Tiwai Point smelter production decision hinges on long-awaited grid cost-sharing recommendations

A long-awaited recommendation on how the cost of the national electricity grid in New Zealand should be shared in future is due on May 17. The NZ Electricity Authority says it will release its transmission pricing methodology paper and run an eight-week consultation.

The issue has been running for years without resolution and revolves around whether South Island electricity generators and consumers pay too much for access to the grid, especially since $2 billion of upgrades over the past five years has delivered a significant improvement in security of supply for North Island consumers.

Whatever the outcome, there are likely to be economic and political consequences.

The Rio Tinto-controlled aluminium smelter at Tiwai Point regards the final decision on grid costs as an important input into decisions it faces on whether to keep the smelter running at its current full capacity, drop a third of its production, or pull the plug on its New Zealand operations.

Those decisions, in turn, have flow-on impacts for the electricity system. Reduced demand from the smelter would add to the current glut of electricity production, which has been pushing down the price of wholesale electricity in recent years.

However, a decision favourable to the smelter would also be likely to mean higher grid connection costs for North Island consumers, including the country's largest city, Auckland, and for remote areas such as the West Coast of the South Island.

The first cut of proposals for the reform suggested savings of up to $60 million a year may be available to the smelter although subsequent tweaks to the modelling used in that report have left open the potential for smaller, more staged changes to pricing than were originally indicated.