In theory, the closure of Tiwai Point aluminium smelter should bring down electricity prices and help get New Zealand closer to its Carbon Zero 2050 goal. In practice, that isn’t so easy.
The announcement Tiwai Point aluminium smelter will close by August next year is a massive blow for the Southland economy, in particular the 2600 people employed directly or indirectly by the plant.
But in two other ways – the cost of electricity, and the reduction in carbon emissions – the closure could have significant benefits – if the market works well.
And therein lies the rub.
First, prices. Tiwai Point uses almost 13 percent of New Zealand’s electricity – and it gets it pretty cheap. The laws of supply and demand suggest if you take away the country’s biggest customer, the price should fall.
Even better, if you take out a customer who’s been getting a massive discount, the average price for everyone else should go down.
Second, carbon. Making aluminium sends a lot of CO2 up your smelter chimney – globally aluminium production accounts for 0.8 percent of total greenhouse gas emissions.
Shutting Tiwai Point will help New Zealand’s aspirations to be carbon neutral by 2050 (though from a saving-the-world standpoint, the aluminium has to come from somewhere, and producing it from a plant in Asia could potentially be more polluting than from New Zealand).
There’s another potential climate change positive from closing Tiwai Point: it frees up a swathe of hydro electricity, meaning some of the older gas and coal-fired power plants could get early retirement. Genesis Energy’s Huntly station, for example, might no longer be needed. Contact Energy has already suggested its Taranaki Combined Cycle plant at Stratford might be under threat.
Meanwhile, excess renewable electricity in the market (particularly if it was cheap) could also encourage industries that burn fossil fuels to make heat – milk powder plants, for example, or pulp and paper mills – to switch to electricity.
And that’s good for our carbon emissions. A 2019 report from the Interim Climate Change Committee suggested accelerated electrification of transport and process heat could produce net carbon dioxide emissions reductions of 5.4 million tonnes in 2035. That’s around 7 percent less CO2.
So what could go wrong?
First there’s a question of timing. All that electricity being produced at Manapouri needs to be available to other customers, particularly those in the North Island, before it’s going to impact prices nationwide. And that needs power lines to take it there.
Transpower is working on a $100 million South Island upgrade (the Clutha Upper Waitaki Lines project) to double capacity on its lines to get more power out of Otago and Southland and into the grid. But putting up new lines is weather dependent, says Transpower’s general manager of grid development John Clarke. And completion is still another three summers away.
Then there’s the issue of whether it’s in the best interests of electricity generators to see prices fall.
Electricity market sceptics, particularly the independent retailers like Flick Electric or Electric Kiwi, accuse the Big Five generator-retailers of using their market power to keep wholesale prices high. Meridian, Genesis, Mercury, Contact and Trustpower control 90 percent of the market.
A recent decision by the Electricity Authority found Meridian Energy manipulated lake levels late last year to push electricity prices up, costing customers – and the small retailers that brought the complaint – $80 million.
Gentailer market power
University of Auckland economist Dr Stephen Poletti goes further when he talks about gentailer market power. A study he published in 2018 found the way gentailers priced their electricity drove prices up and cost customers $5.4 billion between 2010 and 2016. He says the Electricity Authority has a history of moving slowly and not taking action to bring prices down.
Electricity Authority chief executive James Stevenson-Wallace refutes that. The authority “takes its compliance and monitoring responsibilities extremely seriously”, he says. “The Authority monitors trading activity and market maker performance and acts as quickly as it can if it sees any evidence of anti-competitive behaviour.”
Meanwhile, the Market Development Advisory Group (MDAG) is also currently reviewing trading conduct in the wholesale market,” Stevenson-Wallace says. “We expect to consider MDAG’s advice on this during the second quarter of this financial year.”
Electric Kiwi chief executive Luke Blincoe says the Tiwai Point closure will be a “major test of how effective the market is”.
This will be a test of the Electricity Authority’s mettle.
Massey University’s professor of sustainable energy and climate mitigation Ralph Sims is also concerned.
“In a perfect world, closing Tiwai Point should theoretically result in greater shares of renewable electricity, a reduction in greenhouse gas emissions, and cheaper electricity for all New Zealanders.
“However we have an electricity market largely driven by profit motives… We also have a carbon price that, though now rising steadily, is still too low to drive the necessary urgency to reduce our greenhouse gas emissions.”
Will New Zealanders reap the economic and environmental benefits of having cheaper hydro power suddenly becoming available once the smelter starts winding down, Sims asks.
“I have my doubts.”
Others are less cynical. Former Meridian Energy CEO Keith Turner, now on the Trustpower board, says customers in the South Island should start seeing their power bills coming down once the smelter closes. And if the country migrates towards even more renewable energy, that could also see prices trend downwards.
Meanwhile Ross Copland, chief executive of the Government’s strategic infrastructure body Infracom, says price falls in the South Island could see customers that use coal for heating – particularly bigger facilities like hospitals, schools or prisons – start thinking about switching to electricity.
This is already happening to a small extent in some industrial facilities. Synlait announced last year its Dunsandel milk drying plant would be powered by electricity not coal.
But without government support, this process could be slow.
In its April 2019 “Accelerated Electrification” report, the Interim Climate Change Committee urged the Government to “strongly encourage” the phase-out of fossil fuels for process heat.
The report called on the Government to “set a clearly defined timetable to phase out fossil fuels in existing process heat and reduce regulatory barriers relating to electrification.”
Meanwhile there’s another alternative to moving the Manapouri electricity to the North Island, Keith Turner says – develop new industries in the south.
“If I was an entrepreneur I’d be looking at building a green hydrogen plant to replace the smelter, with the double benefit of hydrogen being carbon-free and also being able to export the hydrogen. Or you could have a green data centre, using the cheap, renewable electricity.”