Why the $2.5 billion Tomago aluminium deal is no ordinary bailout
The government’s approach to saving Tomago offers a blueprint for other interventions to future-proof industry, such as at Whyalla.
In a move that defies conventional economic wisdom, the federal and New South Wales governments have jointly agreed to inject A$2.5 billion over ten years to bail out Australia's largest aluminium smelter, Tomago. The smelter, owned by mining giant Rio Tinto, consumes 12% of New South Wales' total electricity demand, making it the nation's highest electricity consumer. Its closure would have resulted in a devastating loss of 1,000 jobs and a significant chunk of the Hunter region's industrial base.
This bailout is unique in that it aims to future-proof the smelter, rather than simply keep it afloat. It's part of a broader trend of government intervention to save struggling industrial facilities around the country, with the federal Labor government having backed numerous such initiatives to the tune of billions of dollars. However, the Tomago bailout is different, as it's the result of over a year of negotiations and is designed to be sustainable in the long run.
The primary obstacle for Tomago is its high electricity costs, which account for 40% of its total expenses. As the world moves towards renewable energy, Tomago's management wants to shift to 50% renewables by 2030 and 100% by 2035. However, its existing power supply contract expires in 2028, necessitating a new, commercially viable electricity source.
The government has devised a novel solution by creating a "specialist investment vehicle" (SIV) to provide power to Tomago at a competitive rate. This SIV can also offer concessional loans to investors interested in building renewable energy capacity to supply the smelter. The Snowy Hydro entity has been chosen to fulfill this role due to its existing infrastructure and expertise in renewable energy.
The federal and New South Wales governments have committed to underwriting the cost difference between the market price for electricity and the negotiated price with Tomago. They will provide $250 million annually from 2028 for ten years, with a chance of recouping their investment through aluminium revenues and Tomago's contributions to grid stability. This arrangement is expected to be cost-neutral over the decade while simultaneously accelerating the energy transition and industrial diversification in the Hunter region.
Written by urgent.news from The Conversation AU's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
