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Alcoa’s struggling Portland smelter secures lifeline with power deal, $160m in subsidies

Energy accounts for between 30 and 40 per cent of an aluminium smelter’s cost base. Alumina chief executive Mike Ferraro has repeatedly said the plant needed more reliable and cheap power if it was to remain open beyond this year.

The closure of the smelter would have grave consequences for communities in and around Portland, which rely on the plant for employment. It would also have far-reaching impacts on the state’s energy grid, as the smelter is the single biggest user of energy in Victoria and accounts for about 10 per cent of statewide demand.

Under the federal support plan, the Morrison government has guaranteed the Portland smelter receives up to $76.8 million over four years.

It allows the smelter to take part in the Australian Energy Market Operator’s (AEMO) effort to stabilise the electrical grid at times of soaring demand. Known as the Reliability and Emergency Reserve Trader scheme, the AEMO program pays large energy users to power down during peak electricity use periods such as heatwaves to prevent blackouts and price spikes.

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Prime Minister Scott Morrison, who went to the Portland smelter on Friday, said the deal reaffirmed Australia’s commitment to heavy industry and would be crucial to “keeping the lights on” across Victoria.

However, a Grattan Institute energy expert on Friday questioned the justification for the federal government’s intervention in the work of the energy market operator and the use of taxpayer money.

The Grattan Institute’s Tony Wood said providing “more supply in times the market is under stress is a good idea, and that’s exactly why AEMO has the reserve trader mechanism to pay large customers to reduce their demand in those times”.

“But for the government to be prepared to pay the Portland aluminium smelter when AEMO does not think it is worthwhile seems an extraordinary waste of public funding.

“To suggest the government knows more about the gap in the market than AEMO does seems to be a big call.”

Mr Wood said the government’s financial commitments to Portland appeared to be the latest in a long line of subsidies that would be “very hard to justify on any basis”.

The Alcoa-controlled Portland Aluminium smelter is dependent on government subsidies.

The Alcoa-controlled Portland Aluminium smelter is dependent on government subsidies.Credit:Damian White

The Victorian government on Friday said it had also agreed to match the federal government’s financial contribution. Treasurer Tim Pallas said the state’s funding package built on the significant support provided to the Alcoa smelter over the past four years. “Every single regional job matters to a Victorian family and they matter to us,” he said.

The lifeline for the Portland smelter comes one week after another deal between the Victorian government and power giant EnergyAustralia, which has announced it will close down its loss-making Yallourn coal-fired power plant in 2028, four years earlier than planned. The Victorian government has committed to an undisclosed level of support to help sustain the plant’s operations until that time.

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Both the Portland and Yallourn deals will help to ensure the stability of supply and demand for the state’s electrical grid over the next four years.

The Australian Aluminium Council, representing Alcoa and Rio Tinto, said Portland’s multi-party power agreement was the “first of its kind” and a recognition of the value of large energy consumers such as smelters played in providing critical stable demand “all day, every day”.

“This is welcome news for the thousands of employees, contractors and suppliers across Western Victoria who depend on the smelter for their livelihoods,” Australian Aluminium Council chief Marghanita Johnson said.

“There is a real opportunity on the horizon which could see Australia’s manufacturing industry, like aluminium smelters, thrive in an increasingly low-emissions power grid.”

More than 30 per cent of the Portland smelter’s electricity is derived from renewable sources, including a nearby wind farm, according to Alcoa. This figure is expected to grow with the implementation of the Andrews government’s Victorian Renewable Energy Target, which aims for the state to reach 50 per cent renewables by 2030.

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