New Zealand Aluminium Smelters has opted to retain its contracted supply cover with Meridian Energy.

A variation to the agreement between the two companies commits Meridian to cover the full 572 MW currently used at the smelter from January 1, 2017. The new deal will see that cover provided at more competitive rates for the smelter than would have applied if NZAS chose to rely on the previous arrangement.

“This variation will give the smelter the flexibility to operate at current production levels for the full contract period should it want to and provide Meridian with an improved overall price for its electricity,” chief executive Mark Binns says.

The Tiwai Point smelter at Bluff is the country’s biggest electricity consumer. The site can use up to 630 MW of power but has been running only three of its four pot lines since early 2012 when record-low South Island hydro storage sent wholesale prices soaring.

Tiwai is currently using about 572 MW annually, fully-hedged under a new lower-priced deal it agreed with Meridian in August 2013.

But that deal, signed in the lead-up to Meridian’s listing, required the smelter to reduce its cover to 400 MW from January 2017 or have its entire supply return to the higher electricity prices set in a new contract settled in 2007.

Contact

Under the deal announced today, the price on that supply will increase. Meridian describes it as a “blend” of the agreed post-2017 price on 400 MW of load and a more market-related price for the balance. Prices also increase if the New Zealand dollar value of global aluminium prices rise above certain levels.

Today’s deal will also see Contact Energy provide Meridian with a financial contract for 80 MW of supply to help guarantee its hedged position.

The Contact deal will apply for at least four years and a maximum of 14 years commencing from January 2017. It also includes provision of associated risk management from Meridian to Contact under certain limited circumstances.

Genesis Energy has also agreed to provide Meridian with 50 MW of financial cover from Huntly for two years starting in 2017.

Meridian is committed to cover Tiwai Point’s electricity usage at current production levels through to 2030, but NZAS retains all its termination rights from the 2013 round of negotiations, which includes a 12-month notice of termination that can be given any time from January 1, 2017.

New Zealand Aluminium Smelters has said it wants to keep operating here and has been sounding out other generators about providing a hedge over the other 172 MW of supply. It previously negotiated an additional summer supply from Meridian but was unable to utilise that due to the impact on the smelter’s transmission bill.

Predictions

More than 60 per cent of participants in an Energy News poll had expected the smelter to keep operating at 572 MW. Just 13 per cent thought the smelter would close in 2017; 25 per cent thought NZAS would drop its load to 400 MW.

Twenty-two per cent of participants thought a deal would be announced with Contact and Genesis – the two companies most exposed to lower wholesale prices if the smelter was to reduce its demand.

On the plus side for the smelter, the weaker New Zealand dollar is offsetting much of the recent price weakness. Longer term, changes to transmission pricing proposed by the Electricity Authority should also deliver big savings for the site.

• The Report updates current statistics and other information from a variety of published sources. Due to the staggered nature of formal disclosures the Distribution section will be updated when all latest Distribution Network disclosures are to hand at the end of April.

• The Gas Pricing section incorporates extended discussion of the wholesale gas market with additional information flowing from the operation of the wholesale trading platform.

• A variety of recent reports have fed into extended discussion of gas supply and demand scenarios, and the opportunities and challenges they may present.

Overall, the Report notes that the gas industry continues to be in good health, although it faces some headwinds:

• The total market has grown on the back of a return to full three-train methanol production at Methanex.

• Increased petrochemical demand is offset by a continuing trend towards a gas ‘peaking’ role in electricity generation, with a resulting further reduction in gas use for baseload generation. At the same time broader retail market demand is relatively flat.

• Fall in international oil prices is inevitably affecting New Zealand upstream investment, especially because New Zealand exploration is targeted mainly at oil. Smaller explorers and producers are particularly affected. Oil prices will continue to change within the longer horizons of the New Zealand gas story, however, and new and large investors continue to be attracted to New Zealand through the block offers regime.

• An intensive exploration effort in the last few years has to date not yielded the significant new discoveries that many hoped for. But the domestic gas markets have seen a lift in reported reserves levels in the past year from further development of existing fields, and new figures on ‘contingent’ reserves from those fields signal significant further potential.

• Downstream, gas consumers continue to be well-served and customer numbers are growing. Consumers have a good and expanding choice of retailers with recent new entrants strengthening an already competitive market. And the emsTradepoint wholesale market is gaining traction, with increasing market participants and volumes traded.

• Existing gas infrastructure is expected to carry the industry forward in the foreseeable future, pending any future step change in the form of a major new discovery or a substantial new demand source.