Low cost renewable energy could save Tomago Smelter
By Brian Tehan
EcoNetwork Port Stephens
Why the Tomago smelter has been talking about shutting down
Introduction
This article explains why Tomago Aluminium has repeatedly raised the possibility of shutting down operations and why electricity prices are central to that risk. Aluminium smelting is one of the most energy-intensive industrial processes in the world, and Tomago’s long-term viability depends almost entirely on securing large volumes of electricity at internationally competitive prices. The article also outlines a proposed policy solution that could keep the smelter operating while helping to lower wholesale electricity prices in NSW.
Image sourced The Australian Mining Review, Tomago Aluminium supplied.
Why energy costs matter so much for aluminium
- Aluminium is “congealed electricity”
Producing one tonne of aluminium requires around 14–17 MWh of electricity, which is why aluminium is often described as congealed electricity.
Tomago Aluminium produces approximately 1,616 tonnes per day and consumes about 10% of NSW’s total electricity supply. - International competitiveness depends on power prices
To remain viable, Tomago needs an electricity price that allows it to manufacture aluminium at a cost competitive with global producers.
While “green aluminium” can attract a premium price, this has not yet been sufficient—or guaranteed enough—to offset high electricity costs. - The true break-even electricity price is not public
The maximum electricity price at which aluminium production remains feasible is commercially sensitive and not disclosed by companies.
However, most industry estimates place this threshold between $50 and $70 per MWh.
Aluminium is
‘congealed electricity”
Image sourced
Hunter Renew Energy
The problem with NSW electricity prices
- Wholesale prices have been far too high
In the NSW National Electricity Market (NEM), the average wholesale electricity price over the last financial year was about $140 per MWh—more than double what is generally considered viable for aluminium production.
These high prices were largely driven by expensive coal and gas.
Prices are tracking lower this year due to increased renewable generation and storage, but not yet at consistently viable levels for smelting. - Insufficient renewable energy supply in NSW
At present, renewable energy is the only source capable of delivering electricity cheaply enough to support aluminium smelting in the long term.
However, NSW has been slow to approve and build renewable projects at the required scale.
As a result, Tomago has been unable to secure enough renewable power contracts—unlike in Queensland, where renewable supply has supported the Gladstone smelter.
Subsidies and the reality of aluminium economics
- Long history of electricity subsidies
For decades, state governments have subsidised electricity prices for aluminium smelters.
Even with subsidies, the underlying (unsubsidised) electricity price still needs to be low enough for the smelter to remain competitive. Without that, subsidies alone cannot solve the problem.
(See: The Australia Institute, Subsidies to the Aluminium Industry and Climate Changes.) - Electricity is the dominant cost driver
The current international price of pure aluminium is around A$4,400 per tonne. Electricity accounts for more than 40% of Tomago’s operating costs, which equates to roughly $118 per MWh at today’s aluminium prices.
Hunter New Energy reports ‘The company [Tomago Aluminium] said electricity accounts for more than 40 per cent of its operating costs and that all power supply proposals to date — from both coal and renewable sources — would make the smelter unviable after 2028.
Since 2022, Tomago Aluminium has been sounding out the market to find an economically feasible energy supply. Despite extensive engagement with energy providers and government, Chief Executive Officer Jérôme Dozol said no commercially viable options have emerged.
“We continue to engage with stakeholders on a viable pathway for Tomago. Unfortunately, all market proposals received so far show future energy prices are not commercially viable, and there is significant uncertainty about when renewable projects will be available at the scale we need,” Mr Dozol said.‘
A feasible solution: The Yates Proposal
Last year, Oliver Yates, former CEO of the Clean Energy Finance Corporation, proposed a solution that would involve government participation without requiring ongoing subsidies.
The core problem being addressed
When Tomago attempts to contract electricity directly from new renewable projects, it is seen as a high-risk customer. This increases financing costs for developers or prevents projects from reaching financial close altogether, pushing power prices above viable levels.
How the Yates Solution works
- Government as intermediary
The federal and state governments would help finance the construction of large-scale renewable energy and storage (around 3 GW) required by Tomago. - Scheme Finance Vehicle (SFV)
A proven mechanism (already used by EnergyCo) that uses public finance to de-risk projects, attract private capital, and significantly lower developers’ cost of capital. - Long-term Power Purchase Agreements (PPAs[i])
The SFV would sign long-term clean energy contracts, providing certainty for developers and stable, lower electricity prices for Tomago. - Snowy Hydro as retailer
Federal government-owned Snowy Hydro would act as the retailer, selling power to Tomago.
If Tomago were to shut down, Snowy Hydro would simply sell the electricity into the NEM. - Strike price / floor price mechanism
Governments would guarantee a floor price, giving developers revenue certainty.
When market prices exceed the strike price, excess revenues are returned—meaning taxpayers are not exposed long term.
This mechanism has helped deliver Australia’s lowest electricity prices in the ACT.
Why this is not a bailout
Yates stresses that this approach:
- Addresses the structural problem (energy costs make up 40% of operating expenses)
- Does not rely on permanent subsidies
- Allows governments to recover their investment through green aluminium premiums, battery trading, and electricity market sales
- Should also result in lower wholesale electricity prices across the NSW NEM due to reduced financing costs and risk
Recent discussions suggest the federal and NSW governments are now working with Tomago on a solution closely aligned with this model.
Conclusion
Tomago Aluminium’s future hinges on one issue above all others: access to large volumes of electricity at internationally competitive prices. Without this, even decades of subsidies and short-term interventions cannot make aluminium smelting viable in NSW. The challenge is not unique to Tomago, but it is emblematic of the broader tension between energy-intensive industry and Australia’s transition to a cleaner electricity system.
The Yates proposal offers a credible pathway forward by addressing the underlying cost of energy rather than applying temporary fixes. By using government-backed finance to de-risk renewable energy investment, it has the potential to secure Tomago’s future, support the development of large-scale renewables, and reduce wholesale electricity prices for the wider market — all without imposing ongoing costs on taxpayers.
Whether governments act decisively on this opportunity will determine not just the fate of Tomago, but the future of energy-intensive manufacturing in NSW.
[i] Power Purchase Agreements with new renewable energy projects are getting finance more easily and at a much lower interest rate, meaning lower power prices. PPAs are well used to obtain cheap energy prices for corporate customers. For example.our Port Stephens Council is a participant in a multi council PPA.