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Draft Cabinet paper: New Zealand Aluminium
Smelter electricity allocation factor update
1. We seek feedback on the attached draft Cabinet paper (Appendix 1).
2. The draft Cabinet paper seeks agreement to set a new electricity allocation factor (EAF)
for the New Zealand Aluminium Smelter (NZAS). An EAF is an estimate of the impact of
the Emissions Trading Scheme on electricity prices. They inform the free allocations of
NZUs industries receive where the emissions from using electricity are a component of
allocative baselines.
3. NZAS has a unique EAF that needs to be updated to reflect the emissions cost NZAS
wil incur for electricity purchased under its new electricity contracts, which came into
effect in July. We understand that you and the Minister of Energy prefer an EAF of 0.137
tCO2-e / MWH based on our review of the draft contracts. The draft Cabinet paper
presents this as your recommendation to Cabinet.
4. This option would increase NZAS allocation by about 600,000 NZUs each year, at a cost
of $36 million at current market prices, relative to its current allocation. We have since
received the final versions of the electricity contracts, which are unchanged from the
draft contracts that our preliminary assessment of the emissions costs was based on.
5. Your preferred option sits between two estimates of the EAF that were separately
modelled for the Ministry and NZAS. The draft Cabinet paper states that:
i
Determining the EAF for NZAS requires judgements about electricity prices and the
non-renewable energy share of energy supply over the next 20 years, which can
have a significant influence on the modelling outcomes and EAF calculation.
ii Different approaches can therefore be valid and produce reasonable estimates of
the EAF. This means there is no such thing as a definitive estimate of NZAS’s EAF.
iii Having considered the different modelling methodologies and key assumptions, and
their relative impacts on EAF estimates, you propose an EAF of 0.137.
6. Paragraphs 28 to 34
of the draft Cabinet paper are the key places where these points
are set out, as well as in the executive summary.
7. We welcome feedback about whether this explanation adequately captures your
reasoning.
8. The Regulatory Impact Assessment being prepared for this paper wil identify a lower
EAF of 0.08 tCO2-e / MWH as officials’ preferred option. That option was also the one
favoured by MfE’s independent modeller. Your preferred option of 0.137 was produced
by using the basic modelling approach of MfE’s modeller but using some of the key
assumptions from the NZAS-procured modelling. The RIA notes that those key
assumptions are subject to uncertainty and different judgments may be equally
reasonable, but swapping assumptions between models may cause internal consistency
issues.
9. 9(2)(h)
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9(2)(h)
10. We are happy to meet with you if you wish to discuss which option to recommend in the
Cabinet paper and whether the explanation for the current preferred option adequately
captures your reasoning. We also attach our draft RIS, noting that it has not yet been
assessed by our internal Regulatory Impact Analysis panel (Appendix 2).
Next steps
11. We invite your feedback to be incorporated into the next version of the paper, which wil
be circulated for agency and, with your approval, Ministerial consultation. The paper is
timed for consideration at the ECO Commit ee on 18 September. The EAF wil be used
in March to set NZAS’s final allocative baseline for 2024 and provisional allocative
baselines for 2025 and 2026 in NZ ETS regulations.
Recommendations
We recommend that you:
a.
provide feedback on the attached draft Cabinet paper: New Zealand Aluminium Smelter
electricity allocation factor update
Signatures
Mark Vink
Hon Simon WATTS
General Manager
Minister of Climate Change
Markets
Date
Date
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Appendix 1: New Zealand Aluminium Smelter electricity
allocation factor update
Appendix 2: Regulatory Impact Statement: New Zealand
Aluminium Smelter electricity allocation factor update
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