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Portland smelter rescue deal to cost Victoria $1.1 billion over 4 years

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portland smelterThe bailout of Alcoa’s ageing aluminium smelter in the Victorian coastal town of Portland is possibly the dumbest thing that the Andrews Labor government has committed to, and could cost more than half a million dollars per employee per year.

These are the inevitable numbers caused by the direct subsidies from the state and federal government and the impact on power prices. Together, they stand at more than $1.1 billion over four years.

The future of the Portland smelter, and of the 1,500MW Hazelwood brown coal generator, are two of the biggest influences on electricity prices in Victoria and neighbouring states over the next few years.

The announced closure of Hazelwood late last year (it will close on March 31), was somewhat anticipated and somewhat unexpected. In the short term it provides some trading profit opportunities for the electricity market since its owner, Engie, has to buy back Hazelwood contracts.

Now that Portland is staying open, the market for electricity in Victoria is going to get tight.

Figure 1 Victorian demand showing Hazelwood and Portland. Source ITKe

Figure 1 Victorian demand showing Hazelwood and Portland. Source ITKe

We had expected the smelter to close, but a recent report in the AFR stated that the Victorian Government was going to provide a 4 year, $200 million subsidy and the Federal Government a $40 million interest free loan.

To us here at ITK these are incredible numbers. Measured against the 540 direct employees this represents a subsidy of $110,000 per year per worker.

However, in the world of politics and pork barreling nothing ever surprises. What is supposed to happen in four years time is anyone’s guess. If this comes to pass it’s arguably the dumbest thing the normally sensible Andrews Labor state Government will have committed to.

The $240 million is most unlikely to be full cost because keeping Portland open will increase electricity demand by about 5 TWh, pushing up the price of electricity not just for people in Victoria but also in South Australia and NSW.

That 5 TWh of extra demand is equivalent to about 600 MW of baseload supply, or say 1200 MW of wind ($3 bn of capital). In the short term that electricity will have to come from NSW and it will be expensive and force up the steaming coal price in NSW. And that is assuming there won’t be any transmission issues.

Based solely on Victorian demand – and if we assume Portland staying open causes prices to be $5MWh higher than they otherwise would be – the “hidden” cost paid by all other electricity consumers in Victoria is 45.7 TWh x 5 = or $228 million per year.

So the full cost of the Portland bailout is somewhere between $240 million and $1.1 billion on a four year basis.

Per worker, the cost ranges from a low of $94,000 cumulative over 4 years ($24,000 per worker per year) if we use the 540 Portland employees and 2000 people estimated to be employed in related directly dependent industries and just the direct subsidy costs, through to $2.1 million ($546,000 per year) if we use just the 540 direct employees and include the direct subsidy and indirect impact of higher prices for electricity paid by all Victorians.

These numbers are shown in Figure 2.

leitch figure 2

Figure 2: Pick your subsidy

The smelter wasn’t making any money last year when electricity prices were low, so as stated above we see this as a very poor outcome. It’s also obviously unfair to every other industry. There has been plenty of complaints about high gas prices recently but Goverments have correctly decided to let the market sort it out for itself.

David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.  

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  • A1

    do you know what the cost of the prior “subsidy” was, i.e., the long term cheap contract they had. perhaps there is no net change, this is just an extension some form of support on a same cost basis.

    here is something from the age:
    So far, the company has refused to publicly commit to keeping the Portland smelter operating after a long-standing contract brokered by the Cain government supplying it with heavily subsidised power ended last year.
    In March last year, Mr Pallas said the subsidy was costing taxpayers well in excess of $100 million some years, saying it had “well and truly run its course”.

    I dont know the details of the old agreement.

  • Jonathan Prendergast

    I disagree. We need that demand to remain the market to stimulate investment in new renewables.

    As no one has taken the reins of Australia’s energy system, and there is no plan, there has been no proactive development of renewables in preparation of the Hazelwood closure. Due to the lag, it means short term price increases. Regretable, but the solution is not to encourage large demand to exit the market.

    Producing aluminium is an opportunity to export renewable electricity internationally. Once the smelter is gone it will never return.

    • Mick

      Completely agree Jonathon. Would be a terrible wast of infrastructure and skilled workforce if this smelter were to exit. Would never come back – and looking to the future, our competitive advantage is abundant and good quality renewable energy resources – and associated low electricity costs.

      And as I understand it, it is a (relatively) young smelter in the scheme of things.

      • Greg Hudson

        Is a skilled workforce worth the damage caused by the pollution created by the smelter, and the huge burden on the power grid? I think not. Retrain the workforce (building wind turbines in a new Portland factory) instead, or start building Govt funded solar farms, employing those same workers…

    • Daniel Boon

      ‘export renewable electricity internationally’? please explain

      • Brian Tehan

        He means that, in the future, Australia’s natural advantage in renewable energy means that we can support energy intensive industries like aluminium smelting better than most other countries. Refer to BZE’s Renewable Energy Superpower report. Of course, Alcoa should have been investing in alternative energy supplies themselves, located as they are in one of the windiest parts of Victoria. The problem is that electricity has been too cheap in the past, so no incentive. Pressure should be brought to bear on Alcoa to start building some renewable infrastructure nearby, as a condition of the bailout. That would be a win for Victoria.
        Of course, it would be political suicide at this point in time to shut down the main source of employment in this corner of Victoria and a valuable industry, even if the locals keep voting for the coalition.

        • Andy Saunders

          Aluminium production uses so much energy it’s sometimes referred to as “electricity in a bar”. So exporting aluminium made from renewable power is a fairly efficieennt way of exporting renewable energy, without the massive infrastructure that undersea cables would represent.

          • Daniel Boon

            I agree …

        • Daniel Boon

          BZE is renowned for speciousness. It takes about 14 megawatt-hours per tonne of aluminum; so how much do the Victorian wind farms produce and what consistency and cost and how much aluminum?
          I am interested in the ERoEI as well as ROI.
          No business will stay in business receiving less from their products than it costs them to manufacture.

      • Matt Grantham

        Aluminium is quite often described as “congealed electricity”

    • Barri Mundee

      To my mind a big problem is the reliance of a small community on a single large employer with the potential for huge job losses and inevitable blow back for the State government.

      Ideally a host of smaller industries would have been fostered way back and encouraged with all the means a modern state or nations has at its disposal.

      This is a legacy from a different era when emissions reductions were barely a consideration so propping up the smelter may be the least worst political option ?

      Hazelwood’s closure, whilst welcome from an environmental perspective, will further increase joblessness and despair unless some bold initiatives are forthcoming from both tiers of government. The federal government has much more capacity to off-set the inevitable economic and social impacts but tends to push the burden onto the state government whose capacity to effectively intervene is much less.

      In this neoliberal age some sort of fiscal stimulus is not popular,

      • Jonathan Prendergast

        Good point. Governments seem a bit gun shy and reactive rather than proactively solving a problem.

    • Greg Hudson

      Now the writing is on the wall for Hazelwood, pressure needs to be put on AGL to get rid of their Loy Yang brown coal power station. Spend more installing wind turbines instead (to cover the closures). Same goes for the black coal PS’s in NSW.

      • Jonathan Prendergast

        We will need them for a little while we get some new generation built to fill the gap by hazelwood and bring prices back down.

  • Chris Fraser

    Hope I have understood, but the smelter can run on clean energy ? With Hazelwood going, there might be investment in more wind there.With a bit of luck, there’s possibly a correlation between this and emerging industry for manufacturing cars. I mean modern cars, of course.

    • john

      I do not think Australia will ever see a car manufacturer build Electric Vehicles.
      Considering these were the first vehicles in use 100 plus years ago rather ironic is it not.

      • Chris Fraser

        … I think we might start at the gin and tonic end … like a copy of a Tesla S or a Model 3 … maybe build those under license. Could improve access to Asian-pacific markets for those. And then we’ll build indigenous well-engineered cars like Utes and RVs.This may well be fanciful, but I’m interested in understanding the factors that would stop us.

        • john

          We have the skill we have the materials.
          Those are pluses.
          We have a high cost basis on every level.
          Those are minuses.
          We have a small market.
          This is a minus.
          However we also have a very concentrated urban population who travel less than 100 km per day a definite plus.
          So summation there is a market segment that suits EV.

          The major problem it getting them to actually buy a vehicle be it a 200 km capable or 400 km it does not matter once a year they will want to drive that 1000 km and they will want to use the EV to do it.
          This is exactly the same as those who drive a V8 Diesel 4×4 in suburbia, who think they are going to go to the Cape one day they spend a heap on fuel getting 12 to 14 liters per 100 km.
          In fact if they purchased a fuel efficient vehicle the savings in fuel insurance and service they could fly first class and be taken to the Cape by a guide and save money.

          Frankly yes there is a market but how do you over come the choices of irrational people?

          • Chris Fraser

            Let’s not worry about range. By the time we tool up for these cars they’ll be 800km/charge ?

          • john

            Chris i am going to put in a purchase order for a 150 kw or 200 kw EV to Tesla as a future product.
            This of course would be capable of that distance so at destination It can be charged over night.

          • Bruce

            Would that be a 150 kWh or 200 kWh battery size? For me, a 400 km range on a charge is fine. I could charge that up overnight with the current 85 kWh battery now.

            Plus if my trip is longer, there are a number of Superchargers available to allow a 20 minute charge every ~200 km. Would work for many I would guess, but not everyone.

        • Daniel Boon

          probably the same ones that stop us from building nickel iron batteries (life span up to 80 years) … we have an abundance of nickel iron

  • Daniel Boon

    Aluminum is the highest embodied energy material produced in Australia, we don’t export it commercially as our aluminum is more expensive. Government subsidies here and in the coal and gas industries translates into at least $billion that the population in Victoria will be made to bear

    • Brian Tehan

      Aluminium is much more straightforward to manufacture from renewable energy than steel, for example. In the future, in a low carbon world, Australia will have a natural advantage in energy intensive industries.

      • john

        I concur with your statement we should be using our natural resources of wind,solar, pumped hydro and wave or tidal mind in that area hardly any.
        Once the infrastructure is built for wind, solar and pumped hydro the benefits going forward are multiples of the initial cost.

    • Jonathan Prendergast

      In summary:
      – Aluminium + renewables = good
      – Aluminium + coal = bad

      Closing it down, seeing a rise in aluminum imports, and reduced chance to export, does not see any less aluminium produced or necessarily reduction in emissions.

    • Chris A

      Daniel, Completely false. The majority of Aluminium made in this country is exported. The doubling of wholesale electricity prices in the last three years has removed a substantial competitive advantage. Australia has gone from having one of the cheapest energy markets to one of the most expensive in three years! And since much of our heavy industry is energy intensive due to the historic advantage, it spells chaos in the interim if we don’t carefully manage the transition to renewables. Aluminium is just the “canary in the coal mine”

      • Daniel Boon

        well, you ‘were’ right … and despite sabotaging the value of the A$ by Glenn Stevens, export sales are plummeting, .. as a result of many factors (http://www.tradingeconomics.com/australia/exports-of-aluminium-ores-concentrates) … and I agree, just the canary … which is why politicians are running amok, they know the writing is on the wall and have ‘crashed a car through the shop front’ and stealing all they can … little realizing that in a soon to be poor population, they will stand out like like dog’s balls

  • bedlambay

    Perhaps Alcoa and other big users should look to Korea Zinc which will build 110 MW solar in Townsville. The subsidy to Alcoa could help build wind and solar in SA, Vic and NSW.

    • Jonathan Prendergast

      I presume Aloca don’t have the long term certainty of Korea Zinc.

      • Chris A

        More likely the Margins on Zinc allow them to make a profit using Solar. Aluminium is more energy intensive and won’t turn a profit from solar. Besides, industry is in the business of making products, not making energy. Why should industry invest in producing powe when they should invest in making aluminium or zinc? In a properly functioning market that’s what energy companies are supposed to do!!!!

        • Vox

          Except if on a purely financial assessment, the investment in Solar gives the company a considerable saving on electricity, which they can convert to added margin. You can’t really segregate these things, it’s all intertwined.

        • DJR96

          An ingredient to this businesses product IS energy. It has to source it from somewhere. If installing it’s own generation of any sort is the economic sensible option I’m sure it would be considered. But I doubt Alcoa is interested in that sort of investment. Too short sighted perhaps?

          Or is the writing on the wall – it will fold up before long regardless?

          • Greg Hudson

            Maybe you are not aware that Alcoa had their own coal mine at Anglesea until recently, so they ‘were’ a power company and smelter at the same time. Anglesea closed because:
            https://en.wikipedia.org/wiki/Anglesea_Power_Station

            On a side note: Where does Alcoa get their bauxite from to create the Aluminum ? It sure as hell isn’t anywhere close by, so it is probably sent by ship from far North Qld. In other words, creating yet another pile of pollution getting it here to Victoria.

            IMO the Vic Govt should abandon Alcoa, let them shut up shop and move to China. It simply is not economical to keep funding them.

          • DJR96

            Thanks Greg. Seems all the more extraordinary that they couldn’t manage the energy costs better in-house then. It just all seems poorly managed.

  • john

    I expect the company was getting power at about $40 MWH or possibly less.
    As production of Aluminum is a very high user of electric power to produce; the cost of power in the production phase is a major factor.
    Should every power user pay for this subsidy?
    Because Australia has a high wage structure the 540 workers are the next highest cost of production.
    Looking at the return to the economy from those 540 workers in tax and the outcomes from the production of product does it surpass the subsidy?
    One has to ask the sensible question is the subsidy cost neutral or cost positive to the economy?

    • Jonathan Prendergast

      There are obviously flow on effects to the local town and electricity industry. And, say 30% of wages goes back to Federal Government, plus GST on stuff they consume.

      Also, there may be benefits of economies of scale to our electricity sector, meaning it does bring down prices long term in some terms.

      But yes, it is a very high subsidy per worker. And I don’t think it should be or is intended to be forever.

    • Daniel Boon

      I would say a cost negative (even excluding environmental considerations and remediation / if that were possible), the whole building materials industry receives subsidized electricity for one reason alone (IMO), they create high energy consumers … high embodied energy materials natural characteristic is heat absorption

    • Chris A

      John, I think you should be asking why everyone can’t pay $40MWh when it costs less than $20 on the Short Ruin Marginal Cost to generate?

    • Brian Tehan

      I don’t believe that Australia has a “high wage structure” for skilled jobs. With the dollar around US70-75c, Australians would be getting less than a US worker. In any case, the wage component of a tonne of aluminium would be a small percentage, I would think. Electricity would be a bigger factor, as you said. The age and efficiency of the plant is also a factor. The Portland plant is old but considered reasonably modern, however new Chinese plants are more efficient. According to the articles I’ve read, 2000 jobs depend on the plant. We expect that, in the not too distant future, Australia will have a significant advantage in clean energy production and the cost of power and the economics of aluminium production in this country will be quite different. If the plant is already shut down, it won’t come back, as others have said.
      First we need to elect a federal government with some foresight, instead of one beholden to a dying industry – coal.

  • Ian

    Had that money gone into building solar and wind farms dedicated to supplying the smelter, it would have been a win win.

  • David leitch

    Hey guys a lot of good points. My view though is the smelter is unlikely to be all that competitive looking forward. Modern Chinese smelters are more efficient (less electricity consumed per unit of output) and have lower labour costs.

    Even with prior subsidised electricity cost the smelter wasn’t making any money. If you think that is the future for Victoria so be it.

    • Mick

      “Modern Chinese smelters are more efficient (less electricity consumed per unit of output) ”

      I don’t have any reason to doubt you – but I would be interested to see this substantiated. My understanding that electricity consumption for aluminium consumption is driven by fundamental electro-chemistry (i.e. the conversion of Al2O3 –>Al). Sure, there are probably some efficiency gains at the margins – but I would surprised if they were they dramatically changed the picture. I would expect price to be a more important variable than volume..

      Labour costs for Aluminium smelting are relatively small (~10% of cash costs).

      (p.s. for reference: this is an old, but decent report on the Aluminium refining and smelting industry in AU http://www.pc.gov.au/research/supporting/aluminium-micro-reform)

      • David leitch
        • Mick

          Thanks David, appreciated.

          I would say that China’s ~8% greater energy productivity would be offset by approximately lower electricity costs from a 1.5% difference in capacity factor for a solar farm (for example).

          Would also say on the world stage – we do pretty well. Better than US, Europe, South America (which produce about the same amount of Aluminium as Australia, in aggregate).

          • Chris A

            Its true China has built some very modern and efficient smelters……. they also run very old inefficient smelters which wouldn’t be operating at all without cheap coal and subsidized government energy.

    • Jonathan Prendergast

      One thing in the back of my mind when writing the comments, is that I have heard that Australian aluminium smelters have high MWh use per Tonne, compared to new systems. On one hand, Alcoa should not be spared for failing to invest in efficiency. On the other, why should they when they can build new plants and make aluminium cheaper in China.

      Anyway, I take a longer term view:
      – How long will labour be so cheap in China?
      – Does the Chinese government subsidise or support it’s industry? They are known to fund and build infrastructure like electricity transmission, rail lines, ports etc to support private industry?
      – How long will such subsidies and support continue?
      – Will the exchange rates remain as they are?
      One day Australian aluminium may be competitive or profitable again. But if we let all the smelters go, we will never have that chance.

  • Radbug

    The pundits are predicting The Donald will become Herbert Hoover Mk2, ie., wrong job, wrong time. There is a very good chance that the world will see a GFC Mk2, but much bigger, by 2020. Deals like Portland are what you get with politicians who live in the eternal present.

  • Ian

    Where would a closure leave us if Aluminium batteries prove to be better than Lithium?

  • junkyardnut

    All the more reasons to raise aluminium prices which is so dumb low!

  • Brunel

    It would be better to give A$250k to each worker instead.

  • George Darroch

    Ridiculous.

  • phred01

    Historically Companies that receive cash handout end up cutting & running

  • Don McMillan

    The OZ gas exploration industry has been destroyed. High gas prices has failed to attract investment for obvious reasons. We can blame whoever, doesn’t mean anything as current supplies are in depletion, which means supply can only match demand by shutting down chemical, forging, Al, plastics, fertiliser etc manufacturing.
    Subsidising only delays the inevitable.