Deal struck to keep Tiwai Point aluminium smelter open for another 20 years

Friday, 31 May 2024

The Tiwai Point aluminium smelter will remain open for at least another 20 years, mining giant Rio Tinto has announced.

The smelter had been facing the risk of closure at the end of this year as a result of its power supply agreement coming to an end.

But Rio Tinto said it had reached new 20-year agreements with Meridian Energy, Contact Energy and Mercury that secured its future.

The announcement saw the sharemarket prices of the three power firms each jump by a few percent, adding more than $1 billion to their combined market value.

Two of the deals are still subject to approvals from the Electricity Authority, which in 2022 gave itself the right to veto any power supply contracts, and other unstated conditions that are not believed to be material.

The authority’s veto power was based on its concern that the smelter’s previous shot-term bargain-basement power deal, which is believed to have allowed it to buy electricity at a price of just 3.5 cents per kilowatt-hour, was pushing up prices for other electricity users.

Prior to 2021, the smelter is understood to have been paying about 6c/kWh for power.

The Electricity Authority said in a statement that it had cleared a draft contract between the smelter and Mercury, but made no mention of the status of its consideration of the other new contracts.

A spokesperson told The Post it “did not comment on the status of applications”.

It is allowed 45 days to review large power contracts, so its ability to veto any of the agreements would expire after that.

Rio Tinto Aluminium chief executive Jérôme Pécresse said it was pleased the long-term future of the Tiwai Point smelter had been secured.

The agreements marked “an exciting new chapter” in the smelter’s history, he said.

The power-company agreements allow Meridian and Contact Energy to reduce power supply to the smelter by about a third, or 185 megawatts, when power is in short supply, with the smelter rewarded for decreasing its demand.

Rio Tinto said that would “help ensure secure electricity supply to New Zealand homes and businesses when it is most needed”.

Rio Tinto has separately agreed to acquire the 21% share of the smelter it did not own from Japan’s Sumitomo Chemical Company.

The bulk of the smelter’s power will continue to come from Meridian Energy, which will supply 377 megawatts (MW).

Meridian chief financial officer Mike Roan said the deal it had reached would see the smelter pay a fixed price for its electricity up until 2028.

After that the power price would go up by the rate of inflation each year, but only if the price of aluminium had risen in the previous year, compared to the year prior.

Roan declined to reveal what the fixed price was, but Meridian described it as “sustainable”.

Contact Energy said in a statement to the NZX that it would be supplying between 100MW and 120MW to the smelter at a price that would be “consistent with long-term electricity supply agreements supporting large South Island industrial users”.

The price was “materially higher than the price received on the current transitional agreement”, it said.

Forsyth Barr analyst Andrew Harvey-Green believed it would be safe to assume the average price the smelter would be paying would be somewhere in the band of 6c to 10c per kilowatt hour.

John Harbord chairperson of the Major Electricity Users Group, whose members include the smelter but also many other large commercial and industrial power users, said that — despite Electricity Authority’s previous contract concerns — other power users benefitted from the smelter staying open.

“One of the crucial things having the smelter does, is it provides ‘flex’ in our system by being able to reduce its power consumption,” he said.

“If we have limited electricity supply due to lack of rain or wind or sun, it is the first cab off the rank to shore up the whole system and ensure the lights stay on for the whole of New Zealand.”

If the smelter closed, generation would over time reduce to match existing demand,“ he said.

“It would not suddenly free-up electricity that sat there forever. It would disappear and then you have lost that flex.”

Harvey-Green agreed the “demand-response” aspect of the power deals would be “clearly positive” for keeping the lights on.

Environmentally, it was also a good outcome, given the alternative to the smelter reducing demand during periods of tight supply might be turning on the Huntly power station’s coal-fired Rankine turbines, he said.

Energy Minister Simeon Brown also welcomed the agreement, which he said would provide “much needed certainty for electricity generators”.

“Demand for electricity is going to remain high, and we expect that this news will lead to more electricity generation being brought online,” he said.