Meridian CEO Mark Binns hopes Tiwai smelter will stay, 'but not at any cost'

Friday 28th October 2016

Meridian chief executive Mark Binns says the South Island electricity generator and retailer wants to see the Tiwai Point aluminium smelter stay, “but not at any cost”.

At today’s annual general meeting in Christchurch, Binns told shareholders that he had recently returned from seeing investors in the UK and US where the smelter is always the first issue for discussion.

That was “not surprising, given the smelter uses 12 percent of New Zealand’s electricity and its future has implications for the whole sector,” he said.

From Jan. 1 next year, Meridian gets a price increase under the refreshed contract it negotiated last year with the smelter’s owners, New Zealand Aluminium Smelters which is majority-owned by Rio Tinto. The deal was a blend of the old price for 400 megawatts of supply and 172MW at a higher price.

The contract still runs to 2030 but the owners have an annual option to close or partially close the facility with Jan. 1 being the first date it can make that decision. They also gained a right to cut the smelter's electricity demand to 400MW from April 30 with one year’s notice.

Binns said investors’ views on the smelter vary. Some investors are concerned, though these tend to be those who have not invested in the sector but probably would if the smelter left and the uncertainty was removed, he said. Others think the smelter economics, although still difficult, don’t justify closure and its associated costs.

His own views haven’t changed. “I believe the smelter will stay for the foreseeable future and hope that they do so. However, the owners have to form their own views based on the reality of the world aluminium market and their view of the future,” he said.

“The only thing we can manage is the energy price, which even with the 1 January increase, will remain the cheapest electricity price to any New Zealand customer.”

If the smelter closed, the excess power in the lower South Island would flow north and the supply and demand side of the markets would need to adjust to the “new normal”, he said. On Meridian’s modelling, over a medium term horizon of five years, the company could be in an even stronger strategic position than it is today, he said, with the caveat that modelled outcomes are always dependent on assumptions and there will always be uncertainty.

Meridian was last year unable to convince any of its rival electricity suppliers to take up the slack on the Tiwai Point contract and remains the sole electricity supplier, although it achieved financial hedging contracts with other power companies.

Board chairman Chris Moller also praised the Electricity Authority’s proposals for transmission pricing which he called a “fairer and more durable option”.

The proposals, which the authority is now undertaking another round of submissions on, is “users’ pay, a concept introduced to New Zealand many decades ago,” Moller said. “Despite some misinformation in the public domain, the fact remains that households in most areas of New Zealand will see a decrease in their bills, “ he said.

However, the proposals have drawn widespread criticism and sparked a campaign led by major electricity users in the Upper North Island to overturn them. They would raise the price of electricity for Auckland, Northland and the South Island’s west coast by changing the way the national grid is paid for. The main beneficiaries of the long-debated reforms would be Meridian and other South Island electricity generators and the Bluff aluminium smelter.

The EA has delayed a final decision on the pricing methodology until mid-April. Moller said he hopes at their next annual meeting, they can outline a timeframe for implementing a resolution of the “long-standing issue”.

Changes in the supply-demand dynamics in the market with the retirement of around 800 megawatts of thermal generation capacity have spurred Meridian to revise its view on when new renewable generation will be required, with planning brought forward to potentially as soon as 2019.

“It’s our intention to be ready with the lowest cost renewable option when the market requires it,” Moller said.

Meridian’s directors also sought a near 12 percent increase in their fee pool to $1.1 million from $986,000 over two years.

The shares slipped 0.4 percent to $2.59, having gained 8.8 percent so far this year.

BusinessDesk.co.nz

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