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Industrial allocation and the New Zealand Aluminium
Smelter
Purpose
1. This aide memoire outlines conclusions from our review of industrial al ocation
implications from NZAS’s three conditional electricity contracts. Officials from the
Ministry for the Environment will communicate these findings to NZAS late on Tuesday 7
May and provide our consultant’s report to NZAS soon after.
Background
2. The purpose of industrial allocation is to reduce the risk of emissions leakage, which is
where domestic investment and production is replaced by offshore activity due to
differing climate policy stringency. The New Zealand Emissions Trading Scheme impacts
the price of electricity faced by all consumers. Those price increases can impact the cost
competitiveness of some producers, including NZAS.
3. Due to NZAS’s significant consumption of electricity, it can negotiate financially
favourable terms for the price it pays compared to typical consumers. Historically, it has
faced much lower NZ ETS impacts on its contracted electricity costs compared to grid-
based purchases. If this impact is not reflected in its annual al ocations through a
bespoke allocation, there is a risk that NZAS would receive a substantial overal ocation
with associated fiscal costs (see the default line in the table below). NZAS is the only
firm that is subject to bespoke policy decisions on industrial allocation for consuming
electricity, although we are reviewing NZ Steel’s cogenerated electricity arrangements.
4. The current electricity contract between NZAS and Meridian Energy Limited expires at
the end of 2025. Cabinet agreed in 2021, fol owing our analysis of that contract, that
NZAS was not exposed to electricity market emission prices. Consequently, NZAS does
not receive industrial allocation for electricity consumed under that contract.
5. NZAS still receives al ocation for the emissions caused in the chemical process of
smelting aluminium, for a small amount for natural gas and liquid fossil fuel use, and
some minor purchases of electricity outside its contract with Meridian.
6. NZAS has completed negotiations on replacement electricity contracts with three
generators. Ministers directed officials to assess those contracts for industrial al ocation
policy implications to assist NZAS in deciding whether to bring those contracts into force.
There are three conditional matters in the contracts: industrial al ocation policy
treatment, Electricity Authority approval, and final NZAS Board approval.
7. NZAS provided copies of the three conditional contracts to officials on 27 March 2024.
We contracted Concept Consulting Group to independently assist us with this work.
Concept has deep NZ ETS expertise and experience in evaluating previous NZAS /
Meridian electricity contracts for the purposes of industrial allocation. Two meetings were
held between NZAS, Concept and officials to discuss the contracts and proposed
methodology.
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9(2)(h)
Next steps
17. We intend to communicate Concept’s recommendation to NZAS late on 7 May by phone
call to the Chief Executive, Chris Blenkiron. Concept’s draft report and model will be
forwarded to NZAS shortly after.
18. We had committed to this timeline in discussions with NZAS, noting the urgency for their
decisions. There is a NZAS Board meeting in the week of 13 May where this matter may
be discussed.
19. A meeting between the two Ministers can be arranged if required. Officials will organise
this with your offices.
20. It is possible NZAS will contact Ministers to discuss the Concept recommendation. Some
key points to assist you in any such meeting are:
i
The finding is indicative only, for the purposes of informing NZAS Board decisions
and is not binding on future Minister recommendations and Cabinet decisions.
ii
The indication shows NZAS is exposed to NZ ETS impacts on electricity prices but
due to NZAS’s location and the pricing of the contracts, it is not as exposed as a
North Island industrial consumer purchasing from the spot market, for example.
iii Officials continue to be available for technical discussions on the methodology and
conclusions.
iv We are open to repeating the analysis with another expert advisor, at NZAS’s
request.
21. Should the contracts enter into force, we will seek copies of them by notice in the NZ
Gazette and compare them to those we have analysed. The extent of any changes from
the conditional contracts will determine how much work is needed before seeking
Cabinet decisions on amendment to the Climate Change (Eligible Industrial Activities)
Regulations 2010 by the end of 2024.
22. The Treasury has been informed of the potential increase in industrial al ocation
expense for 2024/25 and out-years. This increase has not been budgeted for and will be
raised to Cabinet’s attention when decisions are sought. It will be noted that any
increase in industrial al ocation should lead to a commensurate reduction in NZUs
available for auction, as NZU supply is capped to remain aligned with emission budgets.
The auction volume adjustment will be considered in next year’s NZ ETS settings, as it is
dependent on the passing of the amendment regulations.
23. Officials from the Ministry of Business, Innovation and Employment have been kept
informed of developments in the work and have received copy of this aide memoire.
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Signatures
Mark Vink
General Manager
Markets, Climate Change Mitigation and Resource Efficiency Date 2 May 2024
Hon Simeon BROWN
Minister for Energy
Date
Hon Simon WATTS
Minister of Climate Change
Date
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