Aluminum smelter | The shortfall is 1.4 billion for Hydro

We agree, the stakes are high. Not only do aluminum smelters pay virtually no taxes here, but they can also emit greenhouse gases without paying any compensation. Hence the importance of returning to another advantage they enjoy: discounts on electricity rates.

The question is all the more relevant since the aluminum smelters are requesting approximately 1,000 megawatts (MW) of additional energy from the Quebec government, according to what I have learned. These 1000 MW would constitute a jump of 30% of their consumption, in a context of energy scarcity.

To clarify the issue, Hydro-Québec has agreed to send me the electricity rate actually paid by aluminum smelters since 2015, since the government of Quebec – then Liberal – renegotiated all contracts downwards. Hydro’s figures essentially validate mine, which I calculated from contracts appended to government decrees published in the Official Gazette.

Thus, since 2015, aluminum smelters have paid an average rate of 3.87 cents per kilowatt hour, Hydro-Québec tells me. This rate is below that deemed profitable by the state corporation for large industrialists, i.e. Rate L.

This L rate, usually 5¢/kWh, is lower for customers whose Hydro power utilization factor is very high, such as aluminum smelters. In this case, the relevant Rate L for the comparison is 4.6¢/kWh.

For Hydro, the difference between this L rate of 4.6 cents and the average rate of 3.87 cents for aluminum smelters constitutes a shortfall of 1.4 billion over the past eight years, according to my calculations, i.e. an average of 178 million per year.

Aluminum smelters pay less than Rate L because their electricity supply is determined based on the price of aluminum rather than Hydro-Québec’s costs. These risk-sharing contracts are authorized by the government and not by Hydro.

In the long term, with such contracts, Hydro should ideally obtain sometimes more than Rate L, sometimes less. However, according to official data from Hydro-Québec, aluminum smelters have paid less than Rate L every year since 2015, except this year, when the average rate is 5.45 cents for the first nine months of 2022.

The 2022 tariff adjustment is explained by the explosion in aluminum prices last spring in the context of the war in Ukraine. Prices have since fallen, so that the average rate is closer to 4.7¢/kWh as of December 13, 2022, very close to the comparable Rate L (4.6 cents).

Between 2015 and 2021, the rate fluctuated between 3.3 cents and 4.4¢/kWh.

Tuesday morning, the Minister of Economy, Innovation and Energy, Pierre Fitzgibbon, told the Saguenay radio program It’s never the sameof Radio-Canada, that the rate for aluminum smelters had exceeded Rate L since 2021.

Reached by email, his press secretary maintains that “in 2021 and 2022, due to the price of aluminum, aluminum smelters paid more than the L rate”. Hydro data contradicts the minister for the year 2021.

By the way, why compare to Hydro-Québec’s L rate? Because it is the rate approved by the Régie de l’énergie du Québec taking into account all of Hydro-Québec’s expenses. This rate incorporates a return on assets of 8.2% for the Crown corporation.

In short, below Rate L, Hydro-Quebec loses money with large industrialists. And for aluminum smelters, it’s 1.4 billion for eight years.

Hydro-Quebec, it should be remembered, has the possibility of obtaining a much higher price. His recent contract with New York was signed for a price of 9.75 US cents from the spring of 2026, or 13.2 CAN cents if we convert with the current exchange rate. The rate with New York is indexed by 2.5% per year for the term of the 25-year contract.

Of course, other factors could be taken into account, for example the proximity of aluminum smelters to Hydro-Québec lines, which reduce transmission costs. However, the rebates raise questions about their profitability for taxpayers, and even more so compared to the contract with New York.

At Radio-Canada, Pierre Fitzgibbon said that there was no question of renegotiating the old contracts with the aluminum smelters. However, he explained that he wanted to adjust the rate formula for future energy allocations to aluminum smelters to ensure that the rate is as close as possible to Rate L at the bottom of the aluminum cycle.

The minister believes that aluminum smelter decarbonization projects, in particular with Elysis technology, will make global buyers willing to pay more for aluminum from Quebec. He says he is working with the aluminum smelters so that the green bonus is reflected in the electricity rate.

This decarbonization of aluminum smelters will probably require a little more energy than currently, the Minister now confirms. In addition, aluminum smelters are asking the government for additional megawatts to ensure their growth.

Rio Tinto confirmed to me recently that its demand for new energy is around 600 MW. And Pierre Fitzgibbon estimates that the demands of all the aluminum smelters would be around 1000 MW.

“We’re talking about 1,000 MW for 4-5-6 billion in investments, that’s major. The real debate is how we are going to price the surplus, ”he said to my colleague Julien Arsenault, on the sidelines of an interview on Tuesday on another subject.

In short, the new energy would be granted to aluminum smelters with a risk-sharing tariff, once again, but taking into account a green premium.

Big questions arise in this context. First, will the Legault government make investments by aluminum smelters an essential condition for obtaining advantageous rates, contrary to what has been the case in recent years?

Then, who tells us that global buyers will be willing to pay more for green aluminum from Quebec? That aluminum bike makers won’t prefer to buy Chinese black aluminum, often produced with coal-fired power, to have a cheaper finished product?

In short, why must taxpayers share this risk, once again, especially when we see the past results of this pricing formula and energy scarcity?