Thursday, March 28, 2013

A bombshell for the electricity industry

Meridian Energy thinks it is "unlikely" to reach a new deal with Pacific Aluminium to supply electricity to the Tiwai Point aluminium smelter. Pacific Aluminium disagrees (apparently believing that Meridian will sell them cheap power for no reason), but there's a real possibility that there will be no deal. Which according to Pacific Aluminium would mean that Tiwai Point would have to close.

They could be scaremongering, of course, trying to use the threat of thousands of job losses and ~2% of GDP to blackmail the government into leaning on Meridian. But if they're not, then suddenly one third of the South Island's electricity supply (and 15% nationwide) is up for grabs. And this will have consequences.

The most immediate one will be a drop in electricity spot prices and reduced profits for electricity companies. Those with fossil-fuel plants (Contact and Genesis) will be worst affected, as they will no longer be able to rely on annual shortages to reap windfall profits. But it will also affect hydro generators as well. Which means that Mighty River Power will be far less profitable and the government will get a far worse price for it than it was banking on. Whoops. Selling it looks like an even worse idea now, and even if they proceed the lower prices should put paid to the rest of the asset sales programme.

This in turn is going to leave the government with a $5 to $7 billion hole in its books, money it has already budgeted and spent. So their magical surplus target goes out the window as well. Whoops again.

On the positive side, Tiwai Point emits over half a million tons a year of CO2 in direct emissions. Not only will this pollution be eliminated, but we will also no longer have to pay to subsidise it. In 2009 Carbon News estimated Tiwai Point's pollution subsidies at more than $200 million - or around $225,000 per job.

Even better: flooding the market with cheap hydro will displace polluting fossil fuel generation from the electricity system, forcing its mothballing or permanent retirement. Which means not just lower emissions, but also a decisive shift towards renewables. It also means that those peaker plants Contact and Todd Energy have built will be redundant pretty much from day one - with no shortages to cover, they won't be burning much.

The down-side: no-one will be building new wind-farms for a while. But that does give us time to get policy in place to direct new investment solely towards renewables.

Obviously the shutdown of Tiwai Point would be bad for Southland. But there's some silver lining to this cloud. And if it happens we are just going to have to make the best of it.