Aluminium and Energy

Electric power is vital to the aluminum industry's survival. It is involved in various phases of production and represents approximately 35% of a smelter's operating costs. Under these conditions it is hardly astonishing to note that any smelter construction, expansion or upgrading project depends to a great extent on the availability of large volumes of electricity at prices that are competitive on international markets and fixed for long periods.

A brochure describing the situation in Quebec, titled “Aluminum and Electricity”, can be found in the Publications section of this site.

THREE CONDITIONS FOR SUCCESS

First condition
The price of electricity must be competitive, not just within Canada or North America, but in terms of the world market. In view of the important volumes required by smelters, companies seek to locate their plants close to sources of electricity at the best price. In this regard, competition is global. In Iceland, South Africa and the Middle East, governments have chosen to sell their electricity to smelters at very low prices in exchange for the enormous economic spin-offs that they bring to the local regions. This policy brought immediate results. Most new aluminum smelters are being built in these areas of the world.

Second condition
Electricity prices must be fixed for the long term. In view of the enormous investments required by aluminum smelter projects, it is obvious that guarantees concerning developments in the price of the primary operating cost must be reliable in the long term. Who would invest billions of dollars without knowing the long-term outlook for their main operating cost? The answer is evident.

Third condition
The delivery of volumes of electricity subject to agreements must be extremely reliable and this electricity must conform to the highest quality criteria. The production of aluminum cannot suffer fluctuations without entailing considerable costs.

To maintain its competitiveness, the industry must have access to electric power at competitive rates. In addition, the cost of electricity must be foreseeable for the long term

LARGE VOLUMES AND SIGNIFICANT ADVANTAGES

Large volumes of electricity ... and what else? The ten aluminum smelters in Quebec use some 4,600 megawatts of electricity, or 14% of Hydro-Québec's entire installed capacity, all sources combined, equivalent to the total installed capacity of La Grande-2A and La Grande-3 power plants.

The industry itself produces approximately half this energy. Rio Tinto Alcan produces an average of 2,000 megawatts used exclusively in its smelters, while Alcoa, together with the Abitibi-Consolidated paper mill operates a power station that produces 325 megawatts, 250 of which are used in its Baie-Comeau plant.

Contrary to popular belief, these volumes of electricity produced by the aluminum industry do not represent free power. Above and beyond the productions costs involved in operating facilities and transporting this electricity, smelters pay the Government of Quebec statutory fees and water rights of evaluated at $50 million each year. Not to mention the maintenance costs and investments necessary in the regions.

ELECTRIC POWER: HALF IS SELF-GENERATED, THE OTHER HALF IS PURCHASED

The other half of the electric power used in operating the smelters (2,380 megawatts) is purchased from Hydro-Québec, making smelters the provincial corporation's largest customer. It should be mentioned that the sale of such large, long-term blocks of electricity to the smelters, at stable prices, rather than depending on fluctuating spot markets, facilitates Hydro-Québec's access to major financing markets at advantageous conditions. These agreements enable Hydro-Québec to count on a regular entry of funds over a long-term period, an advantage it can make use of when negotiating loans.

This is an added asset when the company is seeking financing for major projects at the lowest possible cost. Also, the smelters' continuous operations, 24 hours a day, 365 days a year, contributes to the stability of the network. This consistency avoids creating fluctuations in Hydro-Québec's network, a much appreciated factor for the managers of large industrial customers' networks.

We should also not underestimate the fact that aluminum smelters have agreed, by contract, to temporarily offload a portion of their consumption when Hydro-Québec needs some extra flexibility to meet demand during peak periods. This flexibility, agreed to by the smelters, could help delay the need to maintain back-up power stations or purchase additional power from outside markets at unpredictable costs.

In addition, delivering such large blocks of electricity to a single customer also allows Hydro-Québec to make considerable savings in its distribution costs.

RISK-SHARING CONTACTS

The first risk-sharing contracts were signed in the 1980s. Their objective was to promote the introduction and expansion of large job-creating companies in Quebec which consumed large quantities of electricity, abundantly available in the Province.

This type of contract was concluded with companies in the metallurgy and chemistry sectors in Quebec. Other enterprises, including smelters also obtained such contracts, the use of which is very common elsewhere in the world.

These contracts are related to Hydro-Québec's “L” rate (large corporation rate) and, in the case of smelters, they allow for modulation in its application. The practice of concluding these contracts ended in the mid-1990s, among others, due to the difficulty in anticipating the development of prices and markets around the world with any degree of certainty. However, the contracts already signed will continue to apply until they expire.

In the case of the smelters, the risk-sharing contracts were drawn up to ensure that Hydro-Québec and the companies would share the risk related to fluctuations in the price of aluminum. In response to a request by the Régie de l'énergie du Québec, on March 12, 2002, Hydro-Québec Distribution declared that, “The Distributor is sure of recovering all his transport and distribution costs (including the performance related to special contracts).”

Maintaining electricity rates at a competitive level is one of the main comparative advantages of Quebec's economic development strategy for many years and it would be wise to retain it in order to attract investment.