Alcoa in talks on Portland power deal
lcoa is in talks with power generators over securing a new electricity contract for its Portland aluminium smelter in Victoria.
Alcoa is in talks with power generators over securing a new electricity contract for its Portland aluminium smelter in Victoria after a joint plan with AGL Energy seeking competition clearance to share the load was abandoned, dealing a fresh blow to the under threat facility.
AGL opened talks with the national competition regulator in May over whether it would allow a consortium of the state’s major electricity companies to collectively offer an agreed price for power to Portland at discounted rates, in order to keep the smelter operating.
The move was prompted by the looming expiry of the smelter’s supply deal with AGL, which is set to end in August 2021. However, the scheme was shelved due to onerous conditions and the unwillingness of suppliers to band together and agree a supply deal.
Alcoa has opened talks with rival suppliers to AGL and would consider striking either a contract with a new generator or potentially having a range of separate deals to cover its 510 megawatt needs, sources said, which represents 10 per cent of Victoria’s demand.
EnergyAustralia said in July it would consider supplying Portland in a move that may ease pressure on its Yallourn coal station, while Alinta Energy, which runs the Loy Yang B coal plant, may be another supply contender.
The decision not to pursue sharing the burden of a discounted power contract was a blow for Portland and its 500-strong workforce, the Australian Workers Union said.
“Obviously it’s disappointing news as I was hoping, as were my members, the sharing plan would come together nicely,” AWU Victorian state secretary Ben Davis said. “It’s a setback but Alcoa are still engaging and talking to the power companies themselves one-by-one. So this makes it more difficult, but not impossible.”
Both Alcoa and Alumina, which jointly own 55 per cent of the smelter on Victoria’s southwest coast, with China’s Citic and Japan’s Marubeni owning the rest, have said a new power deal is key to keeping Portland open ahead of the expiry of the AGL contract and rolling subsidy deals in 2021.
“It may yet come together but the question is whether it comes together at a low enough price. I’m not giving up that’s for sure,” Mr Davis said.
The Victorian government said it was hopeful of finding a solution for Portland. “We’re continuing to talk with Alcoa about options for a more sustainable long-term footing for the smelter,” a spokeswoman said.
AGL is also facing a demand to renegotiate its electricity contract for the Tomago aluminium smelter in NSW and faces a range of earnings risks from “smexit uncertainty”, according to Morgan Stanley. It estimates AGL’s contracts for the two facilities are set at $60-$65/MWh compared with current spot prices of about $45/MWh in the two states.
A worst-case scenario for AGL could see “smelter closures followed by coal plant exits” with the federal government then following through on its latest interventionist threats to keep a lid on prices. A $10/MWh fall on 40 terawatt hours of AGL’s generation equates to a $280m net profit hit.
“Intermediate scenarios could involve a combination of price reductions, and sharing of supply — should the smelters run a reverse auction — allowing AGL to sell some output at market prices,” Morgan Stanley analyst Rob Koh said. “The least unfavourable scenario we can think of is that AGL negotiates contract extensions with minimal price changes, with agreements to improve smelter sustainability.”
AGL in May hinted governments will be reluctant to let the Portland and Tomago smelters collapse in a post-COVID9 environment but considerations by each facility’s owners may also play a part. Rio is racing to cut its carbon footprint, potentially impacting Tomago, while Alcoa is also looking to cut poorly performing smelters.