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Alcoa Portland aluminium smelter invites bids for electricity supply

Australia’s biggest electricity suppliers have been approached to bid for a power contract securing the future of Alcoa’s under-threat Portland aluminium smelter in Victoria as concern grows the facility could be forced to shut its doors next year.

A Portland tender was sent on Thursday to major national retailer-generators including EnergyAustralia and Alinta after AGL Energy, its current power provider, dumped a plan to seek competition clearance allowing it to share the burden of a new discounted contract.

AGL has also been invited to submit its interest, sources close to the process said, although it’s now expected the most likely option is to break its current contract into different tranches. That would allow separate suppliers to cover the 510 megawatt load for the facility, which uses 10 per cent of Victoria’s demand, but still leave the door open for AGL to keep part of the supply contract if it wants to reduce its exposure to Portland.

The deal represents one of the largest electricity contracts up for grabs in the market and was sent to market players ahead of the expiry of Alcoa’s supply deal with AGL in August 2021.

Such a large supply deal would normally receive strong interest but it’s understood the smelter requires an electricity contract priced at just $50 a megawatt hour — close to current wholesale spot prices — which may dampen interest among potential bidders.

Securing sufficient capacity within existing generation portfolios may also prove problematic for several operators. Alcoa was unavailable for comment.

AGL opened talks with the national competition regulator in May over whether it would allow a consortium of the state’s major electricity companies to collectively offer an agreed price for power to Portland at discounted rates, in order to keep the smelter operating.

However, the scheme was shelved due to onerous conditions and the unwillingness of suppliers to band together and agree a supply deal.

AGL competitor EnergyAustralia said in July it would consider supplying Portland in a move that may ease pressure on its own Yallourn coal station while Alinta Energy, which runs the Loy Yang B coal plant, may be another option although it has less generation capacity.

A decision to shut down Portland would remove the state’s single biggest power user and pile pressure on Yallourn which supplies 22 per cent of Victoria’s electricity but is the next facility due to exit the state’s power grid.

Both Alcoa and Australian-listed Alumina — which jointly own 55 per cent of the smelter on Victoria’s southwest coast, with China’s Citic and Japan’s Marubeni owning the rest — have said a new power deal is the key to keeping Portland open ahead of the expiry of the AGL contract and rolling subsidy deals from the Victorian and federal government in 2021.

AGL is also facing a test in NSW after Australia’s biggest aluminium smelter Tomago reopened negotiations to strike a cheaper electricity contract amid concern an existing deal set to run until 2028 and a tough market backdrop may cripple the future of the giant manufacturing site.

AGL faces a range of earnings risks from “smexit uncertainty”, according to Morgan Stanley.

The power giant in May hinted governments will 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.

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.

Source: The Australian