Tiwai Point smelter safe until 2017; Meridian still sole supplier

Monday 3rd August 2015

The Tiwai Point aluminium smelter will remain open, with Meridian Energy remaining its sole electricity supplier at an undisclosed but somewhat improved electricity price for about 30 percent of the smelter's total consumption.

Meridian had hoped to convince one or more of its rival electricity suppliers to take up the slack on the 572 Megwatt contract to supply the smelter at heavily discounted rates, but in the end was only able to gain support at arms' length through a hedge contract with Contact Energy for 80MW of that total.

In a statement to the NZX, Meridian chief executive Mark Binns said the company was "disappointed New Zealand Aluminium Smelters was unable to reach an agreement with other parties" but "believes the new arrangement provides pricing for 172MW that is more in line with market expectations."

NZAS chief executive Gretta Stephens said the agreement "crossed a hurdle" that gave "more certainty about our immediate future,” but gave no assurance about the ageing smelter's long term future as global aluminium prices remain below the Bluff smelter's cost of production.

“The agreement provides short term security for the smelter and allows time for market fundamentals to improve,” she said. "Our combined electricity and transmission prices are still not internationally competitive."

The smelter's owners, Rio Tinto and Japanese conglomerate Sumitomo, renegotiated the smelter's electricity contracts in 2013, using the fact the government wanted to sell 49 percent of its three state owned power companies as a bargaining chip to overturn a 30 year contract signed in 2007, prior to the global financial crisis and a collapse in metal prices.

That agreement is believed to price the smelter's 572MW of supply at around $45 per Megawatt hour, compared to prices between $60 and $70 per MWh commonly charged to other industrial electricity users. It had a break point at July 1, extended to Aug. 3, this year allowing NZAS to declare whether it intended to continue operating the smelter and giving Meridian the option of shedding 172MW of the 572MW contract, so that it could sell it more profitably elsewhere.

In the end, however, Meridian was unable to lay the additional generation off to other parties. Instead, Contact Energy has entered into a four to 14 year financial hedge contract with Meridian to cover 80MW of the smelter load, with "provision of associated risk management from meridian to contact under certain limited circumstances."

The smelter retains rights to announce a shutdown, with a year's notice, with the first notice date being Jan. 1, 2017.

Genesis Energy has made no statement on any involvement in contract support, despite being widely tipped as a likely source of new supply.

"While other generators have differing views as to the impact of a smelter exit on their competitive position, Meridian has been able to gain sufficient support from some parties to warrant it covering this extra volume from 2017," said Binns of the refreshed contract terms, which run through to 2030.

BusinessDesk.co.nz

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