The global head of aluminium at Rio Tinto says the “economic reality” of coal-based electricity in Australia has priced the fossil fuel out of the equation when it comes to powering aluminium smelters into the future, leaving them with “no chance to compete” in global markets except with a mix of renewables.
Jérôme Pécresse, Rio Tinto’s chief executive of aluminium and lithium, told Renew Economy this week that the increase in the price of coal-fired electricity has been “so significant,” it leaves no possibility of renewing current coal power contracts for its Australian smelters.
In Australia, Rio Tinto holds a roughly 52 per cent share in the nation’s largest aluminium smelter – and its largest single user of electricity – Tomago, in the New South Wales Hunter region, where a constant load of 950 megawatts is powered by NSW’s still coal-dominated grid.
In Queensland, it holds the majority stake in Australia’s second-largest aluminium smelter, Boyne, which consumes roughly 10 per cent of the state’s electricity, largely sourced from the nearby Gladstone Power Station, a 1.6 gigawatt (GW) coal plant that is penciled in for potential retirement in 2029.
And in Tasmania, Rio Tinto owns, outright, the Bell Bay aluminium smelter, which has been in operation on the island state since 1955, when it became the first aluminium smelter in the Southern Hemisphere.
In the past year, all three of these smelters have signed up to major deals with federal and state governments that extend billions of dollars in tax-payer funded support to Rio Tinto to help make the transition from fossil fuels to renewables – a move Pécresse says is a matter of survival.
“The decision to move to renewable is first and foremost a decision based on economics because that was, I think, and I continue to believe, the only way to define the future where the smelters can compete,” he told Renew Economy in an interview on Wednesday.
“The economic reality of the evolution of the price of coal-based electricity in Australia, which is itself based on the evolution of the price of coal, is that when we look at both Boyne and Tomago, and we look at the possibility of renewing the current contract with coal-based electricity, the increase of the price of electricity was so significant that the smelters would have had no chance to compete in the global markets and hence to survive.”
In the case of Boyne, the federal Labor and Queensland LNP governments in March agreed to invest $1 billion each over 10 years – from 2030 to 2040 – to support the long-term future of the aluminium smelter, which directly employs around 1,000 people.
For its part in the deal, Rio Tinto has committed to underwriting $7.5 billion of new wind, solar and battery storage development in the once coal dominated Gladstone region, which it will contract to supply the smelter’s energy needs through new and existing power purchase agreements (PPAs).
For Tomago Aluminium, the federal and NSW Labor governments agreed in August to underwrite a $2.5 billion package to the smelter – which employs more than 1,000 people – secure long term wind and solar contracts.
The $2.5 billion “bailout” – as it has been described by most media – will be provided in equal portions by the federal and state governments and will reduce the cost of the power supply by around $35/MWh, meeting the difference between the asking price of new renewables and what Rio Tinto is prepared to pay to keep Tomago open.
Bell Bay, meanwhile, secured its own deal in October – a $200 million joint support package from the Tasmanian and federal governments, backed by a five-year power deal with state utility Hydro Tasmania.
The publicly funded deals have prompted criticism from some quarters, including from the conservative side of politics with federal Nationals leader Matt Canavan arguing loudly and often that only coal can keep smelters alive, and that it is the shift to renewables that is causing their economic demise.
Notably, this is not how the Queensland LNP government sees it, having agreed to support the Boyne smelter’s shift to renewables alongside federal Labor, even despite its fondness for old coal and its penchant for “calling in” previously approved projects, including some that are contracted to Rio.
Most notably, though, coal is not part of the future plan for Rio Tinto or its shareholders. The question is no longer whether coal can continue to power Australian smelters, but whether Australia can build enough firm renewables fast enough to keep its existing smelters alive and kicking.
“The reality [is] we looked at the quote we would get for extending the [coal-fired power] contract, it’s not working,” says Pécresse. “So that’s why we ended up with a solution which is slightly different in New South Wales and Queensland, but which are all based on basically renewable electricity.
“In Boyne, as you know, we are kind of assembling the solution ourselves by of taking solar, wind, and battery PPAs. In New South Wales, we are taking one single PPA from Snowy Hydro, but in both cases we are … with the government support … moving the smelter [to] the right side of the cost curve.
“And it has the additional benefit that these smelters … will be able to claim a lower carbon content, and that’s important as well because there is a higher and higher proportion of customers who … no longer want high carbon aluminium, and among those there is … a fraction that can pay a premium.
“So it’s going to allow us to have a better cost structure and to have a product which is going to be better positioned in the market.”
And while governments stumping up money to support the energy transition of global mining giants is an approach that has come under criticism from even the pro-renewables side of the equation, Pécresse says Rio Tinto is giving back, by underwriting new renewables and investing in innovative technologies that support industrial electrification.
A case in point is the Arena-backed trial of a 30 MW and 360 megawatt-hour (MWh) “hot bricks” heat battery at the site of Rio Tinto’s Yarwun alumina refinery in Queensland, where it will soak up cheap daytime renewables, convert the energy into high-temperature heat, and deliver it as steam at up to 1,000°C.
“In Queensland, we are more involved because what we are doing in Boyne … triggers $7.5 billion of renewable investments … which in turn are going to benefit the energy system in Queensland.
“So we have had a lot of discussions with the Queensland government on that, and they are clearly seeing the benefits … for the smelters, but also for the broader energy system.
“So I think it’s a positive role we play, which is recognised. … For example, we have to make sure that these renewable projects get connected to the grid in due time, so there is, I would say, a joint effort on that front, which I find quite effective.”
And in comparison to those other great energy sinks, data centres – which are facing their own scramble for renewables – Pécresse says there are some comparisons to be drawn, and some competing interests, but also a number of key differences.
“Smelter and data centres are very massive users of power. Clearly, data centers can can afford a much higher price per megawatt-hour for the power they use, but smelters create many more jobs,” he told Renew Economy.
“So I think that’s a kind of competition on which every government, I think, has to position itself on what they want the most. But the answer to that question from the Australian government has been quite clear.
“Clearly one of the lessons that is emerging from the Australian reshaping of our smelters portfolio is that smelters will play a bigger and bigger role in the energy markets in which they operate,” he adds.
“We used to see smelters as a kind of passive off-taker of one energy contract. Now it’s no longer that.
“When you think about a smelter like Boyne, it will have to manage and optimise the complex energy solution: off-taking from the different PPAs, loading the batteries, using the batteries to feed the smelter, using the batteries to source from the network, or to sell into the network.
“In almost every contract we have in the (Asia Pacific) region, we are providing services to the grid in terms of how can we flex a little bit during a little while the energy consumption of the smelter for peak management without losing too much production.
“I would say, smelters have to face the reality that they are a big player in the energy market where they operate, build the capability that goes with it, and stretch the envelope of the services they can provide – and obviously get remunerated for it, which brings down the cost of electricity.
“So there is a win-win solution somewhere in Australia, but not only in Australia, that’s kind of developing.”
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