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?


Three more years

03/08/2015

Tiwai Point smelter will stay open for at least another three years:

The Tiwai Point aluminium smelter will stay open until at least 2018, with a new agreement reached between owner New Zealand Aluminium Smelters (NZAS) and electricity suppliers Meridian and Contact.

The revised contract will see 572MW of energy supplied to the smelter until 2030, with NZAS able to reduce the load or terminate the deal altogether from 2018, depending on market conditions.

“We have crossed a hurdle today and now have more certainty about our immediate future,” says NZAS chief executive Gretta Stephens.

“The agreement provides short-term security for the smelter and allows time for market fundamentals to improve.” . . .

Aluminium is a commodity and like many others, including dairy produce, it is in the midst of a downturn.

The announcement the smelter will stay open will be a relief to the hundreds of people working there, the businesses which service and supply it and the wider Southland economy.

It is probably good news for Meridian and Contact shareholders too. Even though the smelter gets power at a discounted price, losing such a big customer would have hurt the companies, though it might have meant lower power prices for the rest of us.


Southland happy

09/08/2013

The Southland Times says a dark cloud has been lifted with news the Tiwai Pt aluminium smelter will remain open and further job cuts are “unlikely“.

The smelter’s immediate future was secured through the signing of an electricity agreement between New Zealand Aluminium Smelters and Meridian Energy after 12 months of negotiations.

The deal came after the Government gave the smelter a $30 million one-off payment.

NZAS chairman Brian Cooper said the previous electricity contract had included price increases which threatened the future of the smelter in the face of falling aluminium prices and the strong New Zealand dollar.

The new deal is until 2030, but the smelter can terminate the deal from January 2017 if it gives 15 months’ notice.

“The clouds have lifted over Invercargill today, both literally and metaphorically,” Cooper said, alluding to the fact the smelter would remain open for at least three more years. . .

The Opposition which has been calling for the government ‘to do something’ is of course critical of the deal but Finance Minister Bill English explains:

“This is a one-off incentive payment to help secure agreement on the revised contract because of the importance of the smelter to the stability of the New Zealand electricity market,” Mr English says. “It provides medium term certainty for Southland and New Zealand.”

This deal protects jobs in the short term.

It is also a $30 million counter to claims from the opposition that the government doesn’t care about the regions.


Crisis or opportunity

04/04/2013

The loss of jobs if the Tiwai Point aluminium smelter closes would be devastating for those affected and have an impact on the Southland and wider economy.

However, in crisis there is almost always opportunity and energy consultant Wayne Cartwright sees one in the excess power that would be available.

An energy consultant says if the Tiwai Point aluminium smelter is closed and the Manapouri hydro lake is made available it would be a huge boon for the country.

The plant is under threat of closure because its owners say the price they pay for electricity is too high and the operation is not economic.

Wayne Cartwright says worldwide demand for energy will rise substantially over the next few years and with some investment from the Government, power from Manapouri could be siphoned to the national grid.

He says if that happens the price of energy won’t soar as much in New Zealand as it could around the world.

“We’re looking at a substantial rise in global prices of energy, particularly oil and gas, and if the substitution of hydro electricity for those requirements in New Zealand that need at the present time oil-based energy … can be made then this will be a great advantage to New Zealand because of the lower cost. . .

Most of the excess power would be in the south of the South Island which isn’t necessarily where the demand would be but upgrading the transmission lines to cope with the excess supply would be expensive. Instead of shifting the power north, it would be cheaper and could be more attractive for some businesses to move south.

The mnemonic love many fat royal people today has kept the six factors which determine the location of industry in my memory since 6th form geography – labour, market, finance, raw materials, power and transport.

If the smelter closes there will be excess labour and power in Southland. Finance is mobile, there’s a good port and reasonable roads in Southland. If whatever is produced is exported, nowhere in New Zealand will be much further from the market than anywhere else.

The possible closure of the smelter could be regarded as a crisis but it also has the potential opportunity for new businesses which could be better for Southland and New Zealand.


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