Tomago seeks cheaper energy deal
Australia’s biggest aluminium smelter has reopened negotiations with AGL Energy to strike a cheaper electricity contract.
Australia’s biggest aluminium smelter has reopened negotiations with AGL Energy to strike a cheaper electricity contract amid concern an existing deal set to run until 2028 and a tough market backdrop for the metal may cripple the future of the giant manufacturing site.
Tomago Aluminium — the nation’s largest power user, whose owners include Rio Tinto and CSR — said the smelter was not in a “sustainable position” and faced an uncertain future despite a move by the Morrison government to push the private sector into building more supply to replace AGL’s Liddell coal plant, which currently supplies the facility.
“The Australian dollar has come up to above US70c and that in combination with depressed metal prices means the smelter is not in a sustainable position, which is why we’re endeavouring to renegotiate our electricity contract with AGL,” Tomago CEO Matt Howell told The Australian.
His comments come as Energy Minister Angus Taylor on Tuesday will detail low-emissions technology that the Morrison government will prioritise for investment to help underpin the energy market while cutting emissions.
Tomago struck an 11-year deal with AGL in 2017 that represented the biggest power supply contract signed in NSW. While NSW wholesale power prices have dived in the past year, the terms are understood to lock the smelter into a comparatively high-priced contract until its expiry in 2028.
“We are in discussions with them right now,” Mr Howell said.
“This is not a simple contract or a simple arrangement, however. We are talking to AGL about how we can give them certainty and what sort of value we can trade off for a low electricity cost.
“We have to find a way to lower the energy price for the smelter to be there. The combination of the very significant increases in power prices and persistently low metals prices means smelters are fourth quartile on the global cost stack and that is not a position where you have any kind of survival prospects.”
The smelter has been enduring a tough period of trading, according to Mr Howell, pointing to statements made by its owners.
“We know Rio Tinto has said they’re suffering a loss, CSR put in some very favourable hedges which has given them some breathing space. But you can’t have a business that is only profitable on the back of opportunistic hedging. That is simply not a viable situation,” Mr Howell said.
10 per cent of NSW demand
Tomago, which uses 10 per cent of NSW demand, has also opened talks with the Australian Energy Market Operator to investigate different payment models to recognise the role it plays in the electricity grid, where it can power down to help the state avoid potential blackouts.
“Having Tomago operating is perhaps the biggest defence against widespread blackouts in NSW because we have the largest and fastest-acting interruptible load in the country,” Mr Howell said. “But that’s only true if the smelter is viable. If it’s not viable and the load comes out, the supply-demand picture will come back into balance, but now you’ve lost your biggest circuit breaker,” Mr Howell added.
AGL has also been contending with renegotiating a critical power supply contract due to expire in mid-2021 in Victoria for the Portland smelter run by Alcoa.
AGL in May hinted that governments would be reluctant to let the Portland and Tomago aluminium smelters collapse in a post-COVID-19 environment, but considerations by each facility’s owners may also play a part.
Rio is racing to sharply curb its carbon footprint, potentially affecting Tomago, while Portland’s future under Alcoa’s ownership rests on the negotiation of a new and cheaper power contract, complicated by the fact it takes most of its power from Victoria’s brown coal generators and Alcoa also wants to reduce its global carbon footprint.
AGL said it was focused on both facilities. “AGL has been very clear that we care about the future of both Portland and Tomago aluminium smelters. While we can’t comment on the specifics of our contracts with these businesses, we do offer pricing that isn’t linked to wholesale power prices, thereby protecting them from pricing variations,” AGL said in a statement on Monday.
“We are continuing to engage with the smelters on other ways we may be able to further support the viability of their operations. Additionally, we are open to understanding how we might work with other market participants, government and interested parties to support jobs and assist industry in this region.”
Tomago said it backed a move made by the government last week that gave investors until April to commit building 1000MW of new power capacity to ensure there was a like-for-like replacement for AGL Energy’s Liddell coal plant, which will close down in the 2022-23 summer.
