Jobs saved as Alcoa’s Portland aluminium smelter gets its lifeline

Updated | The future of Victoria’s Portland aluminium smelter has been secured, saving 500 jobs and bringing an end to looming fears the facility would be axed.

The Portland Smelter is a major user of electricity.

The future of Victoria’s Portland aluminium smelter has been secured after a long awaited electricity supply deal was struck with the nation’s biggest energy retailers, saving 500 jobs and bringing an end to looming fears the facility would be axed.

Owner Alcoa confirmed The Australian’s report on Thursday that it had reached a deal that will keep the manufacturing facility running until 2026 with three separate power agreements reached to cover one of the biggest supply contracts in the national electricity market.

Incumbent supplier AGL Energy has signed up to a new five-year contract and will be joined for the first time by power operators Alinta and Origin Energy.

Portland has been under threat of closure for more than a year, after majority owner Alcoa flagged a review of its future if a new, cheaper energy contract could not be negotiated ahead of the expiry of the current deal — and a four-year subsidy agreement with the Victorian government — in July.

The new agreement safeguards the jobs of 500 workers employed at the smelter in the small western Victorian town, as well as for the thousands of others that rely on its continued operation.

“On behalf of the Portland Aluminium joint venture partners, I recognise everyone’s co-operation and dedication in reaching the energy agreements that help to improve the smelter’s competitiveness,” Alcoa president and chief executive Roy Harvey said. “We look forward to finalising the Australian and Victorian government agreements, which underscore the smelter’s importance to the economy and the vital role it plays in securing Victoria’s electricity grid.”

A signing ceremony was held with representatives of Alcoa, AGL, Alinta and Origin in Melbourne’s CBD on Thursday afternoon ahead of an official announcement on Friday morning followed by a formal event held at Portland.

Prime Minister Scott Morrison joined Federal Trade Minister Dan Tehan at Portland on Friday morning to announce the rescue package.

Mr Morrison said the deal would ensure the “reliability of the grid across Victoria. It‘s great news for Portland, it is great news for the jobs here in Portland and the many thousands of jobs that exist beyond the gates of this tremendous facility,” he said.

In December the federal government offered up a $77m package to help guarantee the massive energy user continues to play its role in stabilising the east coast energy grid. The Victorian government plans to match the federal package under an “in principle” agreement, suggesting a deal has yet to be fully locked down with Alcoa. The Andrews government last week inked a secret financial deal to keep EnergyAustralia’s Yallourn coal plant running out through 2028.

AGL, which previously covered the entire contract, said its new five-year contract which starts on August 1 represents a “mutually beneficial outcome on commercial terms” for 275 megawatts, or just over half the 510MW load. The deal provides AGL flexibility including rights for the short-term reduction of volume at times of peak demand. Origin and Alinta will provide the balance although Alinta did not provide details of their supply commitment.

“AGL recognises the importance of the Portland smelter to the communities it supports and as a large wholesale electricity user. The total Portland load comprises approximately 10 per cent of Victoria’s total energy demand and we are pleased to play our part in securing its continued operations,” AGL chief executive Brett Redman said.

Portland will help keep the power grid stable as Victoria chases a goal of 50 per cent renewables by 2030, Alcoa said.

“As a stable baseload energy consumer, the smelter will continue to provide important market stability as more renewables enter the system. Currently, more than 30 per cent of the smelter’s consumed electricity is derived from renewable sources, including electricity from a nearby wind farm. This figure is expected to grow with implementation of the Victorian Renewable Energy Target that aims to reach 50 per cent renewables by 2030,” Alcoa said in a statement.

Portland has been kept alive over the last decade by a succession of rolling subsidy deals from the state government, worth $200m over four years when last signed in 2017.

The rescue of Portland represents a rare bright spot for Australian manufacturing after a rocky period. ExxonMobil’s decision to shut the Altona refinery in Melbourne put 300 jobs in peril and concerns over the fate of Sanjeev Gupta’s industrial empire including the Whyalla steelworks following the collapse of his main lender, Greensill Capital.

While AGL holds the electricity contract with the smelter, Alcoa asked the incumbent’s rivals to consider bidding for the contract over fears that AGL may not have the appetite to take on the entire weight of supply by itself.

Breaking up the load allows separate suppliers to cover the 510 megawatt load for the facility but means AGL can keep part of the supply contract as it faces a separate test in NSW after Australia’s biggest aluminium smelter Tomago reopened negotiations with the company to strike a cheaper electricity contract.

Alinta and EnergyAustralia, which run the Loy Yang B and Yallourn brown coal plants in Victoria, were expected to take part in any electricity deal, but the inclusion of Origin was unexpected given its lighter baseload generation capacity in Victoria.

AGL initially approached the Australian Competition and Consumer Commission to open talks over whether it would allow a consortium of the state’s major electricity companies to work together on a contract. However, that was shelved a few months later and the three contracts that have been sealed were negotiated on an individual basis rather than via an approach to the ACCC.

Alcoa said current production is approximately 85 per cent of the smelter’s total capacity of 358,000 tonnes per year.

 

Portland uses 10 per cent of Victoria’s energy use each year, and produces almost 20 per cent of the nation’s aluminium output. It also provides a critical role in keeping Australia’s power grid stable.

It can idle its smelters for up to three hours at a time on short notice, freeing up about 440MW of energy at times of peak demand, more than any other single user in the state with a demand response capacity that is about three times that of the 150MW big battery in South Australia.

Alcoa has said a key point in negotiations over a new power deal is whether Portland will be compensated if it is forced to shut down during power outages.

Under the government deal Alcoa would be required to dial down its Portland smelter if the Victorian power grid comes under pressure in the summer heat, a role it has often played when coal-fired power stations become erratic as temperatures soar.

Portland’s future has also been bolstered by steady improvement in the price of aluminium since it hit rock bottom as the coronavirus pandemic hit manufacturing centres across the globe.

Alcoa and Australian-listed Alumina jointly own 55 per cent of the smelter on Victoria’s southwest coast, with China’s Citic and Japan’s Marubeni owning the rest.

Average electricity spot prices have halved from a year ago to between $40 to $45 a megawatt hour range in most states as a flood of cheap renewables lowered daytime prices along with cheaper gas and coal and softer demand amid COVID-19.

Electricity futures point to subdued conditions extending through this year and into 2022 with prices in the low $50MwH range, potentially making a cheaper contract easier to secure for Alcoa.

Additional reporting: Tom Minear, Eli Greenblat

Originally published as Jobs saved as Alcoa’s Portland aluminium smelter gets its lifeline