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Out of cycle funding letter to Minister of Finance
1. The Treasury have requested you to submit an out of cycle funding request to the
Minister of Finance. This relates to the proposed increase in industrial allocation to the
New Zealand Aluminium Smelter because of their new electricity contracts through your
draft Cabinet paper
New Zealand Aluminium Smelter electricity allocation factor update.
2. A letter to the Minister of Finance is attached along with the required out-of-cycle funding
request template.
3. We ask you to review those materials and to sign the letter.
4. The Cabinet paper can be considered by Cabinet if the Minister of Finance pre-approves
the funding request. The Cabinet paper seeks a decision on the rate of allocation to
NZAS for its new contracts. The fiscal forecasts include a zero rate of allocation as this
was the rate under NZAS’s previous, and now obsolete, electricity contract. Therefore,
any increase wil impact OBEGAL and the industrial allocation expense.
5. Your recommended rate of allocation to NZAS for the electricity contracts wil increase
NZAS’s industrial allocation by approximately 600,000 NZUs per year, or $36 mil ion at
$60 per NZU.
6. Following, and assuming, approval from the Minister of Finance, the Cabinet paper can
be lodged immediately. We will provide you with a final version of the Cabinet paper and
seek your approval to lodge at that point.
Recommendations
We recommend that you:
a.
sign the attached letter to the Minister of Finance
Yes | No
Signatures
Mark Vink
Hon Simon WATTS
General Manager, Markets
Minister of Climate Change
13 September 2024
Date
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Appendix 1: Template letter to the Minister of Finance for Pre-
approval of Out-of-cycle Funding Requests with Financial
Implications
10 September 2024
Hon Nicola Willis
Minister of Finance
Parliament Buildings
Dear Nicola,
Pre-approval for out-of-cycle funding request with financial implications
I am seeking your approval to take my proposal forward for Ministerial consultation in
advance of Cabinet consideration.
The Government has allocated emission units to the New Zealand Aluminium Smelters
(NZAS) since 2010. NZAS is exposed to emission costs for its large consumption of
electricity. Because the fiscal impacts are considerable, a bespoke process of interrogating
the contracts to determine the appropriate rate of allocation is followed. This occurs every
time NZAS changes its electricity contracts. The previous contract was found to have no
emission cost component and NZAS has been allocated no emission units for that electricity
consumption. This is the basis of the current fiscal forecast.
NZAS and three electricity generators recently signed new contracts. Based on modelling
and judgements, I recommend a new basis for NZAS allocation be considered by Cabinet.
The Climate Change Response Act 2002 allows for this arrangement.
My proposed rate of allocation to NZAS for consuming electricity wil therefore increase the
industrial allocation expense from that forecast and impact OBEGAL. This is a non-cash
impact. NZAS’s allocation wil increase by 600,000 emission units per financial year, or $36
mil ion at $60 per emission unit. This expense wil vary year to year according to the quantity
of electricity consumed by NZAS, the production of aluminium, and the market price of
emission units.
An existing appropriation Non-Departmental Other Expense Appropriation in Vote
Environment entitled “Industrial Al ocation” can absorb this funding increase.
However, a policy decision is required now to avoid higher expenses being incurred. Not
making this decision to providing this unique rate of allocation to NZAS wil result a default
rate being used (0.544 NZUs per megawatt hour), which is over three times larger than the
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rate I wil propose to Cabinet (0.137 NZUs per megawatt hour). Therefore, this decision
cannot be deferred until next Budget, and the decision wil cause expenses to be lower than
an alternative in which no decision is taken by Cabinet.
I confirm I have met all the requirements of the pre-approval process for out-of-cycle funding,
including providing credible and genuine alternative funding options in the attached Budget
template.
[Signature of the Minister]
Minister of Finance
Approved / Not Approved
[Date]
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