AGL Energy delivers grim reality check on Tomago aluminium smelter
AGL Energy has warned Rio Tinto it won't subsidise power costs for NSW's largest electricity user, as crisis talks continue over the Tomago smelter's future.
AGL Energy has warned it will not cross-subsidise Rio Tinto shareholders by supplying an uncommercial electricity contract for the miner’s Tomago aluminium smelter, amid crisis talks with the NSW and federal governments to prevent the facility shutting due to high energy costs.
The aluminium smelter is the single largest user of energy in NSW, and its current power contract with AGL expires in late 2028, with negotiations intensifying over a government bailout as pressure grows for a national solution to rescue the struggling sector. AGL is among companies hoping to win one of the state’s largest energy deals when the current contract lapses, but retiring chief operating officer Markus Brokhof said the next supply pact would reflect higher costs in the market.
“AGL is not cross-subsidising the shareholders of Rio Tinto. It is our electricity price. It needs to be a market-based electricity price and AGL is willing to do this in a very competitive way,” Mr Brokhof said in an exit interview with The Australian.
“It’s very clear that our electricity position has changed in NSW after the closure of Liddell and we need to make sure that our sales contracts are competitive.”
Rio owns a 51 per cent stake in the Tomago joint venture, along with CSR and Hydro Aluminium.
The smelter needs 3 to 4 gigawatts of renewables to meet its 950 megawatt needs, plus back-up options given the variability of wind and solar supplies.
But sources said there would be insufficient supplies of green power available once the current deal expires in 2028.
That would mean paying over the odds for higher coal-based pricing as an interim solution until green power becomes available from 2032-33.
“We have been very clear to the outside world that one of our very competitive legacy coal contracts is running out in 2028 … aligned with the smelter recontracting,” Mr Brokhof said. “If we recontract the volumes of Tomago, it will not be at the same price as we have at the moment.
“That has caused most probably a bit of surprise for Rio Tinto and their shareholders. I don’t understand why it was a surprise, but this is for somebody else to determine.”
Rio has conceded a plan to move the electricity contract from the current coal contract by the end of 2028 would see Tomago’s owners pay twice as much for their electricity needs.
A decision is due this year on how to move forward with the smelter given the power cost crunch, as negotiations continue with both the Minns government in NSW and federal Industry and Innovation minister Tim Ayres.
The NSW government said it remains in talks over Tomago’s woes.
“The smelter at Tomago is an important employer and the owners have been public about their need to secure cheap renewable energy as their existing energy contract comes to an end,” a NSW government spokeswoman said.
“The government engages regularly with businesses on a range of emerging challenges they face and how to best support them. We won’t be providing a running commentary on every discussion.”
Mr Ayres’ spokeswoman said: “The federal government is working closely with the NSW government to continue ongoing discussions with Tomago Aluminium about the smelter’s future.”
Both Rio Tinto and Tomago Aluminium declined to comment.
Tomago currently relies heavily on AGL’s coal-fired Bayswater power station, which is set to close by the end of 2033. AGL’s adjacent Liddell coal plant closed in 2023.
AGL said it had offered a variety of contract structures as part of its bid process, but said Tomago’s long mooted plan to go with 100 per cent renewables looked unrealistic.
“I don’t believe that this is a realistic target, but that’s up to them to decide,” the AGL executive said. “We have offered everything and we have done everything we can do with the Tomago smelter and offered a variety of certain energy structures and supply structures. So they have to make a call about this.”
An extended interview with Mr Brokhof will run in The Australian’s Innovators magazine to be released on October 10.
Tomago has previously said it received offers to supply up to 67 gigawatts of renewable energy, including 20GW of storage – more than 20 times its likely requirement. The smelter operator said gas and coal-fired stations would likely still be in the mix in the early stages of the next power contracts to provide energy options when renewables drop out.
AGL’s 11-year coal deal, signed in 2017, remains the biggest power supply contract ever signed in NSW.
However, Mr Brokhof said it was important to recognise the market has changed over the intervening period.
“Since we closed down Liddell, we are short electricity in NSW. So our portfolio is not so much relying now, going forward, on the smelter of Tomago.”
AGL said it had been in talks with Tomago for the last five years about supply concepts, which could include a mix of renewables and coal and an eventual transition to a complete clean energy contract.
A number of major manufacturers are engaged in bailout talks with government authorities as high operating costs threaten the future of heavy industry in Australia.
Anthony Albanese declined requests to meet with Glencore to discuss the future of its teetering Queensland copper operations that underpin about 17,000 jobs in the state’s north.
The Commonwealth contributed the lion’s share of recent bailout package for global commodities trader Trafigura’s struggling metals smelters in Port Pirie, South Australia, and Hobart, Tasmania, albeit the sums involved were much smaller than those sought by Glencore.
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