With the Tiwai Point aluminium smelter representing 13-15% of New Zealand’s electricity demand, the announcement in July of its forthcoming closure had a big impact on the market. There was an immediate drop in the forward electricity price, but we also saw political parties jumping into the debate. There were a range of election promises to renegotiate supply arrangements and keep the smelter open if they got into power.
We’re still faced with market uncertainty – and this is triggering some interesting side effects on electricity pricing.
One thing is certain – transmission pricing will change.
Even if Tiwai stays, transmission benefits for the smelter could be heading toward $50 million to make it worthwhile. With the lines provider still needing to make a dividend payment to the government, this will need to be collected from North Island customers. Another possibility is that the government will subsidise the smelter in some other way.
If the smelter goes, the increase in transmission costs will then be distributed across all consumers. Either way, someone’s going to pay, and it won’t be the smelter.
Foundation work has begun on the CUWLP lines project, and the target date for its completion is May 2022. Any spare capacity from Manapouri cannot be accessed by the rest of the country before that date.
King coal dethroned in the south?
The prospect of lower South Island electricity prices may be the catalyst to encourage some dairy companies to switch from coal to electricity, and thus take up the slack from Manapouri if the closure eventuates.
But how do you make plans with this uncertainty forming a major component of the business case? The substitution of coal is a great thing for New Zealand’s decarbonising strategy, but it’s a reminder that the smelter closure gives energy customers a breathing space to make good decisions, not forgo plans or think they’ve just dodged a bullet when their electricity contracts expire.
It won’t be a sudden switch.
Tiwai would still need to work through a wind-down period that might take around 12 months. This would be in managed increments, so don’t expect smelter usage to drop to zero overnight. As of now, closure is still scheduled for August 2021 but this may be delayed based on election promises from politicians.
Whether this is the first item on the to-do list of the incoming government, who knows?
Remember, it’s not just about Tiwai.
Gas availability in North Island should improve. However, there are still issues with Pohokura, and even after three months, there is no clear answer for the drop in gas production.
If Tiwai closes as notified, then the business case for new solar, wind and geothermal generation will take a hit for a few years. For these projects to go ahead, New Zealand almost needs the smelter to stay.
Other major users like the NZ Refinery and NZ Steel are either reviewing their current usage or have already committed to operation reforms. As was the case with the smelter, this too could bring about lower electricity prices.
Hydro storage levels are sitting at about 95% of average for this time of year, compared with around 79% as at 12 July 2020.
So where are we today?
A market drop was expected, and it certainly occurred. Today we have more water in our lakes, a smelter that’s still on track to close, politicians that have promised to negotiate to keep it open, and a forward electricity price that is right back to where it was on 8 July 2020, before the closure announcement.
Apart from election promises, there is still nothing substantive that should affect pricing for the remainder of 2020 and into 2021. With a snow pack that’s one of the lowest on record, we still need rain over our hydro catchments before we can expect to see electricity prices soften.
Overall, the electricity market is still grappling with a bunch of ‘what if’ scenarios. Until we get some clear direction – be it from the smelter or the government – it’s still a bit of a punt. Time and rain remain key factors. We will keep you updated as developments occur.
The old saying ‘the more things change, the more they stay the same’ remains very true in the energy industry.
In July 2020, NZSA (i.e. Tiwai Point smelter) announced the closure of the smelter in August 2021. This was a big disruptor because Tiwai uses around 13% of New Zealand’s total electricity. A few weeks after this announcement, the ASX Futures (NZ electricity prices) fell significantly from Q3 2021 onwards, and we hoped that we were seeing an end to the volatile and high electricity prices experienced over the last two years.
However, since our last market update, persistent lobbying, which may or may not be connected to electioneering, led to speculation that the smelter could continue operations beyond August 2021. This market speculation was confirmed on 31 August 2020, which immediately resulted in New Zealand electricity prices on the ASX Futures climbing straight back to where they had been prior to the initial closure announcement. Based on these price movements, we calculate that the market is factoring in the cost of the smelter remaining at $800M per annum.
Weathering the weather factor
As if the smelter situation was not frustrating enough, the prevailing conditions which caused the volatility in pricing through 2020 and into 2021 continue. Generation options continue to be limited due to low rainfall, inconsistent wind patterns, and the continuing high price for natural gas for electricity generation.
If you have ever tried to wade through the subtle differences between retailer offers, or understand the range of offerings and which will benefit you the most, you’ll know it can be next to impossible to pin down savings with any confidence. Factoring in the Tiwai smelter situation, and the impact hydrology has on electricity pricing, only makes the decision even more opaque.
This is where Smart Power’s experience and industry relationships add value. We navigate and manage energy procurement for our clients, and make sure your supply arrangements match your operational requirements. Take the hassle out of energy procurement and leave your staff to focus on their core business. Contact Smart Power to find out about cost-effective energy procurement, and how we can help you add value to your business.