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

The 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.

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.

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.