Newsroom wrote:Tiwai Point smelter owner ‘hasn’t read the tea leaves’ in dry lakes – Meridian
Energy supplier says when it's needed most, Rio Tinto refuses to give power back to the people
Meridian Energy's chief executive has mounted an unprecedented public attack on his biggest customer and the country's largest electricity consumer, the Tiwai Point aluminium smelter.
It comes after Meridian reported reduced 2021 earnings to the sharemarket, in part dragged down by the lower power price paid by Anglo-Australian mining giant Rio Tinto, the smelter owner. The renewable energy company's underlying net profit after tax was $232m, down $84m on the previous year.
In an interview with Newsroom, Meridian chief Neal Barclay indicated the Rio Tinto deal was of greater benefit to the country than to Meridian, by creating time for the Southland economy and the electricity sector to transition to life without the smelter.
Barclay stopped short of saying Rio Tinto was a bad corporate citizen, noting its contribution to the community of Southland – but he did express frustration at the mining company's unwillingness to significantly reduce its load to help the country keep its lights on when the hydro lakes are low.
His criticism is less about the August 9 power blackouts (reducing the smelter's load in Southland then would have done little to address the power shortage in the North Island) and more about Rio Tinto refusing to accept an obligation to significantly reduce its demand for days or weeks at a time.
He revealed that Meridian had told Rio Tinto that if the smelting company wanted to find a way to continue operating in New Zealand, it would have to find a way to make Tiwai Point more flexible.
"We can't have a situation, which is what we've had, where we go into a drought situation, we've got scarcity of energy, and the smelter keeps taking its full load," Barclay said.
"And effectively they're exporting that product offshore. There is technology available in the smelting industry where they can actually reduce the energy they take in, and they can do that effectively, and that would be really helpful in a drought – but they've never been willing to entertain the thought.
"They haven't read the tea leaves, and haven't thought about how they could make that facility work more in sympathy with the electricity sector. Which would actually be worth a lot to them. We would pay them to drop off their usage of energy in a drought. But, like I say, it's just not a subject they've been willing to engage with us on."
To be fair, the smelter agreed in April on voluntarily reduce its power consumption by up to 30.5 MWh per hour to assist through the dry winter, if it wished to help address demand. It reduced its load by around 6 MW by not replacing pots that had been cycled out of circulation, and it agreed to not restart the 50MW Line 4 while the lakes were low. "We are pleased to now be in position to be able to do more to assist New Zealand’s security of supply for all customers should the lake levels not be replenished in the short term," a spokesperson said at the time.
But Meridian says that 30MW was "a relatively small amount" in the context of a 572MW smelter. Any reduction in load was voluntary, not obligatory. The agreement took months to negotiate and so came into force very late in the drought and was ultimately of limited value, the energy firm says.
Four months on, after the power crisis has come to the crunch, Rio Tinto is refusing to comment on Barclay's criticisms, or to answer questions about why it would not accept any obligation to reduce its power consumption when others are forced to turn off the lights.
After putting Meridian over a barrel by publicly threatening in July 2020 to quit New Zealand, Rio Tinto extracted the country's lowest power prices through to the end of 2024, in a deal to avoid suddenly throwing 1000-plus employees and contractors on the slag heap.
Meridian Energy swallowed a $60m per year cut to the price paid by Rio Tinto. The smelter now pays just $35 per megawatt/hr – less than a sixth of the average $224 wholesale price paid this year by other power customers. MBIE figures show residential consumers, by comparison, paid $293 per megawatt hour, including GST.
Rio Tinto reported that lower energy prices contributed to a US$43 million (NZ$61m) improvement to its first half earnings, citing the new agreement for electricity supply to New Zealand Aluminium Smelter.
As Meridian became better able to sell its electricity to the North Island, Barclay warned, that Rio Tinto deal would become marginal. "There might be a year or two when we're effectively taking one for the team."
The four year contract gave the Southland and New Zealand economies time to transition, but there would be little incentive for Meridian to renew it thereafter, he indicated. "Rio Tinto played a commercial card last year by cancelling our contract, and put us into a corner. So we negotiated the extended exit deal. But they've got no guaranteed supply beyond 2024 now; they've lost the option of being able to continue to operate in New Zealand."
Barclay pointed out that global aluminium prices had since gone up on the London Metal Exchange, and the outlook was strong. "I suspect there would be a degree of regret on their side. They've now got a very profitable facility. It's only going to become more competitive in the future because it's got such a green footprint because it gets the vast majority of its energy from renewable sources. On a global stage it will become more and more competitive – that's how it appears to us.
"They may not be able to exist in New Zealand beyond 2024, even if they want to."
Barclay said Meridian's plans for a large hydrogen production facility in Southland, to replace the smelter in 2025, would allow it to reduce demand quickly when the power was needed elsewhere in the country.
That responsiveness would combine with upgrades and changes to Transpower's Southland network and Cook Strait cable, and the construction of a 100MW battery in the North Island to store the hydro electricity and feed it back into the North Island networks as needed.
"Because hydrogen production is a hugely flexible process," Barclay said, "we think if we build that and contract the energy to that producer in the right way, we can get a big chunk of demand that can actually reduce production during dry winters, and give that power back to the rest of the customers in the grid."
The company that has profited most from this year's low hydro lakes appears to be Genesis Energy, which at times has had three of its 250MW coal-powered Rankine units running at Huntly power plant this winter. Coal power is expensive and dirty, so that has hiked up power prices for everyone – not least the environment.
Genesis chief executive Marc England said Meridian was upping the ante in negotiations with Rio Tinto, ahead of the end of the smelter contract in 2024. "I think if Rio have the capacity to pay more, they will pay more," he told Newsroom. "And Neal will supply them. They're too big a customer not too.
"They used to pay roughly $55 per megawatt hour. They're now paying $35. They've got one over Meridian for the time being, but they'll have capacity to pay more, and they will pay more.
"Until Meridian can demonstrate they've got an alternative that's going to pay more, Rio Tinto is going to be very much part of the picture for the next decade. That's my armchair observer view."