Tiwai Point owners Rio Tinto did a deal with Meridian to stay three more years to the end of 2024, in exchange for even cheaper power. Photo: RNZ / Nate McKinnon

Power companies and their regulator are at odds over the impact of the costly Tiwai Point smelter deal on the hip pockets of home electricity consumers, Nicholas Pointon and Jonathan Milne report

The Electricity Authority says households are paying an extra $200 per year for power, as they subsidise the cheap energy the Tiwai Point aluminium smelter receives.

The Authority has released its review into the wholesale electricity market to see if it is competitive, following a prolonged period of high spot prices and market volatility.

It said it is concerned that consumers might be paying to much for electricity because the generators Meridian and Contact Energy sold power to the smelter, which is also the country’s biggest energy user, for half a billion dollars less that it cost to produce to keep it in New Zealand.

“The arrangement could be wasteful,” Authority chief executive James Stevenson-Wallace said. “The subsidy maintains demand and keeps prices high in the wholesale market.”

Meridian chief executive Neal Barclay is rejecting that, saying the high wholesale electricity prices over the past three years reflect tight supply and demand conditions, and natural gas scarcity.

He said the Authority was incorrect to speculate that the closure of the smnelter this year would have freed up cheaper power for households. “Most residential customers are on fixed-term plans that shield them from the volatility of the wholesale market, and we know retailers compete hard on price to ensure customers are not exposed to this volatility,” he argued.

“In reality, if the smelter closed the market would adjust, so any wholesale price effects would likely be relatively short-lived. And residential price effects are hard to predict.” 

Barclay has previously acknowledged, in an interview with Newsroom, that the smelter exit contract price is extremely sharp – but he said the deal provided wider benefits for the country, like buying time for the Southland community to attract and secure new industries and jobs.

“The Authority also asserts that hydro generation offers should be priced more cheaply – a lot more cheaply than other types of generation. Hydro offers reflect scarcity and during the period they reviewed we had a gas supply issue. If we had followed the Authority’s guidance here and priced our hydro offers lower, there would be implications for security of supply.

“We have estimated that following the Authority’s guidance this year would have meant that we would have run out of water well before winter and possibly as early as late March.”

The Electricty Authority says that as a consequence of the Tiwai Point deal, households will be paying up to $200 more per until 2024, when the power supply contract between the power generators and the smelter expires.

Stevenson-Wallace said the arrangement had led to greater electricity demand, higher wholesale electricity prices, and more gas and coal generation.

However, he said no competitions rules had been broken but it was looking at whether the market rules that allowed this to happen need to be changed.

The Authority’s review extended back to 2018 when shortages at the Pohukura gas field first emerged, which had put upward pressure on prices.

The situation was compounded earlier this year when the ongoing gas shortages, combined with dry weather, low hydro storage and a lack of wind saw wholesale prices soar 7-fold.

This prompted questions from the Minister for Energy and Resources Megan Woods and the Major Electricity Users Group as to whether prices were aligned with the level of scarcity in the market.

“The review observed that elevated prices do not always match underlying supply and demand conditions and at times, the market price over cost is at times high …though noting this sensitive to the cost assumptions used,” Stevenson-Wallace said.

“There is some evidence that market power may have been exercised through economic withholding.

“However, different indicators provide conflicting views,” he said.

The basis of this article was originally published on RNZ, supplemented by Newsroom reporting

Leave a comment