Radio New Zealand reported yesterday that Contact Energy Ltd (NZX & ASX: CEN) was selling electricity at a cheap price to New Zealand Aluminium Smelter’s (NZAS) Tiwai Point smelter.
Energy and Infrastructure reporter for Radio NZ, Eric Frykberg, said this point was revealed in Contact’s six monthly result.
The smelter at Bluff has a contract for 572 megawatts of power with Meridian Energy Ltd (NZX: MEL; ASX: MEZ), but Contact Energy sub contracts to provide 80 megawatts of that requirement.
The price was said to be confidential.
Frykberg said Contact’s chief Executive Dennis Barnes confirmed the price being paid by NZAS was lower than it could have got elsewhere.
“The way we costed it was to look at the marginal production through TCC (Taranaki Combined Cycle gas-fired plant). The marginal production through TCC is actually lower cost than the sale price to the smelter.
“So we don't make a loss on our production in any hydrological circumstances. However we don't have the opportunity to sell that power to what might be higher priced channels, Barnes said.
“But the benefit, of course, is the market-wide effect of the smelter staying.”
Contact's chief financial officer Graham Cockroft put it another way, when asked by Radio NZ if the lower price was worth it because 80 megawatts was a big sale to secure in one hit, and therefore had economies of scale.
“That's one benefit, but the wider benefit is clearly to encourage the smelter to stay,” Cockroft said.
Rio Tinto’s Pacific Aluminium, which owns 79.36% of the smelter with Sumitomo Group of Japan holding the balance. Pacific Aluminium made a $67 million after-tax profit in calendar 2016. But after allowing for one-off payments and asset value changes, the company made $25 M, less than half the level of the previous year.
Late last year NZResources.com revealed Rio Tinto was again looking at selling its Pacific Aluminium assets that included refineries and other facilities in Australia and Tiwai Point. Earlier Rio Tinto had cancelled the sales idea due to a then low price for aluminium.
Tiwai Point smelter uses one-seventh of all the electricity in New Zealand.
Eric Frykberg said critics have argued that if NZAS shut down, New Zealand would be flooded with cheap electricity, to the benefit of general consumers.
However, it would hit the major electricity companies in the bottom line.
Sources: radionz.co.nz & nzresources.com