Does aluminium smelting need more exemptions?

Australian aluminium smelters have been struggling since the aluminium price crashed while the dollar rose. But a new Coalition push neglects findings that aluminium smelting is likely to be better off with the current renewables target.

Twenty-five Liberal and National Party federal lower house MPs (all backbenchers) have put their names to a letter to Environment Minister Greg Hunt and Industry Minister Ian Macfarlane calling for aluminium smelters to receive a complete exemption from the costs associated with supporting renewable energy under the Renewable Energy Target. Unfortunately, the names of these MPs have not been released. But the letter has been.

The letter also seems to suggest this would be provided as part of a move to substantially reduce the target from 41,000 gigawatt-hours to something closer to 25,000 GWh, which would lie closer to “true 20 per cent” share of electricity demand in light of recent reductions in demand.

The letter states:

Graph for Does aluminium smelting need more exemptions?

The Australian newspaper suggests today that this statement reflects a peace agreement where some Coalition MPs who want the RET scrapped altogether are willing to compromise and accept a scaled down target equating to a real 20 per cent share provided aluminium smelting was exempted.

At present, aluminium smelters receive a partial exemption from the RET subsidy costs. Under the original RET, legislated by John Howard for 9500 gigawatt-hours of renewable electricity, there were no exemptions for any industry. This still remains the case. However, aluminium smelting and a number of other trade-exposed industries receive a 90 per cent exemption from the costs associated with the expansion of the target beyond the original 9500 GWh target.

Now there is little doubt that Australian aluminium smelters have been struggling to remain viable since the aluminium price crashed while the Australian dollar rose. But is the RET part of the problem?

The letter from the Coalition MPs does not acknowledge recent findings by the government-appointed economic modeller, ACIL-Allen, that aluminium smelting is likely to be net better off as a result of the RET. This modelling found that the reductions in wholesale electricity prices induced by extra competition from renewable energy generators would actually exceed the extra costs associated with the RET subsidising the new generators.

The chart below illustrates ACIL-Allen’s estimates of how wholesale electricity prices are lower under the currently legislated RET (solid lines) relative to if it were repealed (dotted lines). It suggests an average reduction in prices to 2030 in the realm of $7 to $10 per megawatt-hour.

Figure 1: Difference in wholesale electricity prices between RET left as legislated versus repealed

Graph for Does aluminium smelting need more exemptions?

Source: ACIL Allen (2014) RET Review workshop preliminary modelling results

In conjunction with these findings, ACIL-Allen provided the chart below estimating the RET cost as a proportion of final delivered electricity prices for industries such as aluminium smelting, which are eligible for exemptions as trade-exposed, emissions-intensive industries. Consistent with what you see in the chart above on wholesale prices, the overall delivered electricity price declines in absolute terms to 2020, even though the RET cost increases slightly.

Graph for Does aluminium smelting need more exemptions?

Source: ACIL Allen (2014) RET Review workshop preliminary modelling results

This chart suggests the RET cost peaks at about 0.4 cents per kWh (roughly 5.5 per cent of a total delivered electricity price of 7.2 cents/kWh). Meanwhile, the smelters get to pocket a saving in wholesale electricity costs of between 0.7 cents to 1.0 cents per kWh.

Other energy market experts have come to similar conclusions. University of NSW researchers observed:

Our findings highlight likely significant redistributive transfers between different energy user classes under current RET arrangements. In particular, some energy-intensive industries are benefiting from lower wholesale electricity prices whilst being largely exempted from contributing to the costs of the scheme.

Another electricity market modeller, from Intelligent Energy Systems, who found similar results as ACIL-Allen, put it another way:

I notice as we go to press that some energy intensive industries want exemption from the LRET requirement for themselves but not removal of the LRET requirement on everybody else. They like the lower wholesale prices from the LRET, but prefer that everybody else pays to achieve that outcome. That’s a smart move if they can get away with it.