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Smelt a rat

By   /  April 3, 2013  /  23 Comments

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What happens when that electricity hits the market? Two things: there would be an over supply of power, causing price falls, and it would displace the most expensive generation — the fossil fuel burners: coal and gas.

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Does the Tiwai Point controversy point the way to a new energy future for New Zealand?

If you haven’t been down into the bowels of Fiordland and visited the giant turbine hall of the Manapouri power station, you should. Carved out of solid rock, huge pipes link the lake to the sea in Doubtful Sound, sending gouts of water to spin turbines that generate 14% of New Zealand’s electricity. The power station is an amazing feat of engineering — the largest hydro station in the country — but it also played a key role in the development of environmental awareness in New Zealand, thanks to a successful campaign during its construction in the early 70s to prevent raising the level of Lake Manapouri. To visit now, more than 40 years after power first flowed, is to see how big industry can work with the grain of the wonderful Fiordland landscape to create something truly sustainable.

Manapouri exists because a major multinational – then Comalco, now NZ Aluminium Smelters Ltd (80% owned by Rio Tinto Alcan, 20% by Japan’s Sumitomo) – wanted cheap electricity to smelt aluminium from big deposits of bauxite discovered in Australia. NZ governments of the time were happy to oblige, believing the relationship would bring jobs and economic benefits to the bottom of the South Island. And so they did, for a while. The Tiwai Point smelter currently employs around 3,000 people and accounts for about 2.5% of the Southland economy. When operating at full bore it takes about 500 MW of Manapouri’s 800 MW maximum output.

Over the decades, the owners of Tiwai Point have not been afraid to play economic hardball with the NZ government — threatening to quit the country on many occasions, most recently over the introduction of the emissions trading scheme. The current kerfuffle — timed to coincide with the Key government’s urgent desire to sell the family’s power generating silver — is just the latest in a long line of attempts to drive down the price the smelter pays for the electricity it receives from Manapouri. The multinational has certainly been successful. In 2011 Tiwai Point paid a mere $0.05 per kilowatt hour of electricity. Consumers paid over $0.20 for the same thing.

What would happen if Tiwai Point were to close? The loss of jobs and the blow to the Southland economy would be unwelcome, but it’s my guess that it would be cheaper to provide generous government support to job creation in the region than to subsidise the profits of a major multinational corporation for years to come. The government’s asset sales programme would certainly face another hurdle — no bad thing, in itself — but the ramifications go well beyond mere political embarrassment. At present, much of Manapouri’s power can’t be shipped north to where it’s needed because of grid limitations in the South Island and across Cook Strait. The Cook Strait connection is already being upgraded, and the Southland grid would only take a couple of years of construction to beef up to take the new loads. At that point, Meridian would be in the position to offer a lot of cheap baseload power to the wholesale market (but still at higher prices than it ever received from Tiwai Point’s owners).

What happens when that electricity hits the market? Two things: there would be an over supply of power, causing price falls, and it would displace the most expensive generation — the fossil fuel burners: coal and gas. In a rational market, the result would be lower emissions, cheaper prices for consumers and businesses, and reduced need for capital-intensive new build generation — renewable or fossil-fuelled. If you don’t want wind farms proliferating across the New Zealand landscape, then you should be calling for Tiwai Point to close.

There would be other benefits: greater security of supply for the country as a whole, because Manapouri is less prone to “dry year” hydro problems, plus it would allow greater use of renewables for future generation because hydro lakes act as a “battery” for the generation system and can compensate for intermittency.

Unfortunately, we don’t have a rational electricity market, or a government willing to take a strategic look at what sort of power generation mix is in the country’s best interest. Where’s the sense in a small country — NZ’s population is about the same as Sydney or Barcelona — having five generating companies and 17 retailers, not to mention the scads of highly paid directors and managers that have to run the system? It’s a classic example of so-called market reforms carried beyond the point of common sense and well into the realms of stupidity. The reforms were supposed to bring lower prices to consumers. They haven’t. Worse, the current structure makes strategic decision making about NZ’s power future much harder to implement than it need be.

If Rio Tinto Alcan pull the plug on Tiwai Point, a future government will have the perfect excuse to simplify the electricity system, cut electricity prices and deliver a low-emissions future for us all. High time our politicians faced up to the fact that market-based business as usual is no recipe for our electricity future (or any other, for that matter).

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23 Comments

  1. Saarbo says:

    Matthew Hooten mentioned on Nine to Noon on Monday that 100% of the power would be lost in transmission losses on its way to the North Island. Is there any truth to this or should these comments be resigned to the same place as his comments in support of David Shearer?

  2. Another David says:

    We probably have to move away from the notion that all governments, and definitely the present one, have the country’s best interests at heart. If they did, they would do the most sensible thing. When they don’t do the most sensible thing for the country, it suggests they have other priorities. Call it an instinct call, but I don’t think this government would like New Zealanders to have lower power prices.

  3. Gosman says:

    Why would a future government involve itself directly in what is a market based price?

  4. Hera says:

    I think the Nats are being particularly crafty about this one. They look good in the media by refusing to cave in to Rio Tinto’s demands. The reality of closing the smelter begins to dawn on Southland and the rest of the country. Uproar ensues. The Nats cave in and claim it’s for the benefit of all those poor Southlanders. They just couldn’t let so many people be thrown into penury. They believe the rest of NZ will understand and be willing to forego cheaper power prices. They stood up to the multi-national corporation but in the end they put the welfare of Southlanders first!
    The smelter will stay! Rio will get its deal! Mission accomplished!

    • Gosman says:

      Or perhaps they simply don’t want to sign up to a long term deal to support Rio Tinto. Time will tell but I suspect my version has more a ring of truth to it than yours.

    • Rob Painting says:

      Great piece Gareth, but I suspect Hera has outlined the likely scenario. It would be nice to be proven wrong though.

    • A McGregor says:

      I wouldn’t be surprised if this scenario eventuates, but I doubt electricity prices would fall much if Tiwai Point is closed. We recently received a letter from Genesis stating our prices will rise this year because of increased lines charges. That seems to be the preferred excuse: increased lines charges, never mind the fact of lower wholesale prices at present compared to the previous year. With the work required on the grid to facilitate the transmission of that surplus generation north, that will probably be a good reason to prevent any fall in the price. If much of Manapouri’s power can’t be transmitted north and will require two years to upgrade the grid to do so, it is unlikely power prices in the eminent future will fall and the share float remain profitable to investors.

  5. Gosman says:

    Interesting article in the Economist this week Gareth. Have you had a chance to check it out?

  6. […] my column for The Daily Blog this week, I dig into the tangled relationship between New Zealand’s electricity system, a […]

  7. andyS says:

    I didn’t think cheap electricity was part of the global green agenda

    • Thomas says:

      Of cause ample electricity provision, especially without fossil fuel use, is part of the global green solution Andy. Cheap, that is another matter. Energy is not cheap and never was, we simply think that we are entitled to cheap energy after a century of very high EROEI fossil fuels without regard to the global crisis their use has been brewing up for us.

      NZ as Gareth points out is well placed to provide ample fossil fuel free electricity to the country, also with respect to the future of electric transport, if we stop propping up the balance sheet of international mining corporations with tax payer subsidies. You should be well pleased to see these subsidies go once they do I would think!

      • andyS says:

        But cheap energy means we can make and consume “things”, something that I thought the greater green agenda was against.

        Actually, I do agree with many of the points in the article. If hydro energy becomes abundant in NZ and we don’t need to build thousands of wind turbines, then I think this is a good thing.

        I am just a bit cynical about those who seem keen to apply a socialist straightjacket by limiting energy via supply and cost.

        Cheap, abundant low emission energy gets my vote, in any case.

  8. sam says:

    i would like to know the monetary value of electricity subsidies that this plant has recieved in it’s lifetime? would it have been enough to build a smelter itself? also, any jobs lost in the closing of the plant, could be regained by creating jobs to upgrade the transmission lines.

    unfortunately, uncle john is hell bent on selling mighty river, which, to enable it to look good to potential shareholders, would have to be making money, which might not happen if nz suddenly has a 15% over-supply of power.

    in the end, I do not want to see NZ taxpayer money going to subsidies for a multinational company, whos profits are higher than the NZ gdp

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