The news announced this morning ends the worst kept secret of the electricity industry in New Zealand. Months of speculation has been concluded with this morning’s announcement that NZAS will continue to operate Tiwai Point with extra hedge contracts being provided by Contact Energy and Genesis Energy. The deal will provide NZAS with greater certainty if Meridain’s hydro lake storage drops to low levels during summer periods in the future. This will no doubt have a flow on effect to the commercial market as there is now certainty regarding the future of Manpouri and the ongoing viability of thermal plants such as Contact’s Otahuhu B and Genesis’ Huntly power stations.
Energy News has posted the following:
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.