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Meeting with NZ Steel
Purpose
1. This aide memoire gives you information for a meeting with NZ Steel on 20
February 2024.
2. This is an opportunity to discuss progress with phasing out coal use through the
joint investment in an electric arc furnace, as well as other strategic
decarbonisation opportunities for NZ Steel.
3. It is likely NZ Steel will want to discuss industrial allocation. This note provides
background on that policy work.
Background
4. NZ Steel is eligible to receive industrial allocation for making iron and steel from
iron sand to reduce the risk of emissions leakage. The company received nearly
two million NZUs in 2022, which was by far the largest allocation transfer.
5. NZ Steel’s allocations are calculated from three inputs: (1) emissions intensity,
(2) the amount of iron and steel that was made in the year, and (3) the rate of
assistance for an activity classed as ‘highly emissions intensive and trade
exposed’.
6. Emissions intensity is a function of emissions and production. Emissions are from
on-site chemical transformations as well as using gas, coal and electricity.
Existing emissions intensity data is from the years 2007-10.
7. The Climate Change Response (Late Payment Penalties and Industrial
Al ocation) Amendment Act 2023 has allowed those parameters to be updated.
Al ocative baselines for all eligible industries will be reset this year.
8. Determining the emissions cost exposure of using electricity is particularly
indirect. Over half of NZ Steel’s electricity needs are supplied from an onsite
cogeneration plant powered by waste gases and a small amount of natural gas.
The Minister of Climate Change Issues of the day, Hon Dr Nick Smith, decided in
2010 that such electricity consumption should be treated the same as any other
electricity consumption. Consequently, NZ Steel receives allocation for
consuming any and all electricity irrespective of its source and emissions costs.
9. The al ocative baseline component of electricity use is known as the electricity
allocation factor. There is a general electricity allocation factor which is used in
determining allocative baselines for all activities. That value wil be remodelled
this year.
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10. Aluminium smelting also has a bespoke electricity allocation factor because of
unique characteristics in the electricity contract between NZAS and Meridian
Energy Ltd. NZAS’s allocative baseline uses the bespoke value for purchases
from the contract and the general factor for purchases from the grid. It is the only
bespoke electricity allocation factor currently.
11. We are considering if a bespoke electricity allocation factor for using cogenerated
electricity should be used in steel making’s allocative baseline. Early findings
from an independent review is that NZ Steel is not exposed to emission costs for
that cogeneration electricity.
12. The key consideration is the emission costs passed on in the contract between
NZ Steel and the generator. The draft report is now the subject of discussions
between the consultants and NZ Steel, with officials facilitating the meetings. We
expect NZ Steel to test the initial findings. Following these discussions, further
refinement of the analysis, and a final report from the consultants, we will prepare
advice for you.
13. Any change to the allocation for this issue will require Cabinet approval. If it
proceeds, once implemented through regulatory change later this year, NZ
Steel’s allocation for 2024 and outyears could reduce by 230,000 – 250,000
NZUs, or $18m per year (at $71 per NZU) for that policy change alone. 9(2)(g)(i)
14. 9(2)(g)(i)
15. Board approval was announced on 8 September. Meetings were held between
NZ Steel and officials on industrial allocation and cogeneration. The then Minister
of Climate Change wrote directly to Robin Davis on 13 October about the work
(attached), before approving the publication of a Gazette notice calling for a copy
of the cogeneration contract.
16. There are a range of other changes to industrial allocation policy being
implemented this year. They will all improve the accuracy of our estimates of
emission cost exposure and reduce overallocation and fiscal costs. In the middle
of the year, we will seek your approval to issue drafting instructions for
amendment regulations which will include:
i. New emissions intensity data from all activities
ii. An update to the general electricity allocation factor
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iii. Any Cabinet decision on a bespoke allocation treatment for NZ Steel’s
cogeneration electricity.
17. Those regulatory changes wil correct 2024 allocations in the ‘truing up’ process
that will occur at the start of 2025.
Industrial allocation and the electric arc furnace investment
18. The Environmental Protection Authority has ruled that NZ Steel wil be carrying
out an existing eligible activity and can receive allocation for operating the electric
arc furnace. NZ Steel stated that ruling provided sufficient certainty for it to sign
the funding agreement with the Crown in late 2023.
19. There wil be updates to the allocative baselines for the output of the electric arc
furnace based on projected data from NZ Steel. We are developing relevant
advice.
20. Even if you and Cabinet agree there is overallocation and regulations are
changed, NZ Steel wil stil receive significant allocation for making iron and steel
products because of direct emissions and the use of coal, natural gas, and grid-
sourced electricity.
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Talking Points
9(2)(g)(i)
24. 9(2)(g)(i)
Signatures
Susan Baas
General Manager Markets, Climate Change Mitigation and Resource Efficiency
Date 15 February 2023
Hon Simon WATTS
Minister of Climate Change
Date
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9(2)(a)
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Appendix 2 – Letter from James Shaw to NZ Steel 13 October
2023
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