10 August 2015

Tiwai deal a lifeline for us all

NZ Herald - Brian Fallow

As commodity prices fall, smelter helps NZ earn a First World living.

By Brian Fallow

It is not only Southlanders who can breathe a sigh of relief that the Tiwai Pt aluminium smelter received a stay of execution this week; the rest of the country should too.

At a time when dairy and other commodity prices are tumbling, the last thing we need is to say goodbye to an enterprise which contributed more than $1 billion of export receipts in the year ended June.

Sure, that is partially offset by imports of alumina and petroleum pitch (for the production of carbon anodes).

But ever since Tiwai and the Manapouri power scheme were built - each for the other - more than 40 years ago, they have constituted a machine for turning Fiordland rain into US dollars, substantially net positive for the balance of payments.

Without that nexus down south, all else being equal, instead of being up to our national neck in debt to the rest of the world, we would be up to our nostrils.

We would be even more abjectly reliant on importing the savings of foreigners or selling them assets to fund a widening current account deficit.

Those who blithely assume the country would be better off if the cheap power generated at Manapouri flowed north to the neon lights and dishwashers of Auckland rather than south to Tiwai Pt tend, in my experience, to be a bit casual about the difficulties of earning a First World living as a trading nation.

Right now that is getting harder.

In the first half of last year we were enjoying the most favourable terms of trade - the mix of export and import prices - for 40 years.

But by last month we were looking at a 27 per cent decline in world prices for a trade-weighted basket of 17 export commodities that ANZ monitors, including a 15 per cent decline in aluminium prices.

Even with a significantly lower exchange rate, export prices are 7 per cent lower than a year ago in New Zealand dollar terms. And that’s before the further lurch lower in dairy prices at this week’s auction.

So that’s the background to the revised deal on electricity prices which has been struck between Rio Tinto and Sumitomo, the smelter’s owners, and Meridian Energy, with some support from Contact Energy and to a lesser extent Genesis.

Remarkably in the circumstances, the revised contract means the smelter will be paying a higher average price for its power from the start of 2017 than it does now - a fact that Labour leader Andrew Little seems confused about.

The smelter, of course, pays a whole lot less for its electricity than the rest of us do. When it accounts for a seventh of national demand and its load is steady 24/7, a serious discount for bulk buying is appropriate.

To call that a “subsidy” from New Zealand households and businesses, as the Greens’ energy spokesman Gareth Hughes does, is no more sensible than it would be to accuse Meridian of profiteering by charging at all for power from Manapouri, when the fuel (rain) is free and the capital costs long depreciated.

Hughes says the gap between the average power price for industrial users (dominated by Tiwai) and the average residential price is extremely wide by international standards.

But such comparisons are never like with like. The composition of industrial demand will vary widely from one country to another and is likely to be a much more mixed bag in larger economies.

No doubt, if the decision had been taken to close the smelter in 2017, consumers might now be looking forward to a period of lower power bills, as generators played a game of chicken about whose suddenly excess capacity would have to be closed. But that process of adjustment - to what would be a seismic shift in the balance of capacity and demand - would not last indefinitely.

And it does not follow that power bills would have been lower in the past if Manapouri’s output had not been committed to Tiwai, but available to the rest of the country.

Wholesale electricity prices reflect not the average cost of generation, but the marginal cost: the most expensive generation needed to meet demand in each half-hour period at 250 offtake points on the national grid.

It might be that we would have just as much gas-fired generation capacity as we do now, but less geothermal and wind, especially given the need to allow for variability in the hydrology of the hydro system.

You could go crazy speculating about alternative possible worlds for past generation investment, counterfactual scenarios about what would have been the case if what is the case had not been the case. The power companies construct elaborate mathematical models trying to figure out this stuff; intuition and prejudice won’t cut it.

It is true, as Hughes points out, that retail electricity prices (which include line charges) have risen faster than inflation in recent years (though not so much lately).

But the effect has been to increase electricity’s weighting in the consumers price index to just 4 per cent, from 3.5 per cent in 2008. And those CPI weightings reflect the results of very large surveys by Statistics NZ on where households actually spend their money.

As with any average, for some households the proportion will be higher than 4 per cent. But killing off a billion-dollar exporter and axing thousands of jobs is not an efficient way of tackling energy poverty.

The deal announced this week was the result of hard-headed calculations by Rio Tinto on one side and Meridian, Contact and Genesis on the other about the price at which they were better off with the smelter alive rather than dead.

Those calculations would include a bunch of assumptions which will prove wrong or which will need to be adjusted over time. But at this difficult stage of the commodity cycle we should be grateful minds have been able to meet.

Link to original article.