While the Coalition blame blackouts and rising energy prices on renewable energy and call for an end to subsidies, the real culprits are going unnoticed.
Aluminium smelters are the biggest user of electricity in Australia – about 15% of total generation. They are also the most highly subsidised industry and have been since they began operation.
When Australia’s smelters were built they benefited from very cheap, long-term electricity agreements with government-owned power companies. These smelters were paying around half to two-thirds of the price paid by other large industrial electricity consumers and about one tenth the price of residential consumers.
An example of such subsidies was the decision to support Alcoa for Point Henry and Portland, made by the Liberal government in 1979. In 2009, Rob Maclellan, who was in cabinet for the decision, described it as a “collective moment of insanity”. This deal was inherited by new private sector owners of generation assets and added $2.45 to every MWh sold in Victoria.
Moving to commercial electricity prices would add about 50 per cent to the average wholesale price applying to these smelter contracts, the Grattan Institute estimated in a report in 2010.
When the carbon price was introduced, the aluminium smelting industry argued that they would go out of business if they weren’t compensated.
Alcoa and Alumina Limited were granted the highest level of compensation available – carbon permits that covered 94.5 per cent of carbon emissions from their smelters and refineries in the 2013 financial year, and permits that covered 93.27 per cent of carbon emissions in the 2014 financial year, to be gradually phased out over a decade.
This not only allowed Alcoa to keep operating, it delivered them a windfall of $60 million in 2013 gained from the sale of excess carbon credits.
In a results presentation covering the first three months after the repeal of the carbon price, Alcoa said “Loss of carbon tax credits in Australia drove higher energy costs.”
Moving on to 2016 and power company AGL was resisting pressure to do a sweetheart deal with Alcoa for cheap power, putting its Portland smelter in danger of closing until, once again, the taxpayer came to the rescue with the Victorian government providing $200 million and the federal government another $30 million with the proviso that the plant must remain operational until June 30, 2021.
AGL also supplies the electricity for the Tomago aluminium smelter in NSW through the Liddell power station and it is the CEO of Tomago who has been lobbying politicians to keep the power station running and to build new coal-fired power generators.
Chief executive of the state’s largest electricity user, Tomago Aluminium’s Matt Howell, said aluminium smelters needed baseload supply “and practically, that means thermal, either coal or gas”.
“And whilst we’re not ideologically opposed to renewables, wind and solar – they certainly have their place in many applications – but there is no aluminium smelter anywhere in the world that is powered by wind and solar,” Mr Howell said.
Conveniently, Howell ignores companies like Norwegian producer Norsk Hydro and the Lochaber smelter in Scotland whose smelters use hydro-electric power to make aluminium, which translates into carbon emissions at one fifth the scale of those generated by coal-derived power.
AGL’s contracts with the smelters allows them to direct them to shut down briefly during times of peak demand, a situation slammed by Howell who called it “the $100 million decision”.
“If a potline is shut down for longer than an hour it can quickly turn to custard, literally,” Mr Howell said.
But once again, Mr Howell seems unaware of innovation in his own industry like that being pilot-tested at one of German producer Trimet’s smelters.
“EnPot” technology allows a smelter to modulate its power use by up to 25 percent at the flick of a switch, according to Geoff Matthews of Energia Potior, which makes the kit.
That not only opens up the potential for smelters to help manage electric grid flows, changing usage according to price and availability, but breaks one of the industry’s great technical constraints of having to run at 100% capacity all the time.
AGL’s manipulation of demand from the smelters sounds like a good idea but it isn’t completely altruistic. If the smelters, who have cheap contracts, shut down during times of peak demand, it allows AGL to sell that electricity on the spot market for insanely high prices.
If Tomago Aluminium had ignored AGL’s request for a potline shutdown in February, the company would have been forced to pay the wholesale price applying at the time, at the cap of $14,000 per megawatt hour because of the extreme conditions, with a final bill of $5.25 million for 75 minutes of energy.
Any suggestion that aluminium smelting is not viable in this country is always met by cries of what about the jobs.
Almost twenty years ago, the Australia Institute produced a report Subsidies to the Aluminium Industry and Climate Change.
“The smelting industry employed around 5350 people in 1995-96…. the subsidy to aluminium smelting in Australia is A$840 million per annum or $157,000 per employee.”
Goodness knows how much it is now.
Perhaps those people would be better employed building wind and solar farms and pumped hydro stations than working in the extremely dangerous and toxic environment of aluminium smelting.
Losing an industry is always a difficult decision but, with their resistance to innovation, their reliance on subsidies, their huge drain on a stressed electricity grid, the enormous greenhouse gas emissions they produce, and their inflationary effect on electricity prices, Australia would be better off without them.