MORE:

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* Industry, regulator at odds about how best to fund New Zealand power supply

* Tough times for Tiwai with $53m decrease in profit for 2018

* Transmission costs eat into Tiwai's profits

* Tiwai Smelter deal signed between Meridian Energy and NZAS

* New Zealand Aluminium Smelters calls for cheaper power**

The smelter, which employs about 900 Southlanders, has faced 'huge increases' in transmission costs in the past 10 years - this year it is paying $64.5m, up from $41.8m in 2008.

Hamilton says the smelter pays up to 10 times more in transmission costs than some of its overseas competitors.

What makes it 'really tough' is the smelter is paying the increased costs for grid infrastructure upgrades to take power from the south to the north,  and particularly for the big investments in Auckland, he says.

'Since 2008 when these investments were made NZAS has faced total increases in transmission costs of nearly $200 million which we will never get back.'

Hamilton says NZAS supports the Electricity Authority reform and the principle that those who benefit from transmission infrastructure should pay for it.

'But under this latest proposal NZAS would receive a reduction in those high costs of around $11 million and not until 2024 – this is a big blow to a business that is struggling to remain internationally competitive because of these unfair extra costs.'

In July, when  the Electricity Authority released its proposal to reform the transmission pricing methodology, chief executive James Stevenson-Wallace said  the proposed changes would significantly benefit electricity consumers.

'We estimate a net benefit of about $2.7 billion over the next 30 years from our proposal through lower transmission and generation costs. 

In response to Hamilton's concerns, the Electricity Authority's market design general manager Rob Bernau says some large industrial customers face price increases under the proposal, whereas the NZAS transmission charges will fall.

The proposal seeks to strike a balance between consumers paying for assets they benefit from while also limiting price shocks, he says.

'Our proposal protects household consumers, distributors and directly connected businesses from big price increases with a price cap.' 

He agrees that under current charges NZAS and other consumers are paying for transmission investments across New Zealand, including some which they receive little or no direct benefit from.

'The authority wants to change this, our proposal is about rebalancing transmission charges so that those who benefit pay.'  

Transmission pricing is complex and there is no single option that will deliver a consensus.

'If we don't fix transmission pricing New Zealand consumers [including NZAS] will pay more for their electricity in the long term, especially as we transition to a low carbon economy.'  

Southland Chamber of Commerce chief executive Sheree Carey says the team at the smelter has been working hard to get a break from high transmission costs for many years. 

'These very high costs and the increases the smelter has faced to pay for upgrades to the grid in the north of the North Island have made tough times much tougher.' 

'The team at Tiwai and the chamber absolutely back the Electricity Authority's reform process however we are disappointed with this latest proposal as it delivers too little relief for the smelter ($11 million) too late 2024.'

In 2013 the New Zealand Government made a one-off payment of $NZ30 million to smelter owners Rio Tinto - which threatened to close the Tiwai Point aluminium smelter if it didn't get a lower power price from Meridian Energy.

Once the Electricity Authority consultation process is complete and all submissions have been reviewed the authority will look to publish the new guidelines next year.