Tiwai Smelter Negotiations
In August 2013, Meridian Energy reluctantly locked in place a $110 million annual subsidy for the Tiwai Point smelter. This was in addition to the $30 million direct subsidy from the New Zealand Government granted to Rio Tinto, the Tiwai Point smelter majority owners.
This subsidy equates to a discount of approximately $22 per megawatt off the wholesale electricity price that Rio Tinto would otherwise pay. Each year, the Tiwai Smelter uses approximately 5,000 gigawatts of power, 13% of New Zealand’s total electricity supply.
Even before the 2013 Meridian subsidy was secured, Treasury analysis confirmed that Rio Tinto already enjoyed “the lowest industrial price in NZ…well below the average wholesale price of [$80 to $100 megawatt hour]” paid by other New Zealand businesses.
As part of the 2013 deal, Meridian Energy reduced the total amount of energy it offered Rio Tinto from 570 megawatts per hour to 400 megawatts per hour.
Rio Tinto has until Monday, 3rd August 2015 to either notify their intention to close the Tiwai site, reduce their demand to the 400 megawatts per hour offered by Meridian Energy, or secure the remaining 170 megawatt hours from another New Zealand generator.
Nouveau Eco’s economic analysis indicates that Rio Tinto is currently seeking an even greater subsidy for the remaining 170 megawatt hours from Genesis Energy.
Rio Tinto has convinced our electricity industry leaders that closure of the Tiwai site will cause electricity prices to collapse. As New Zealand’s highest cost producer of electricity, Genesis Energy is the most vulnerable to these threats and so has the greatest incentive to offer the remaining 170 megawatts of electricity to Rio Tinto at ridiculously low prices.
Assuming a current average wholesale price of $70 megawatt hour, Genesis Energy’s subsidy could be anything up to $105 million (ie. $70 x 170 MW/hr x 365 days x 24 hrs = $105 million), in addition to the subsidy they already enjoy from Meridian Energy.
As majority shareholder of Genesis Energy, any material subsidy would require the implicit support of the New Zealand Government. It should be noted that the Government’s $30 million 2013 subsidy of Rio Tinto was granted against Treasury advice which stated:
“Treasury’s view is that there is no economic justification for offering a government subsidy to ensure the continued operation of the smelter.”
“Any request by [Rio Tinto] for Government assistance should be rejected, because it would result in a significant transfer of value from New Zealanders to [Rio Tinto] shareholders.”
Industry commentators agree, closing Tiwai would result in lower prices for New Zealand owned businesses and retail consumers. Instead, this week, Genesis Energy is likely to offer Rio Tinto a massive subsidary on top of the very generous support New Zealand taxpayers have given the Tiwai smelter over the past four decades.
Rio Tinto has until Monday 3rd August 2015 to conclude negotiations with Genesis Energy or accept the supply agreement for 400 megawatts from Meridian Energy.
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