$50M upside for Tiwai Pt smelter in grid charge proposals

Tuesday 16th June 2015

The Electricity Authority's latest attempt to find a more efficient way to charge for the cost of the national grid would benefit South Islanders and many large industrial electricity users, including the Tiwai Point aluminium smelter, at the expense of Auckland, Northland and West Coast consumers, if the most comprehensive of the proposals published today is pursued.

The publication of new Transmission Pricing Methodology proposals for public submissions is the latest chapter in a five-year saga that saw the withdrawal of recommendations advanced in October 2012 because of opposition from the electricity industry, industrial users and consumers.

Whether the new proposals are any more popular remains to be seen, although the most purist version is likely to be popular with South Island electricity generators like Meridian Energy, southern consumers except those on the West Coast, and industrial users such as Rio Tinto-controlled New Zealand Aluminium Smelters, operator of the Tiwai Point smelter, which uses around one-seventh of total national electricity producers.

Under the so-called "Application A" version of the proposals, the Tiwai Point smelter could expect to pay around $10 million a year in grid transmission charges instead of around $60 million at present, removing one of the sources of threat that the smelter might shut up shop in New Zealand, at major cost to the Southland economy and national exports.

The smelter negotiated cuts to its electricity tariffs from its current main supplier, Meridian, ahead of Meridian's partial privatisation in 2013, and is due to decide in the next two months whether to roll over those contracts, reduce consumption, or signal a decision to progressively close the smelter. The government paid a controversial $30 million sweetener as part of the 2013 renegotiation after Meridian refused to meet NZAS's price demands - half the amount sought by the smelter's owners.

NZAS has struggled to remain competitive internationally because of falling aluminium prices and a strong kiwi dollar, although it is now profitable and Rio Tinto is again seeking to sell it as part of a suite of ageing Australasian assets, packaged as Pacific Aluminium.

However, Application A also implies that total electricity bills in Auckland would rise by around 4.5 percent, the Electricity Authority chief executive Carl Hansen told a briefing in Wellington, with increases for the West Coast and in Northland of around 10 percent. The increases reflected the benefits to those regions of having upgraded electricity transmission, he said. Those costs are currently smeared across all electricity users, with a bias against the South Island, which currently pays the whole cost of the HVDC cable carrying electricity between the North and South Islands.

South Island generators have been prime movers in seeking changes to the current transmission charging regime, which the Electricity Authority is obliged by law to try to make more efficient. It is expecting court challenges no matter what decision it finally makes on future transmission pricing. The issue is crucial because major grid investments typically carry price tags in the hundreds of millions of dollars.

The Cook Strait cable was once mainly a benefit to South Island hydro-electricity producers, with most electricity on the cable flowing to the North Island. However, changing generation patterns have seen a more even balance of electricity flowing in both directions in recent years. North Island electricity generators benefit more than their southern counterparts in years when low rainfall has curtailed South Island hydro generation.

The key change to previous proposals, published today, is the introduction of a new layer of liability for grid costs, dubbed a "deeper connection charge", which would be applied to both existing and new assets on the national grid that are "predominantly used by a small number of parties" and would create a "market-like approach."

Because it would raise the price of electricity for many upper North Island and West Coast consumers, a range of transitional measures are proposed for full implementation of Application A, although detail was unavailable because the Electricity Authority discovered late yesterday the way transition paths had been calculated. There would be limited impact on power prices in the lower North Island, including Wellington, while total costs for upper North Island mass market load would rise from around $225 million a year to more than $350 million.

South Island consumers would save around $40 million a year from the changes, under Application A.

An alternative approach that would have little immediate impact on prices, called Application B, would apply the deeper connection charge only to new assets, leaving existing assets untouched. While this would have the desired effect of improving grid investment decision-making in the future, it might take decades to alter the current balance of costs and frustrate the EA's requirement to improve price signals for grid investment.

"The deeper connection charge seeks to identify those situations in which, in the absence of a regulator, the parties involved could have otherwise been expected to come together and negotiate an efficient contract for investment," a companion document on the new proposal says. "It would recover all costs that would be subject of such a contract."

BusinessDesk.co.nz

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