After a long period of negotiation, the New Zealand Aluminium Smelter (NZAS) agreed a new 20-year electricity contract with three of the large NZX-listed Gentailers – Meridian, Contact and Mercury. There are many reasons why this deal is positive which I’ll address in turn.

Firstly, the outcome is great for our listed Gentailers and the broader electricity sector, as evidenced by the solid share price performance on the day of the announcement. The deal also removes a very large tail risk event from the sector. NZAS uses 12-13% of New Zealand’s total electricity demand, and this generation is ‘trapped’ in the deep south of the country, a long way from the heavier demand loads in the North Island.

A common counter-argument is that if NZAS had ceased production, it would have created vast oversupply in the electricity market and prices would have fallen. Yes, that is true, but only in the very short term. What the new deal has enabled, is Gentailers and other independent developers to invest in new electricity generation, especially renewable generation. If the smelter had exited, the incentive for anyone to build new generation would have disappeared, in part due to low demand/excess supply, and low pricing – which cannot justify the cost of building new renewable projects.

Having this commitment and incentive to build new generation projects is important for New Zealand’s climate change and carbon reduction goals. As electricity demand grows during our decarbonisation/electrification phase, we need much more electricity as a country (NZ Climate Change Commission estimates approximately +50% generation will be required over the next 15 years). The NZAS deal accelerates our decarbonisation goals.

Photo from a Milford visit to the smelter on a VERY crisp Southland day!

We have already seen Mercury Energy confirm the Kaiwera Downs 2 wind farm near Gore, an approximate $500m build for 155 MW (525 GWh or approximately 1.5% of total country electricity supply), due for completion at the end of 2026. This would become New Zealand’s second biggest wind farm. I suspect there will be more announcements to come soon of new electricity projects.

Secondly, the deal is positive for the Southland community. Each year, NZAS contributes about $400 million to the Southland economy (around 6.5% of Southland’s GDP) and annual export revenue of about $1 billion (a great tax take for the NZ government!). Also, about 1000 fulltime-equivalent employees and contractors work at the smelter, with a further 2200 people offsite employed indirectly. The people of Southland were always frustrated with the games played around the previous shorter contract lengths, but a 20-year commitment will give much better security to the Southland economy.

Thirdly, as Meridian CEO Neal Barclay put succinctly below, the NZAS deal provides a pathway for high-energy users/manufacturing/heavy industry jobs to stay in New Zealand, reversing recent trends:

“It’s further proof that large industrial businesses can utilise New Zealand’s renewable energy advantage and create low carbon sustainable products, high value jobs and export dollars for our country.”

In a global era that values self-sufficiency and system security, this could become more important.

And finally, there are significant benefits to our electricity system security with the large ‘demand response’ mechanisms in the new deal. New Zealand, due to its large hydroelectric generation base, can be susceptible to pressure / shortages during lengthy dry periods in the country. This usually happens when the national lake levels are low and the hydro dams cannot run / produce electricity as often. Meridian Energy has an option to request the smelter reduce its large power offtake temporarily. This effectively makes the smelter a giant battery that can be called upon to assist system resilience during changeable or excess dry weather patterns.

All in all, the deal was a long time coming but congratulations are to be given to the parties involved to reach agreement. A win-win for the smelter, the local community, the NZX-listed Gentailers and the country as a whole.