The closure of the country’s biggest electricity user, expected any time from August next year, comes as a domestic and international recession slows demand growth, the broker said.
New generation currently under construction will add to the potential oversupply in the market.
“Expect lower prices for longer. Unless there is an acceleration of demand growth, we don’t see the market returning to normalised prices and new investment until FY26-FY28,” analysts Nevill Gluyas and Grant Swanepoel say in a 23-page analysis.
“Demand stimulation can have a significant benefit: Adding 2,000 gigawatt-hours (GWh) per annum of Southland/Otago load in short order would rapidly restore most of the post-Tiwai market balance,” they said.
Tiwai Point uses about 12% of the country’s electricity. Its closure will cause the loss of about 2,600 jobs in Southland, collapse power prices, and likely result in the closure of some gas and coal-fired generation capacity in the North Island.
Today, majority owner Rio Tinto said it is not planning to restart a production line shut in April. That is consistent with industry expectations that the smelter will close next August, despite efforts by Meridian Energy and Contact Energy to negotiate a longer ramp down.
Late last month, the Government endorsed the potential to use the smelter’s former energy supply to electrify industry.
It made $70 million available to help with line upgrades and other costs associated with converting coal-fired processing in the lower South Island to electricity.
While no details have been announced, BusinessDesk understands that spending will build on work the Energy Efficiency & Conservation Authority has already been doing with South Island food processors.
The Government’s appetite to move quickly means it will have to be targeted at firms close to making investment decisions in new plants and will probably be provided on a co-funding basis.
But that will not be without challenges.
Earlier this week, Fonterra said the cost of upgrading power supplies to sites, and the complexity of converting existing buildings and processes, meant it was more likely to use wood to reduce emissions at its coal-fired sites than electricity.
Jarden said the potential boost in earnings for the generation sector, if 1,000-2,000 GWh of that surplus supply could be sold to industry, would be “enormous” even if the new customers were offered free power.
Very low power prices from Meridian and Contact for a “few large and rapid” dairy conversions could be the most effective way to “bookend” the impact of the smelter closure.
Based on what Synlait Milk paid to install its electrode boiler at Dunsandel, Jarden estimated a power price of $25/MWh (megawatt hour) would be competitive against current coal prices and an avoided carbon cost of $35 a tonne.
Absent such a “demand stimulation” or a delayed departure of the smelter, Jarden said “large-scale and ongoing” disruption is coming to retail markets, with prices for commercial and industrial power uses likely to fall quickly, compounded by Meridian and Contact trying to contract new customers.
Genesis Energy is likely to mothball or shut its dual-fuel Rankine units at Huntly, but could consolidate its position by contracting or buying some of Contact’s more flexible gas-fired plant and more flexible fuel arrangements, Jarden said.
Sale of Contact’s two gas-fired peaking plants at Stratford would free that company to become a 100% renewable provider, potentially benefiting from a valuation gain enjoyed by solely renewable generators Meridian and Mercury NZ.
While Contact’s 250 MW-plus Tauhara geothermal plant remains the country’s lowest-cost new generation option, Jarden said weak demand growth could see the already deferred development split into smaller staged increments in future.
Meridian’s 165 MW Harapaki wind project north of Napier is also likely to be deferred, even though its production cost of $60-$65 a megawatt-hour means it should be profitable on a stand-alone basis.
North Island power prices appear “quite sensitive” to the extra 570 GWh of electricity it would produce annually, reducing Meridian’s “already very spot-exposed generation portfolio,” the report said.
“Harapaki wind doesn’t look value-enhancing for its owner.”
–BusinessDesk
