Are NZ Power Prices are too high because of Tiwai Pt?

This week I have been updating my notes on solar power generation. What seems clear in global terms is that in the US, Germany and Australia there has been much more proactive legislation to support and encourage the growth of renewables.

New Zealand is fortunate in that we are close to 79% of our energy from renewable sources which means there is less attention being paid to improving that. In recent years anyone who has driven around Southland or other parts of the country will have seen a growing number of wind turbines.

However our electricity is something like 70% more expensive than in other parts of the world so for consumers we have the added incentive of wanting to protect ourselves from further price rises.

We also have a government that is driven by ideology and they still want to sell our three SOE owned electricity companies. Once that happens it will become much harder to regulate prices. This is despite treasury and other advisors noting that selling 3 large scale power plants is a stupid thing to do if you want to make a capital gain.

As Raf says short term gain is not worth it.

The finance argument is simple. There really is no case for selling these assets based on their poor performance, funding costs or return. Government debt may be high and set to rise but flogging the family silver provides short term gain with long term pain. The debt position in NZ (both public and private) is a structural problems and will not be solved by a $5-7b sell down of core assets.
The question of the risk of these proposed sales is perhaps more subtle. It simply comes down to how one views the provision of energy on a national scale. It is a clear public good, even if it can be provided privately (e.g solar or micro-wind) and therefore should be provided at least cost (taking into account externalities) to the public. Floating energy providers onto the stock market changes the goal of the company. It is now a profit maximizer with long term shareholder value as its primary concern.”

What else is contributing to high prices for power in NZ? It seems the regulatory environment – despite lots of changes doesn’t help.

Industry based self regulation has already failed. Nick Russell of Chen Palmer noted this Regulatory Reform in the Electricity Industry: Bold Steps for a New Century or Rearranging the Deck Chairs

The Electricity Industry Act 2010 came into law on 1st of November that year with some parts a bit earlier. It removed “fair” and “sustainable” from the objectives of the new regulator, the Electricity Authority (the EA) and that was seem as unfavourable to domestic consumers hoping for fairer pricing.

But the biggest drag on the price for electricity in NZ is the hidden subsidy given to a mining company for the Tiwai Pt aluminium smelter.

Depending on which numbers are used Tiwai Point uses up to 15% of NZ’s electricity supply at a cost of around $320m annually (to them). The base contract was for 572mw and so a rough calculation says that NZ is subsidising the smelter by a huge percentage. As of early December direct staff numbers have been reduced to around 750 as parts of the system are closed down.

I can’t help thinking that diverting that 572mw or a fair percentage of it would reduce overall electricity costs in NZ. I have seem some calculations that worked out the price as 5 cents per kwh which is about one quarter of what domestic consumers pay (2007 numbers so may be a little more now)

The (2011) accounts also show NZAS made payments totalling $318.28 million to RTA Power (NZ), a Rio Tinto subsidiary which governs the electricity contracts supplying the smelter. That was down 7.7 per cent on the previous year’s payments, despite the smelter consuming more total energy through the year, at 625 Megawatts, than the 603MW consumed in 2010.”

My read on this is that electricity prices to Tiwai Point are still close to the 5cents level. What this means in real terms is that at full price the NZ taxpayer is subsidising that private company to the tune of $700m+ . There is no problem with a large scale customer getting a 15 or even 20% discount for bulk but NZAS is a bully and threatens to close down the plant every couple of years or so over EFTS or some other benefit they think they are entitled to.

(Note: The contract price is for 572mw and the 53mw (to 625) difference was apparently bought on the spot market.)

Tiwai Point has been operating since 1971 and it is time for a transparent and real analysis of the full economic benefits to NZ. The owners say it is making a loss and threaten to close it down on a regular basis. Lets call their bluff and do just that. In actual fact their 2011 books show a profit of $186m!

“However, a dramatic reduction in expenses from $922.69 million in 2010 to $714.57 million in the latest year saw after-tax profit of $186.36 million declared, compared with a loss of $26.92 million declared in the previous year.” Note: this is for related company RTA Pacific (NZ)

If the National Party is so dedicated to the market then why such a massive subsidy. Why the secret contract and what would happen if the government invested that $700m p.a into other projects. 

Plus if we can avoid some generation costs on other large hydro projects if 15% of the power is available at lower cost because we have a surplus. I say come clean on the real economics or close it down.

I can see that Pioneer Generation based in Alexandra has quite a network of generating assets and is also developing customers locally and around NZ via its ownership of Energy for Industry which they bought of Meridian effective 20th of December.

EFI heat related activities includes energy centres in Dunedin (supplying the Dunedin Hospital, Cadburys and others), Silver Fern Farms at Finegand, Washdyke (supplying DB Breweries, Juice Products NZ and others), Winstone Pulp International near Ohakune and Christchurch (supplying Christchurch City Council).

The company’s key area of expertise is in providing complete clean energy solutions to customers, by harvesting the energy from waste products and transitioning from traditional inefficient coal and gas fired boiler technology to more efficient and sustainable multi-fuel technologies, using wood chips from its wood supply facilities at 3 Mile Hill outside Dunedin and a wood fuel hub in Christchurch.

Maybe Pioneer has a role to play in what happens if Tiwai Point is partially scaled down and surplus energy is released to other customers by Meridian. Pioneer has an extensive wind farm at Mt Stuart which has 9 wind turbines, with a combined generating capacity of 7.65MW.

Meridian (back in 2009) “paid $US5.4 million ($NZ8.1 million) for Cleantech America, which is building a five-megawatt photovoltaic solar power plant at Mendota, inland from San Francisco.”

At roughly US$1m/mw that seems like a good price. Chances are that costs are lower now and also that the solar tech is better. Either way it was seen as an opportunity for Meridian to lean more about solar energy generation and potentially apply that learning back in NZ and Australia. It has been generating power since April 2010.

CalRENEW-1 consists of more than 50,000 solar panels covering almost 50 acres; the facility generates 5 megawatts of zero emission, environmentally benign solar electricity. The power is being sold to PG&E under a long-term purchase agreement.

Looking at technology improvements in PV since that plant was commissioned I would have expected to have heard more about it. Anyone know if Meridian has learned anything significant from the experience?

As of November 2011 a 1-megawatt photovoltaic Popua Solar Farm in Tonga is being developed….Impressively …the solar farm will reduce Tonga’s use of diesel by approximately 470,000 litres and decrease carbon emissions by over 2000 tonnes per annum.

tonga-solar

It will be able to generate up to 1.3mw and went live in August 2012 at a cost of NZ$7.9m which is substantially more expensive than the US project so those numbers don’t really make much sense, but logistics costs for Tonga and Tokelau projects are substantial.

Meridian’s Commercialisation Manager Murray Hill and Tonga Power’s Chief Executive Office Peter McGill
The Popua Solar Farm will be the first utility-scale renewable energy generation facility in Tonga.

Tokelau’s 1,411 residents are New Zealand citizens, and New Zealand is advancing $7 million to the Government of Tokelau to install the renewable energy systems that will help achieve its long-term goals of energy independence and reducing reliance on expensive imported diesel, which will put Tokelau at the forefront of global climate change mitigation efforts.”

From other number it seems that Tokelau can avoid some $800k of Oil costs each year from the 3 PV plants installed there.

So what to make of all this. NZ electricity consumers pay 70% more than comparable countries but there are some promising solar stories in Tonga, Tokelau and Mendota that could be translated into other NZ projects.

I would think that if NZ home owners ( or at least 10-20% of them) were able to minimise their power use and generate a percentage of local power then the marginal value of that will translate into huge gains for the country.

Among other things it would help us afford electric cars and thereby reduce some of the oil dependence that we have. Eighty percent of oil usage is in transport that would help us reduce carbon emissions so why is the government not interested?

Note: In other news Norske Skog in Kawerau is closing down one of their paper mills. Apparently they use something like 2.9% of NZ’s power generation so that reduction in demand could drop prices. In another report I have seen that the very same paper mill is going to diversify into renewable energy and biofuels. I would guess some of their power comes from geothermal + waste wood so that makes some sense.