Power for the south

Love many fat royal people today.

That’s the mnemonic by which I can still recall sixth form geography’s lesson on the six factors which affect the location of industry – labour, market, finance, raw materials, power and transport.

When it comes to power, the market in New Zealand is distorted by averaging of transmission costs across the country. That is one of the major reasons Rio Tinto has decided to close the Tiwai aluminium smelter next year and Richard Harman points out it is Auckland votes that did the damage:

. . .Opposition from the city, and particularly its business community, to proposals, put up in 2016 to change the way consumers paid for the transmission component of power pricing killed off what could have been a $20 million cost-saving for the smelter.

That might have been enough to save it. Rio Tinto’s loss on the smelter last year was $46 million. . . 

NZAS has argued that it is forced to pay for investment in the country’s power supply network that has no relevance to it, such as upgrades in the North Island when it is based at Bluff.

In 2017 a company press statement said NZAS paid  around nine per cent of Transpower’s transmission charges to consumers, “including paying towards the $1.3 billion spent on upgrading the grid in the upper North Island since 2004 without receiving any additional benefit to its business.”

“When it comes to transmission charges, we believe you should pay for what you use,” said then-CEO   Gretta Stephens.

“This isn’t what is happening now, so we are committed to working with the Electricity Authority and Transpower to achieve a more sustainable method of pricing transmission services.”

Stephens was therefore ready to endorse an Electricity Authority proposal in May 2017 to radically overhaul the transmission pricing regime and essentially make it a user-pays system. The further a consumer was from their power generator; the more they would be likely to pay.

The smelter uses only about 40km of Transpower lines because the main transmission lines from Meridian’s Manapouri power station to the northern outskirts of Invercargill are owned by Meridian.

The total length of all transmission lines owned by Transpower is 12,000km.

So in proposing that this imbalance be addressed, NZAS, told the Electricity Authority in 2017 the smelter had been located in its current position to allow for port access and to minimise the need for transmission.

“Auckland, by comparison, grew organically because of the natural advantages the location has for residential living,” the company said. “These advantages did not include nearby economic energy resources.

“As a result, considerable expense has been, and continues to be, applied to transporting electricity to Auckland.

“Because of these characteristics, the economic cost of providing transmission services for NZAS is considerably lower than the economic cost of transmission to Auckland”.

Southern individuals and businesses have been and are continuing to subsidise those in the north.

The Electricity Authority then produced a new transmission pricing proposal which would have seen NZAS’s transmission costs drop by 34 per cent to $40 million a year. But to help pay for that, the Authority proposed increasing the transmission costs to Vector, the former Auckland Electric Power Board, by 44 per cent or $50 a household a year.

There was an immediate uproar. . . 

The uproar came from a much bigger voting block than the one in the south and the north won.

Steven Joyce is one northerner who understands this:

Nearly 5 per cent of the Southland workforce will likely lose their jobs — a massive body blow. For Aucklanders having difficulty comprehending what that means, a shock of a similar magnitude in that city would be 40,000 people losing their jobs at once.

The Finance Minister is conveniently trying to hide behind the skirts of Bill English, reminding everyone that Bill said “no more” to Rio Tinto after 2013, and as current minister he’s just sticking with the line. It’s weird how trapped he feels by an 8-year-old decision.

If it helps at all, the Bill English I know wouldn’t have handed out $10 million to a bungy jumping company in Queenstown. If desperate times warrant that much being handed to a single private tourism company, or a ludicrous $280m to support New Zealand Post, Southlanders will legitimately ask why not $30 or $50 million for 2600 jobs in their region?

A very good question and if the smelter was in Northland does anyone doubt that it would get the money?

The smelter has as good a case as the tourism or film sectors, and a considerably better case than what has become a glorified courier company. The international market for aluminium has crashed as a result of Covid-19 decimating the car- and plane-making industries.

More egregiously, the electricity for this and other Southland businesses comes from just up the road at Manapouri, yet Southland is made to pay to have power circulated around the rest of the country. The request for help is more a case for stopping an unfair levy than for a fresh subsidy. Southland is not the only region, and aluminium not the only regional industry that is up against it. . . 

Some people see a silver lining in the smelter closure in the potential for cheaper power. But the electricity the smelter uses is generated in Southland, upgrading transmission lines to get it to the northern North Island would cost many millions of dollars.

If those costs were averaged over the country it would be rubbing very expensive salt into the wounds the smelter closure will inflict on Southland, its labour force and economy.

But it’s not only Southland that is facing big jobs losses.

The Marsden Point refinery bankrolls a similar proportion of high-paying jobs in Northland, and the refining company is making near-identical noises about closure.

Meanwhile, Taranaki is continuing to come to grips with the Government’s pre-Covid oil and gas exploration ban placing an artificial sunset on its biggest industry, and associated companies like Methanex and the ammonia urea plant.

Outside of heavy industry, the Covid-19 border controls have put on ice a series of other sectors that normally contribute to New Zealand’s wealth and jobs.

The $5 billion we earn annually from international education is dwindling to nearly nothing — and that leaves schools, universities and other providers short $1b a year for tuition fees alone.

Tourism limps along on one domestic cylinder, which sparks up in the school holidays but is insufficient to sustain many of the companies reliant on it.

The tech companies that succeed in the world despite our isolated location are wondering how long they can operate from their New Zealand base while being physically cut off from their customers.

And the foresters are suffering from whiplash, feeling alternately loved and loathed, sometimes almost in the same press release, as the Government has somehow got itself to the point where it will decide when forests are planted and where they can be sold. No wonder politicians were belatedly cuddling up to the farmers this week. Food is in danger of becoming our only export sector, so let’s call a truce in the regulatory hostilities and pretend all that talk about the need to diversify away from agriculture was just a bad dream.

The more other export industries falter, the more important agriculture becomes.

Which brings us to the bigger problem that the smelter closure underlines. Exactly how do we plan to make money to pay off this huge debt the Government is running up on our behalf?

How will we fill the massive hole in our exports left by tourism, education, aluminium and oil and gas? And exactly how do we plan to magic up 2600 replacement high-paying jobs in Southland?

Our economic response to Covid-19 is looking ridiculously haphazard. If the Government likes you, you get a bucket of money. If they don’t, then tough luck.

We first need a level playing field, and then we need to focus on increasing the competitiveness of all our businesses. We also need, to paraphrase a certain Australian Prime Minister, to get out from under the duvet and start re-engaging with the safer parts of the world again.

Right now we are being way too cavalier with our whole economic fabric. We could wake up and find whole regions permanently crippled — the ultimate irony for a Government that claims to “champion the regions”.

And, given that our biggest power consumers will have gone, and taken with them their outsized contributions to the costs of the electricity grid, we may not even have cheap power to make us feel better.

Taking big electricity users out of the market won’t make power cheaper. If the big users who contribute most to the energy companies’ coffers go, the cost will be spread across fewer, smaller users including households.

Given the fall in the price of aluminum, even a lower power price probably wouldn’t save the smelter.

But the smelter’s closure should provide the impetus to stop the southern subsidising of the north’s power.

Finding new businesses to soak up the people left unemployed when the smelter closed won’t be easy.

But it could be less difficult if everyone paid the actual cost of getting power which would make Southland much more attractive than Auckland to any enterprises where electricity costs were significant.

Southland has the labour, a variety or raw materials, good transport options and finance is reasonably mobile. It might be further from many markets but much cheaper power could well compensate for that.

So much power is generated in the south, far less will be needed down here without the smelter. This is an opportunity to ensure it stays here and southerners get lower prices to benefit households and the businesses that could soak up at least some of the workers left jobless when the smelter closes.

But what’s the chances of cheaper electric power for the south when political power is in the north?

One Response to Power for the south

  1. adamsmith1922 says:

    Reblogged this on The Inquiring Mind and commented:
    Daily we see the staggering incompetence of this apology for a government

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