U.S. Markets closed

Power struggle: Australian smelters grapple with electricity uncertainty

* Network reliability, price spikes undermine smelter businesses

* S.Korea's Sun Metals plans solar plant for outback zinc smelter

* Other refiners plan output cuts, withhold investment

By James Regan

SYDNEY, Feb 22 (Reuters) - Fed up with unpredictable and often exorbitant electricity prices, Sun Metals CEO Yun Birm Choi plans to invest A$183 million ($140 million) to build a massive solar farm to power his zinc refinery in the Australian outback.

The decision by Sun Metals, owned by Korea Zinc Co , to turn to solar comes as Australia grapples with more frequent power failures and extraordinary price surges on its mainly coal-fired wholesale electricity markets.

Australia mines more coal than almost any other country. But a shift away from coal-fired power plants to meet a national 20 percent renewable energy target by 2020 has wreaked havoc on smelting and refining businesses caught in the transition.

"There is no bigger factor for a smelter than disruption to power supply," said Miles Prosser, executive director of the Australian Aluminium Council. "A disruption for even just a few hours can be almost catastrophic," he said.

While Sun Metals are looking to build their own generation as part of an upgrade to boost production, other smelters plan to cut output and withhold investment because of the uncertainty.

Mining giant Rio Tinto is set to shed jobs and reduce output by 45,000 tonnes from its 35-year-old Boyne Island aluminium smelter because of soaring power prices and fear of interruptions, a spokesman said, confirming local media reports.


Generators, grid companies and market operators have traded blame for the shortcomings, while the federal government cites "ideologically driven" renewable energy targets for the problems.

When most of Australia's smelters were built in the 1970s and 1980s they benefited from very cheap, long-term electricity agreements with state-owned power companies - paying about half the price paid by other large industrial electricity consumers.

Supply contracts for large consumers now typically include clauses allowing generators to divert power to residential users and essential services such as hospitals. That forces smelters to bid on the open market, where prices can spike savagely.

Electricity futures on the price of Queensland base load power have averaged almost $180 per megawatt hour (MWh) this year, compared with an average of $63.45 in 2016. Prices have topped A$13,000 per MWhmore than 70 times so far in 2017, according University of Melbourne's Climate & Energy College.

By comparison, wholesale power prices for baseload delivery next year in Germany cost 30.15 euros ($32.02) per MWh, while U.S. prices are between $25 and $35 per MWh.

After a heat wave this month forced the Rio Tinto's Tomago aluminium smelter 150 km (90 miles) north of Sydney to curtail operations so power could be diverted to residents, the smelter's chief executive lashed out at the "insufficient generation" in the market.

"We should have the cheapest, most reliable energy in the world and yet it's the most expensive and least reliable," Matt Howell, told reporters. "It's a disgraceful situation that needs to be fixed."


In October alone, blackouts cost BHP Billiton over $30 million in lost output from its Olympic Dam smelter in South Australia following a fierce storm.

When the lights went out again in December, BHP Chief Executive Andrew Mackenzie said it was a "wake-up call" across Australia on energy policy failure. Jobs and future investment were at risk, he said.

"(BHP) is now saying that it's having difficulty competing, and industry generally is saying that they're having difficulty competing internationally because the electricity price in Australia is so high," said Queensland Resources Council Chief Executive Ian Macfarlane, a former federal resources minister.

At the nearby Port Pirie lead smelter - the largest source of refined lead in the world - a back-up diesel generator kept the furnace hot for the first hours of the October blackout. But as the outage dragged on, the slag in the blast furnace solidified, rendering it inoperable.

The smelter's Belgian owner, Nyrstar, put repair costs as high as 5 million euros ($5.3 million).

Faced with high costs and tough competition from new, more efficient Chinese smelters, Alcoa has already shut one 185,000 tonne a year aluminium smelter in Australia. In January, the U.S. giant came close to shutting down a second smelter near Melbourne after power outages cut operations by two-thirds.

Production was restored only after the government bowed to a request by Alcoa for a $182 million aid package to defray power costs.

After watching Sun Metal's energy bill balloon by 40 percent to A$70 million in 2016 and encouraged by plummeting costs for solar installation, Choi has expanded plans for the solar plant from 100 MW to 115 MW. That would make it Australia's largest solar farm.

The smelter will still need backup supply from the main grid but might at least benefit when prices surge.

"Primarily, the electricity produced from the solar farm will be consumed at the refinery," Choi said. "Subject to the refinery’s operation and the price of electricity, it will also sell electricity into the national energy market." ($1 = 0.9451 euros) ($1 = 1.3038 Australian dollars) (Additional reporting by Sonali Paul in MELBOURNE and Henning Gloystein in SINGAPORE; Editing by Lincoln Feast)