Power for the south

13/07/2020

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?


Subsidies begat subsidies

05/11/2019

Why is the south subsidising power delivery to the north? Steven Joyce opines:

I hold no brief for Rio Tinto or its aluminium smelter but I am a fan of Southland, and I don’t think Southland is getting a fair deal.

It’s worse than that.  Southland looks like it might be getting lined up for the “Taranaki Treatment” from the government.

Rio Tinto is once again reviewing the future of the smelter, which directly and indirectly, pays the wage packets of about 3,500 people in a region of roughly 100,000. . .

That’s a lot of jobs and there will be more in businesses which service and supply the smelter and it’s staff, but that by itself isn’t a justification for subsidising Rio Tinto. But there’s a but:

But actually they have a legitimate point – or at least, the people of Southland do.  People and businesses in Southland, including the smelter, pay too much to get their electricity delivered to them.  More correctly they subsidise the delivery of electricity to everyone else, and they are sick of doing it.

The lower South Island produces much of New Zealand’s power, and at the lowest cost, but they see no benefit from having the big hydro power stations in their neighbourhood.  Electricity is expensive to shift around so it should make sense to set up your business near a power station, but it’s not because electricity transmission costs are currently averaged across the country.

If you live over the road in Te Anau from New Zealand’s biggest power station, you are not just paying to have your power delivered to you, you are paying to get it delivered to people in Auckland, 1700 kilometres away on a whole other island.

Given the loss of energy and cost of sending power so far that doesn’t stack up environmentally or financially.

And as Auckland grows, it needs more power. Transpower, which runs New Zealand’s electricity grid, has spent several billion dollars over the last decade upgrading their network and keeping the lights on, much of it for the benefit of Aucklanders.

 And Southland people and the smelter have been paying for a lot of that.  

And we’ve all been paying for the subsidy to Rio Tinto because the south is subsidising the north’s power.

The previous government put together a new Electricity Authority to, amongst other things, sort out a fairer price for electricity transmission. It’s taken a while because it’s controversial.

In 2016 the authority put up a fair proposal that would have saved Southlanders a lot of money. The smelter would pay around $20 million a year less than it does now in transmission charges, and other Southland power users would get a commensurate reduction.

That would be better for the company and other southerners than subsidising the smelter.

But people in Auckland and Northland who would pay a bit more kicked up a big public fuss and so did politicians, including New Zealand First.  The Authority went away to check its sums again. It has now come up with another, watered down plan. It still improves things for Southland, but only about half the amount as previously.  And its still a few years away from coming in.

Tanspower should not have bowed to political pressure to change it’s  mind about people paying the trues cost of power just because for once the south would gain and the north would lose.

So it’s not surprising the smelter is getting antsy, or anybody else in the deep south. Southlanders pay higher petrol prices because the population is smaller and there is less competition.  They pay higher electricity prices because they are subsidising getting power delivered to Auckland.

On energy costs they never win. And they risk large industries leaving – industries that should be attracted to their part of the country because of the abundant cheap electricity that is generated there.

Thanks to the mnemonic Love Many Fat Royal People Today I can still    recite the factors affecting the location of industry – Labour, markets, finance, raw materials, power and transport.

The market in the south is smaller, but if you’re exporting that, and transport are not a big consideration. Finance is mobile, the south has plenty of Labour so it’s just subsidised power that makes the north more attractive.

If the south wasn’t subsidising the north’s power at least some   of the businesses which locate in Auckland, would choose somewhere nearer where the power is generated instead?

That would have the added bonus of slowing Auckland’s growth.

Meanwhile the trendies in Auckland and Wellington opine that we’d be better off without the smelter anyway for all sorts of thinly argued environmental reasons. Of course it’s not their lives that would be up-ended if it goes.

All this is grimly familiar to Taranaki people, who have had one of their largest highest-paying industries sacrificed on a Greenpeace-inspired oil and gas ban that is now generally accepted will do absolutely nothing to reduce climate change. Because of the complex interplay between coal, gas and electricity, it may be making things worse. It’s certainly lifting gas and power prices.

And it is not just industry that is at risk in Taranaki and Southland. There was news out this week that the aggressive new water policy the Government wants to impose on food producers will disproportionately affect people and economies in places like Taranaki and Southland. . .

Our self-styled champion of the provinces might be a bit miffed that provincial people don’t show appropriate levels of political adulation when he shows up with the taxpayers’ cheque book and sprays $10m here and $10m there. The truth is his largesse is poor consolation for the damage other things are doing to the economic prospects of regions like Southland

We shouldn’t subsidise the smelter. Rather we should stop forcing Southlanders to subsidise Aucklanders. 

We should also revert to a more gradual water plan that gives farmers time to adapt, and we should let Southland retain control of SIT. Then we should get out of the way and let the sensible practical Southlanders get on with making a success of their province.

This illustrates how subsidies begat subsidies.

If transmission costs were levied where they fell, Rio Tinto would have cheaper power without subsidies and the rest of the south would also save on their energy bills.

 

 


Rural round-up

29/10/2013

Futuristic drones to watch your sheep – Howard Keene:

Kiwi agriculture scholarship winner sees drones having a big potential in the industry.

Natasha King went overseas on a Nuffield Scholarship recently to primarily look for energy-generating solutions to New Zealand’s effluent disposal problems, but also became fascinated by some of the new technologies she came across.

“It wasn’t my area, but I became interested in it as a basic farmer from New Zealand,” Ms King, who is Meridian Energy’s national agribusiness manager based in Christchurch, said. . .

Steaks high in trans-Tasman Trans-Tasman beef battle – Jenna Lynch &  Elton Smallman:

The Kiwi and Aussie battle is heating up again, but there’s no sport in sight. This time it’s a battle of the beef.

Australian red meat is making its way across ditch and filling a gap in our supermarkets, as Kiwi beef farmers recover from last summer’s drought.

But how does the Aussie beef compare to a good homegrown Kiwi steak?

Well there’s only one way to find out: A blind taste test. . .

Lots of changes in industry, but basic principles remain the same – Yvonne OHara:

Winning the first and second Southland regional Sharemilker of the Year competitions and coming second by half a point in the national competition was memorable and disappointing for Karen Bellew and Stephen Malone.

The former Edendale 50/50 sharemilkers, who have since separated, won the inaugural regional competition in 1990 but it was held too late for them to compete in the national final.

However, they were allowed to enter the Southland event the following year and won again. . .

Lincoln University to apply expertise to restoration project:

International mining company Rio Tinto has confirmed that it will continue funding a major ecological restoration project currently underway at Punakaiki on the South Island’s West Coast.

The Punakaiki Coastal Restoration Project (PCRP) has been underway for five years and is part of a four-way partnership between Lincoln University, Rio Tinto, the Department for Conservation (DoC) and Conservation Volunteers New Zealand (CVNZ). Professor of Ecology, Nicholas Dickinson , and his colleagues in the Faculty of Agriculture and Life Sciences have been spear-heading the project for Lincoln University.

Rio Tinto has committed to another three years of funding the PCRP, which involves the restoration of a 70-hectare site that has been negatively impacted over the years through both mining and agriculture. The company originally bought the site to mine ilmenite (an oxide of titanium), but later gifted it to DoC. . . .

Tarras Water weighs options:

Tarras Water Ltd is still afloat, even if the company’s hopes for a dry shareholder have been sunk, director Peter Jolly says.

When contacted by Southern Rural Life last week, Mr Jolly said the company’s shareholders were looking at their options, including some which would not involve Tarras Water Ltd.

The company’s board was still meeting regularly and had a ”telephone link-up” about three weeks ago and an ”informal” meeting last week, he said.

However, the board had abandoned hope of a dry shareholder taking equity in the company, he said. . .

Council downsizes, reports increased event attendance  – Timothy Brown:

Beef and Lamb New Zealand’s Central South Island Council decided on a smaller council at its annual meeting in Cromwell last week, reducing the number of councillors from four to three.

South Canterbury farmer Andrew Fraser stepped down, and the three other councillors, Blair Smith, Ivan Geary and Robert Peacock were re-elected unopposed. . .

Council downsizes, reports increased event attendance


Southland’s loss NZ’s gain?

07/04/2013

Invercargill City Council has resolved to take out full-page advertisements in all major New Zealand newspapers to get across what it calls the “correct information” about the deal Meridian Energy and the smelter’s owner, Rio Tinto, are trying to negotiate over power prices.

I’m pleased my rates won’t be paying for that.

The rest of New Zealand, or at least the newspaper reading segment of it, might have a great deal of sympathy for the plight of workers facing redundancy and the downstream impact on Invercargill and Southland.

But sympathy is very unlikely to translate into action and if it did, what action would that be?

When the price of aluminium was high it might have made sense to import bauxite, use our relatively cheap power to convert it into aluminium and export that. But the world price of aluminium has plummeted and Rio Tinto says the power isn’t cheap enough to keep it here.

Getting across the “correct information” isn’t going to change that.

The ads are going to be even less effective if those who read them also read that there’d be no trouble getting excess power to Auckland if the smelter closed.

The ICC would be better employed working out how to attract businesses to the south to help employ those who would lose jobs in the smelter closed.

That might also provide a use for at least some of the excess power so it wouldn’t need to be sent north.

Without that, the loss of the smelter in Southland could turn into the gain of a greater supply and therefore lower priced power for the rest of New Zealand.


Meridian unlikely to reach agreement with smelter

28/03/2013

Meridian has announced it’s unlikely to reach an agreement with Pacific Aluminium over supply of electricity to its Bluff smelter.

. . . Chief Executive of Meridian Energy, Mark Binns, says that Meridian has advised Pacific Aluminium of its ‘bottom line’ position.

“Despite significant effort by both parties there remains a major gap between us on a number of issues, such that we believe that it is unlikely a new agreement can be reached with Pacific Aluminium,” says Mr Binns.

In the event no agreement can be reached, Meridian will seek to engage with Rio Tinto and Sumitomo Chemical Company Ltd, the shareholders of NZAS, who will ultimately decide on the future of the smelter. . . 

The smelter is a big employer in Southland but falling global prices for aluminium have put pressure on its operation.

This announcement also has implications for power prices. Without the smelter supply could well be greater than demand.

. . . news that there may be no new electricity price agreement with New Zealand Aluminium Smelters carries huge implications for the electricity sector, which has struggled to grow in the last five years and would face a massive supply over-hang which could last years, were the smelter to close.

However, that outcome is not yet certain.

The smelter’s majority owners, Anglo-Australian minerals giant Rio Tinto, are locked into the first three years of an new 18 year contract, which took effect from Jan 1, took three years to negotiate, and had been agreed in 2007.

While the New Zealand smelter makes internationally recognised high grade metal, which sells at a premium, Rio has been hit hard by its exposure to the aluminium sector, where world prices have been hit hard since the global financial crisis.

Rio Tinto is seeking to sell the smelter, along with a clutch of other, older smelters in Australasia, which it has packaged as a new subsidiary, Pacific Aluminium. . . .

If my recollection is correct the smelter was wooed to New Zealand by the price of cheap electricity.

This is an example of the dangers of such policy. It was designed with the good intentions of job creation but has skewed the electricity market.

State Services Minister Tony Ryall says all relevant information – including about the smelter electricity contract – will be reflected in the Mighty River Power offer document which is currently being finalised.


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