Contact says smelter closure is ‘disappointing’

9 July 2020 Media release

Contact says smelter closure is ‘disappointing’

Contact Energy (“Contact”) CEO Mike Fuge said Rio Tinto’s intention to effectively close
New Zealand’s Aluminium Smelter (“NZAS”) by giving 14 months’ notice on their electricity
contract with Meridian Energy was “very disappointing”.

He said all commercial parties involved in dealing with NZAS, including Contact, had
collectively delivered significant cost reductions for electricity. “We’ve all had a strong desire
to help secure the financial sustainability of the unique low-carbon smelter at Tiwai, and
retain the 1,000 high-paying jobs in Southland, plus the 1,600 contractor and supplier roles.

“We’re very disappointed to have played our part in delivering these savings for one of the
greenest smelters in the world and to have such limited engagement from Rio Tinto. We
urge Rio Tinto to seriously consider the offer for improved electricity supply and encourage
them to consider what is right for Southland, for New Zealand and for their own global
environmental commitments.”

Mr Fuge said that with the disorderly exit of 13 per cent of national electricity demand
looming, Contact would now accelerate mitigation options including the consideration of
closure of the Taranaki Combined Cycle thermal power station at Stratford. Contact also
expects Transpower to expedite the build-out of the transmission grid and in this regard
welcomes the commitment to the lower South Island transmission upgrade.

He said that the smelter’s departure will have a significant impact on the Southland
economy. “In addition, the decision will also result in an avoidable and significant increase in
global emissions as production shifts away from NZAS to aluminium smelters powered by
electricity generated solely from fossil fuels.”

Mr Fuge said customers should expect to see an increase in transmission costs as the
proportion of transmission costs currently paid by NZAS will be spread across all customers.
“The reality is that NZAS has subsidised transmission costs to consumers for years. Not
only will those costs now fall to other customers, there will also be additional costs for the
significant transmission investment from Transpower now needed to shift surplus energy
from the lower South Island north to where it is needed. In the meantime, the surplus water
currently being used to generate renewable energy in Southland will in large part end up
flowing down the Clutha River.”

Contact’s ‘shovel-ready’ Tauhara geothermal power station remained New Zealand's
cheapest and most attractive option for new, renewable, baseload electricity generation, but
Mr Fuge said the sensible option was to defer this investment. “Tauhara remains a fantastic
project, however it is prudent to press pause for now. We need to factor in the impact of
COVID-19 and the potential exit of NZAS and get a clearer picture of demand,” he said.

Opportunities to decarbonise transport and accelerate the electrification of South Island
industry away from a reliance on coal remained in focus. “One silver lining is that we expect
today’s news to be a catalyst for users to accelerate their shift toward low-carbon electricity
– however this transformation would be a slow burn and take much longer than 12 months.”

Mr Fuge said Contact would update the market on any implications of the NZAS exit on the
company’s expected earnings and dividend. “We’re accelerating our mitigation plans to

minimise the financial impact. Our portfolio of long-life renewable generation assets, flexible
thermal assets and fuel contracts, and strong balance sheet provide confidence we are well-
placed even in a lower demand environment.”

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