From Chain Reaction #107, November 2009

<www.foe.org.au/resources/chain-reaction>

Prime Minister Kevin Rudd has proposed that Australia's greenhouse gas emissions would be cut by up to 25% by the year 2020 as part of a global agreement. If we are to achieve this target, we must radically examine the viability of some of our more heavily emitting industries such as aluminium smelting.

Much of Australia's smelting capacity was added in the late 1970s and early 1980s in a way that severely compromised the long term benefits to the Australian economy of hosting the industry. It might be time to examine how we came to host this industry and to look at its long-term future.

This article looks at one particular deal that occurred between the Victorian government and the US giant Alcoa that resulted in a three pot smelter being located in Portland in the state's far west in the 1980s. The deal was the result of a highly politically compromised process that has been an ongoing financial and environmental disaster for the state and the nation ever since.

The Victorian taxpayer has subsidised the production of aluminium by the US multinational by between $100 million and $200 million per year through electricity subsidies for the past 25 years and will continue to do so until at least 2016. At the same time the aluminium manufacturing process at Portland releases approximately 4.76 million tonnes of carbon dioxide per year contributing to Victoria being Australia's and one of the world's biggest greenhouse polluters per head of population.

In 1978 I was working as a social researcher in the Victorian Department of Economic Development, ostensibly as part of a state government taskforce that was developing the then Hamer-Liberal Government's bid for a new Alcoa Aluminium Smelter to be located somewhere in Australia. My job, as part of the taskforce was to look at the social impact of locating the smelter at Portland on Victoria's far west coast, some 550 kilometres away from Victoria's electricity generating centre in the Latrobe Valley.

At this time Australia was emerging from an economic recession brought on by the first oil shock in the mid 1970's. Although the economic climate was improving, unemployment and inflation were of concern − both hovering around 7% nationally. Victoria and Queensland had been particularly hard hit. Victoria's traditional manufacturing industry was in decline and its regional areas were suffering. Queensland was also under pressure with unemployment at 8%, the nation's highest, and inflation was on the rise.

Both states needed an economic boost, especially Victoria because it was due to hold an election early in 1979 and an announcement of a major new project for the state was seen by the Liberal government to be a real shot in the arm for their re-election chances. Queensland was also keen to attract the energy intensive project as it would complement its decision to build a brand new power station slap in the middle of Premier Joh Bjelke Peterson's electorate in south-eastern Queensland.

A key factor in the production of aluminium is the supply of abundant and cheap energy − something Victoria's Latrobe Valley had in spades. The Valley, which contained 20% of the worlds known reserves of brown coal, had been the centre of the state’s electricity generating industry since the 1920s and was the basis of Victoria's industrial development. But Portland was located at the opposite end of the state.

It would have seemed rational to locate the aluminium smelting project as close as possible to the Valley − Hastings for example, on the shores of Victoria's Westernport Bay, was less than 100 kilometres away and overlooked a deep, safe harbour capable of receiving large container ships. But rationality had little to do with the final decision to firstly bid for the project and then locate it in far western Victoria. It was all about politics.

Portland at the time was in serious decline, hit hard by the closure of its meat works − Borthwick and Sons – then the town's biggest employer. This meant several key conservative seats in the upcoming state election were in jeopardy, including the upper house seat of Western held by the then Minister of State Development, Decentralisation and Tourism, Digby Crozier.

In conversation with a senior Liberal Party cabinet minister decades later, it was confirmed that Crozier had lobbied hard for the project to be located in his electorate and won, despite strong opposition to the project's final location in Cabinet. This former minister in the Kennett government said quite openly to me that the decision to build the smelter in Portland was a disaster that cost the state literally tens of millions of dollars in infrastructural costs − including the building of a $350 million power line across the state.

But I'm ahead of myself. Victoria needed to be fast on its feet if it was to lure the smelter from Queensland's clutches. And it was. In departmental correspondence, internal briefings and memorandums leaked to The Age and Financial Review at the time, the arcane negotiations over the key elements to the success of the negotiations − including the provision of infrastructure, like the 550 kilometre power line and more importantly the price of electricity supplied to the smelter − were revealed.

Aluminium smelting is a high energy-intensive activity, with electricity purchases accounting for 21% of production costs, so it was important to get the price of supply right if the government was going to lure the smelter to Victoria.

The price of electricity per kilowatt hour (kWh) largely depended on what is included in the measurement of the cost of producing that energy. In the leaked correspondence between the then chair of the State Electricity Commission Charles Trethowan and the Premier, a debate raged about the true cost of providing electricity to the project. Specifically it concerned the inclusion of a replacement cost of generating capacity in the final energy price and how the Commission would be able to build an entirely new generating facility in time to fuel the new project.

The Premier indicated that the cost price of power for the project quoted by Trethowan was too high and Queensland would certainly offer a cheaper alternative.

Victoria needed to offer a more attractive incentive package − including a long term electricity supply contract and a raft of taxpayer funded infrastructural projects in order to lure Alcoa to Victoria. These included roads, transport links, harbour upgrades, local government rate waivers, housing and a streamlined environmental effects process that would guarantee approval despite real concerns about toxic emission fall-out over Portland and destruction of important coastal habitat.

This was a very attractive incentive package for the US multinational giant, however the real clincher was Hamer's insistence on paying the full cost of building the high tension power line from the Latrobe Valley to Portland, some $350 million in 1978 dollars. Ironically Alcoa felt this would be political dynamite and offered to contribute to some part of the cost.

There was still the matter of the price of energy supplied by the state to Alcoa and negotiations continued over the next few years, even after Victoria secured the project.

Once Alcoa's signature was on the contract, the government's attention was drawn to the legislation that would ensure the project went ahead. The government put into law Victoria's commitment to supply enough energy to allow a five pot line aluminium smelter to be operated in Portland. If they failed to deliver, there were significant penalties to be paid to by the government to the multinational giant. There was no such obligation on Alcoa to build the full five pot line project. And they didn't – the Smelter at Portland has never gone beyond three.

This legislative requirement for guarantee of supply resulted in the government compulsory acquiring land in the Valley and then borrowing tens of millions of dollars at high interest on short-term overseas money markets in order to build what subsequently became the Loy Yang Power Station.

The Alcoa draft legislation was also leaked to the media in the lead up to the 1979 election where it was strongly condemned by both the Melbourne Age and Financial Review for the level of subsidy offered by the government to the US giant. Unfortunately that subsidy was about to blow out even further.

In the final contract established by the Cain Labor Government in 1984, electricity was supplied to Alcoa on the basis of a flexible tariff that will be in place until 2016. This price was based on the world price of aluminium at 1982 prices.

Unfortunately the world price for the commodity plummeted after 1984 which has resulted in Alcoa in real terms rarely paying any part of the capital component of the flexible tariff − costing the taxpayer around $200 million per year up until 2001 at least. Alcoa's Victorian smelters (located in Portland and Point Henry in Geelong) employ around 1800 people, so taxpayers are directly subsidising each job at around $70,000 per year.

Former Victorian Treasurer Alan Stockdale described the contracts as "manifestly unjust" and the Department of Treasury and Finance agreed, describing the contract as "onerous and unfavourable”. (For a detailed analysis of the pricing arrangements and the impact on greenhouse emissions as a result of the Alcoa project, see the excellent report written by Hal Turton for the Australia Institute entitled 'The Aluminium Smelting Industry: structure, market power, subsidies and greenhouse gas emissions'. <www.tai.org.au>)

Added to the direct subsidy to Alcoa is the vast environmental damage inflicted by the smelter and the brown coal-fired power stations used to produce the vast amounts of electricity required.

Portland produces on average about 350,000 tonnes of aluminium ingots a year. The problem is that for every tonne of aluminium smelted, approximately 13.6 tonnes of carbon dioxide is produced from electricity generation. That's around 4.76 million tonnes of CO2 per year. In fact Alcoa Australia admits that in 2006 the combined CO2 direct and indirect emissions from the Point Henry and Portland smelters were 11.2 million tonnes.

The fall out from this smelter and other smelters across Australia results in the aluminium industry accounting for around 6% of Australia's greenhouse gas emissions − five times more greenhouse pollution than the aluminium industry's world average and five times more emissions than agriculture − and around 22 times more than other manufacturing activities.

Victoria has paid, and continues to pay, a high price for the political machinations that resulted in the Portland aluminium smelter being built in Victoria − the costs include billions of dollars in electricity subsidies, tens of billions of tonnes of greenhouse emissions and the allocation of 25% of our electricity generating capacity to one industry.

Meanwhile our renewable energy industry is starved of government funds, opportunities for new clean energy producing industries are lost, other energy users pay a premium to support the Alcoa deal and the state and nation are becoming an environmental pariah in the eyes of the world.

The only people who did not pay a price for the smelter are those who negotiated the deal in the first place.

The Hamer Government was returned with a reduced majority in the 1979 election and Digby Crozier was rewarded for his troubles with a senior Cabinet position – he became the Minister for Local Government and later the Minister for Minerals and Energy and Mines, a position he held until the Liberal Party lost Government in 1982. In 1985 he moved from the upper house to take up the lower house seat of Portland. He then went on to be the Shadow Minister for Police and Emergency Services, a position he held until he left parliament in 1988.