The head of Rio Tinto's Boyne Island aluminium smelter has accused Queensland's state-owned generators of being "un-Australian" after soaring power prices forced the company to slash production and cut jobs.
The 585,000 tonnes a year aluminium smelter on Queensland's central north coast is slashing production worth more than $100 million and as many as 30 jobs as Queensland's high power prices make the plant uncompetitive.
Boyne Smelters general manager Joe Rea said it was "un-Australian" that the company was being offered power at "500 times the cost of generation" at a time when aluminium prices are lower than during the global financial crisis in Australian dollars.
"How bad is it that we have got to shut it down in the face of these uncompetitive power prices? Generators have got to get the message that you cannot produce aluminium without globally competitive power," Mr Rea said.
But Stanwell Corporation's chief executive Richard Van Breda hit back, saying Boyne Smelters could have averted the crisis by accepting "one of the many offers presented to it" and Stanwell would be happy to offer it power on terms "reflective of market prices".
Boyne Island is the third smelter to fall victim to Australia's dysfunctional and high-cost energy market in 12 months after Rio's Bell Bay Aluminium and Alcoa's Portland Aluminium were hit by last year's Tasmanian power crisis and western Victorian blackout.
The Australian Energy Regulator is investigating price spikes in the highly concentrated Queensland electricity market – including last weekend's surges and similar events dating back to last October. Chief Scientist Alan Finkel is inquiring into the security of the nation's power system as more renewable energy enters the grid and the coal-fired power stations are forced out.
Harsh penalties
Federal Energy Minister Josh Frydenberg said he was concerned about the electricity price spikes in Queensland, saying it was up to the AER to get to the bottom of the issue.
He warned there would be harsh penalties for Queensland state-owned generators if they were trying to game the system.
"If these price spikes were caused by generators gaming the system by using bidding practices that are in breach of the rules, the AER can impose strong penalties on those involved," he told The Australian Financial Review.
"Energy affordability and security are key priorities for the government and I encourage the AER to get to the bottom of this matter as soon as possible."Federal resources minister Matt Canavan tweeted that the Boyne Island cuts were "even more reason why Labor should drop unachievable renewable energy targets that will cost Queenslanders jobs".
Mr Rea told The Australian Financial Review that Boyne Island had achieved world class productivity and purity in the last 12 months but could not compete in the global market when Queensland power prices had doubled since 2014 and the aluminium price was at rock bottom.
"You can call it market rates till the cows come home. The fact is there is no country in the world outside of China that would be close to producing aluminium at a market rate [for electricity]," he said.
Rio's Boyne Smelter receives 85 per cent of its power, or 810 megawatts a year, from a long-term agreement with CS Energy and Gladstone Power Station in which it has a 42 per cent stake. But since its expansion it also needs to source another 15 per cent, through either additional contracts or on the spot market.
Offers 'uncommercial'
Rio Tinto had been negotiating with the two state-owned power generators, Stanwell and CS Energy, but had not signed up to any contracts.
Mr Van Breda said Boyne Smelters had "chosen not to accept' all offers put to it for the 15 per cent of its power requirements not covered by a long-term contract with the Gladstone power station because it claimed the offers were uncommercial at current aluminium prices.
"As a government-owned corporation, Stanwell will not offer uncommercial contracts which would effectively see Stanwell and its owners, the people of Queensland, subsidising the operations of a multinational company," he said.
He denied manipulating prices, saying the high prices in Queensland were the result of record demand in response to very hot weather cross the state.
CS Energy chief executive Martin Moore said Rio's decision to lower production and cut staff could have been avoided.
"CS Energy had made numerous and very competitive offers to meet Boyne Island aluminium smelter's additional load requirements. But Pacific Aluminium chose not to accept our offers and instead left itself exposed to the volatile spot electricity market."
Rio said it had been forced to shed 80 megawatts of power because spot electricity prices had surged as high as $12,000-$14,000MWh during Queensland's heatwave last weekend. It estimated the exercise would cost 45,000 tonnes of production.
That amounts to lost revenue of about $108 million at the current $US1805 a tonne London Metal Exchange spot price. The number of jobs to go is yet to be determined but could be as many as 30 of Boyne Smelters' 1000-strong workforce.
The company fears the situation could deteriorate further this weekend as temperatures in Queensland are again expected to soar and the Australian Energy Markets Operator forecasts more record electricity demand.
Boyne's anger at high power prices mirrors that of BHP Billiton, whose giant Olympic Dam lost weeks of production after South Australia's statewide blackout in September.
Mr Rea lashed the management of the state's electricity system, which suffers from a concentration of generating companies engineered by the Labor government in a U-turn from the previous government's privatisation plans.
More jobs at risk
He said it was the second time in three years Boyne Smelters had had to cut production because high electricity prices were making its smelter uncompetitive and putting more jobs at risk.
"The decision to curtail production is a very difficult one. It takes months, not weeks, to bring the smelter back to a stable full capacity, and that can only happen if and when power prices become competitive," he said.
"We are not prepared to lock into a contractual arrangement that would have us paying delivered energy prices comparable to the least competitive countries in the world outside of China.
"It is an ongoing concern for our business that the trajectory for wholesale electricity prices in Queensland is a significantly increasing trend – doubling since October 2014. From 1 January this year, we saw a real upward change in spot market power pricing.
"This all comes at a time when the price for aluminium in Australian dollar terms remains lower now than during the global financial crisis. Electricity prices in Queensland and the recent bidding practices of generators are putting BSL jobs at risk."
With a mid-summer heatwave pushing up the temperature to the mid-30s in Brisbane, Queensland recorded a record energy demand usage of 9412 MW on Wednesday afternoon, according to AEMO. This topped the 9154MW recorded last year.
The high energy usage pushed up the energy spot price which hit $850MWh hour during Wednesday mid-afternoon. The record peak demand has not resulted in any power blackouts, such as in 2009, but big industrial users not on longer-term contracts have been hit with higher prices.
