by Jeanette Fitzsimons
I see the Tiwai Pt Aluminium smelter (still known to most of us as “Comalco” but actually Rio Tinto now) wants to go back on its power contract with Meridian because God let them down. A transformer failure left them unable to run at full production for two months which meant they didn’t “take” at the rate specified in their “take or pay” contract and they claim the failure was an act of God so they shouldn’t have to pay.
The smelter gets its power much cheaper than anyone else in the country (and exactly how cheap is secret) because they contract to take it at a certain rate 24 hours a day continuously which is a dream load for a power company. This lowers Meridian’s costs and enables it to plan its water use logically.
But the smelter objects to paying some $10m for power it didn’t use.
So who should pay for an unavoidable accident? There is a precedent, when the boot was on the other foot and a giant transnational was supplying the energy to the NZ government. In that case there was no question – the contract would be enforced. Does it just depend on who is bigger?
When the Maui gas field was discovered the NZ Government agreed to take the gas very fast – over a total period of 30 years – in order to get it at a very cheap price – some $2 a GJ. It thought it was going to use it for power stations, which would have been only 30% efficient in those days so could have chewed through it rapidly. But electricity demand stopped growing at 7% a year and grew more slowly and the new power stations weren’t needed. The need to use that gas at the take or pay quantities drove NZ energy policy for the next 30 years. I don’t remember Maui Development Ltd (ie Shell and others) offering to let us off.
This isn’t the first time the smelter has pleaded for special treatment at our expense. They flew their regional manager out to the hearings on the ETS legislation last year, saying that free credits for 90% of their consumption wasn’t good enough and they would leave the country if they weren’t exempted. Some of us might think that getting 15% of our power supply back again to back out Huntly and fuel electric transport mightn’t be a bad idea – but we would need major transmission investment to be able to use it where it’s needed.
Anyway, it seems likely this will go to court over the interpretation of the fine print of the contract. But let’s be absolutely clear – if the smelter doesn’t pay, we do – either in another power price hike or in higher taxes to replace the dividends Meridian will not be able to pay to the government.
Published in Economy, Work, & Welfare | Environment & Resource Management by Jeanette Fitzsimons on Mon, July 6th, 2009
More posts by Jeanette Fitzsimons | more about Jeanette Fitzsimons
on the trolls and those who are unable to keep on topic
“However, in December the smelter used only 413MW of power, massively below the 608MW used in December 2007.”
Some day, some where, a reporter will learn the difference between a watt and a watt-hour …
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The smelter got cheaper power by agreeing to pay for it whether it consumed it or not. If they want this changed, they can pay more for their power, like I do.
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Rio Tinto also wants some of whats under the seabed – (from KASM – kiwis against seabed mining)
————–
Rio Tinto applies for Exploration Permits
Update 13 Feb 2009
Riotinto surrenders Prospecting Permit 39287 and applies for two Exploration Permits #51496 & #51498
12 March 2007
Rio Tinto to acquire Iron Ore NZ interest in Prospecting Permit
The renewal documents for the prospecting permit #39287 include the immediate acqisition of a 60% interest the the permit previously held by John Rutherford owned Iron Ore NZ Ltd. The permit renewal also indicates a future total transfer of the interest to Rio Tinto Mining and Exploration Ltd – a newly formed company #1918541 reg 16 March 2007
Rio Tinto (parent and subsiduary companies) have the attention of environmental watchdogs in Indonesia WALHI ,in Madagascar Friends of the Earthand the Jabiluka Uranium Friends of the Earth lease in the Northern Territory of Australia
While still raising the ire of the conservation and environmental lobby, Rio Tinto has developed policy to address the environmental effects of their mining operations. Rio Tinto Environmental Policy. The proof of the adequacy will be in the historical audit of the mining operations when compared with the policy.
One note of concern in 2006 the Riotinto subsiduary Environmental Resource Management Limited (ERM) while conducting an internal environmental audit, found four operations in Australia where the level of identification and protection of indigenous archaeological artefacts could have been improved, and unauthorised land clearing highlighted deficiencies in management controls.
Let us hope there is no further environmental white wash
KASM – http://www.blacksands.org.nz
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Thanks for the article.
http://www.listwebsite.net
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A few years ago when Rio Tinto (then Comalco) threatened to move off shore the government were offering more concessions.
They should have called their bluff.
If they had have called their bluff we would be in a surplus of at least an extra 340,000 daily households of power.
That would have to affect the price of power.
Shouldn’t we get this large ape off our backs?
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They should have called their bluff.
Nice.
Sinbad used a clever ploy to get the ape off his own back…now how could we tempt Rio Tinto similarly…
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Hmmm. If nothing else it’s an interesting legal question- is failure of a 40-year old transformer an unforseeable ‘act of God’; or simply the inevitable result of poor maintenance? I would suspect the latter; but hey if they can spend a few $100K on legal bills and stand a chance of getting $10m back for it, why not?
Personally I think we should expand the smelter- aluminium made there is aluminium not made in China or the US with coal-fired power stations.
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That is a good point kiwi, one Rio makes constantly… I think they name a country in South America that would most likely take over the production (can’t remember which Chile, Brazil anyone?) but they also say the smelter injects 3 – 4 Billion NZ$ into the NZ economy every year… Although I find that hard to believe as all the profits go off shore to Aussie and England… Does 800 jobs and selling some discounted power inject that much cash into our economy..?
Would the availability of an extra 15% more power lower the price of power enough NZ wide to bring the same dividend to the economy..?
It is a much more complicated question than foreign owned smelter = bad…
P.S. I find it amazing an MP can’t find out how much Rio pays for power, especially as it now seems MP’s can get their own SIS files… Does anyone know who knows much the smelter pays..? The cabinet..? The PM..? The CEO of Meridian..? Or only the CEO of Rio..?
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I saw on BBC news tonight that RTZ is selling off its American food packaging business, in order to reduce massive debt levels. Looks like they are in more trouble than just being unable to pay the electricity bill.
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6 months earlier, electricity prices were high due to low rainfall, and oil-fired generation was being run heavily to reduce the likelyhood of power cuts. I don’t recall Rio Tinto offering to pay more because of that act of God.
Given that a failure of one of their three pot lines was a foreseeable event, why did they sign a contract agreeing to take more power that the other two pot lines could use?
Incidentally, where did that “two month” timeframe come from? I was under the impression it took them a lot longer than that to get their third pot line back into production. It failed late last year.
Trevor.
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Jezza, I assume the price is commercially sensitive but this excerpt from the select commitee report (1 May 2009) on Meridian’s latest Financial Review may shed a little light on their contract(s) with the smelter:
“Meridian’s contract to supply electricity to the aluminium smelter near Bluff, which dates from 1970, will expire at the end of 2012. To replace the present supply contract with Rio Tinto Alcan New Zealand Limited, it has entered into an electricity pricing agreement with New Zealand Aluminium Smelters Limited (NZAS).2 The new contract will commence in 2013 and run until 2030.
We asked about the features of the new agreement, and in particular whether there was any Government subsidy in the pricing arrangements. Meridian informed us that the agreement was a fully commercial one and entailed no Government subsidy. While the electricity price paid by the smelter was lower than that paid by other customers, it was commensurate with the size of the smelter, which uses 14 percent of New Zealand’s energy generation. It was also relevant that the Manapouri power station had been built specifically to service the smelter; significant investment in transmission would be required to allow any alternative use of the power it generated.
Meridian indicated that it was satisfied that the new contract offers significant benefits for the company, and thus for the New Zealand public through its shareholders. As a pricing agreement rather than the present supply agreement, the new contract will avoid transmission risk for Meridian; NZAS will in future need to secure its own transmission arrangements with Transpower. The new contract also guarantees Meridian a significantly higher base price than at present, and reduces uncertainty by linking the price it receives to the average market price for electricity in New Zealand, to the world price for aluminium, and to inflation trends.”
That took me 5 minutes to find on the Parliamentary website. In addition, supporting evidence will have been presented to the select committee (inc. a briefing on Meridian from the Office of the Auditor-General, and most likely a post hearing questionnaire completed by the SOE). These docs may provide more info on the smelter contract but you’d have to ask the select committee staff for copies.
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That’s a great summary kaukapkapa, and all of that has been widely reported in the press as well, particularly when the deal was signed last year. Even discreet inquiries have failed to give us the new price, but at least it’s not a flat rate over all those years. Current rules would not let Transpower build transmission to Manapouri before it was needed, but I agree that the government should never be afraid to call Rio Tinto’s ‘bluff’.
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Then again, Frog, it’s still only a summary of what Meridian CHOSE to tell the select committee. Being far more familiar with Genesis Energy’s operations, I’ve been amazed at the porkies they’ve told committee members at their financial reviews – and disappointed that the MPs didn’t pick up on them (despite being forewarned!). Sadly, no Green MPs on that select committee this term.
What is public knowledge about the new contract then? If Rio Tinto pulls out of NZ, and the smelter shuts down, does that mean they have to keep paying for electricity until the contract ends in 2030? Did they sign another ‘take or pay’ contract? What’s the estimated life of Manapouri power station if it’s the main source of power for the smelter for the next 21 years? If there is going to be a re-shuffling of generation assets among the energy SOEs, how will that affect the smelter contract if Genesis or MRP get handed Manapouri?
And on the subject of reshuffling assets, do we dare to hope that the Rodney gas-fired baseload development will be taken off Genesis? I’m confident that any other Board of Directors will see the sense in not pushing ahead with it. Or does Rodney have to be built before it’s classed as a “generation asset”?
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Thanks for that info Kaukapakapa, if Rio Tinto provides the benefit to the NZ economy as claimed I don’t see too much of a problem with a deal like that, hopefully an ETS will phase out their emissions…
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The smelter emits a significant amount of CO2 as part of the process of reducing the bauxite to aluminium. However the carbon comes from the graphite electrodes and it is my understanding that these are manufactured on site from wood rather than coal, so there is no net CO2 emissions if the forests are included in the calculations.
Trevor.
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“Shouldn’t we get this large ape off our backs?”
Ah, the difference between the state and the private sector.
What private enterprise would talk about customers in terms of getting an ape of its back?
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A private enterprise with a customer that wanted to break its contract perhaps.
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