Alcoa’s Portland smelter’s survival hangs on power deal

The owner of Victoria’s Portland aluminium smelter said a rescue deal was only made possible by a combination of cheaper energy prices and hefty government subsidies.

Prime Minister Scott Morrison visits the Portland aluminium smelter, to announce funding, standing with Dan Tehan, Ron Jorgensen, Michael Gollschewski and Tim Pallas. Picture: Nicole Cleary

The owner of Victoria’s Portland aluminium smelter said a rescue deal warding off its closure for another five years was only made possible by a combination of cheaper energy prices and hefty government subsidies as it battles to remain internationally competitive.

Metals giant Alcoa confirmed 600 jobs had been saved after a long awaited five-year electricity supply deal was struck with the nation’s biggest energy retailers, in addition to $155m of subsidies split evenly between the federal and Victorian governments.

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.

Alcoa said the five-year lifeline was achieved by the combination of a competitive tariff from the energy suppliers and guaranteed payments from the two governments to ensure the plant remains operating through until 2026.

“The real issue we had here is an energy price that wasn’t competitive in the market we compete into, which is a global market. So that’s where we need governments who understand how smelters work and the role that they can play in a national energy market,” Alcoa’s Australian president Michael Gollschewski said on Friday.

“The governments understand that and have put a price on that. The federal government is not giving us a handout but a guarantee about what we can expect to receive when the grid is in trouble. Some years it can be handsome and other years it can be very lean. This deal is to average that out to help with our long-term planning.”

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.

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.

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.

PM Scott Morrison and Michael Gollschewski speaking to the press at the Portland smelter on Friday. Picture: Nicole Cleary.

It can idle its smelters for up to three hours at a time on short notice, freeing up about 440 megawatts 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.

“We’re a big baseload generator, we need stability and reliability but we’re also a very flexible baseload,” Mr Gollschewski said.

“When you come home in summer and the aircon goes on and the power goes up and the wind isn’t blowing and the clouds go over the solar panels, we can modulate 400MW of power to let the grid catch up with things.”

The Andrews government has been under the spotlight after inking a secret financial deal to keep EnergyAustralia’s Yallourn coal plant running out through 2028.

The Alcoa boss was reluctant to specify any details of the Victorian tie-up but said it had helped get a deal over the line.

“The state have given us some underpinning that when times are tough they’ll be there for us, so we don’t fall too far or too heavily and can get ourselves back up again and reimburse the state and get on with business. In 2017 we weren’t quite there yet with an energy market that was competitive. But they gave us a chance, so we’re eternally grateful for that.”

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 275MW, 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.

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.