Subsidies begat subsidies

November 5, 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

October 29, 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?

April 7, 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

March 28, 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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