Electricity tariffs to aluminum smelters in Iceland

In this article you will find information about the electricity prices which the three aluminum smelters in Iceland paid to the Icelandic power company Landsvirkjun in the period 2005-2014. The information is based on several Icelandic and international reports.

• The Norðurál smelter (Century Aluminum) pays the lowest tariff.
• The Fjarðaál smelter (Alcoa) pays a slightly higher price than Norðurál.
• The tariff to the Straumsvík smelter (Rio Tinto Alcan; RTA) is presently the highest.

Very low tariffs to Norðurál (Century Aluminum) and Straumsvík (Alcoa) are the reason for extremely low average price of electricity to aluminum smelters in Iceland. With regard to the low tariffs, it is not surprising that Century Aluminum has stated, that its Grundartangi smelter in Iceland “generates significant free cash flow in virtually all price environments”. The same situation is likely to apply to Alcoa’s Fjarðaál smelter, as it pays on average only approximately 10% higher price for the electricity than Norðurál (Century) does.

Since late 2010, the Straumsvík smelter of RTA has paid a substantially higher price for the electricity than the other two smelters. Before 2010, RTA enjoyed the lowest electricity tariff of all the aluminum smelters in Iceland. With the new contract between Landsvirkjun and RTA in 2010, the base price increased and the power tariff was no longer linked to the price of aluminum.

So far, the new contract between Landsvirkjun and RTA is the only energy contract with aluminum smelters in Iceland where the electricity tariff is not linked to aluminium price. Instead, the price in this new contract is adjusted according to US Consumer Price Index (CPI).

Although the tariff to RTA is much higher than to Alcoa and Century Aluminum, the price to RTA is quite modest. For example, it is much lower than the average price of electricity to aluminum smelters in the United States (USA). And the said tariff is similar or even lower than the average power tariff to aluminum smelters in Africa.

The graph shows the average annual electricity price paid by each of the three aluminum smelters in Iceland to Landsvirkjun, in the period 2005-2014. All prices on the graph include transmission. The red columns are the electricity price to Norðurál at Grundartangi (Century Aluminum), the green columns are the electricity price paid by the aluminum plant at Straumsvík (Rio Tinto Alcan; RTA), and the light blue columns are the tariffs to Fjarðaál in Reyðarfjörður (Alcoa). Note that readers should presume a confidence interval of 5%.

The tariff to Straumsvík (RTA) is currently approaching 35 USD/MWh. In 2014, the smelter in Straumsvík paid almost 45% higher power tariff than Fjarðaál (Alcoa), and close to 60% higher price than the aluminum smelter at Grundartangi (Century).

Landsvirkjun’s average price to the aluminum smelters in 2014 was slightly above 26 USD. Same price for aluminum smelters in Africa that year was about 30% higher, and comparable prices to smelters in the USA and Europe were close to 45% higher. For more information about average power tariffs to aluminum smelters in the world in 2014, we refer to our earlier post; Electricity Tariffs to Aluminum Smelters.

Historically, all electricity sales by Landsvirkjun to the aluminum industry has been linked to aluminum prices (until 2010). Therefore, the tariffs and Landsvirkjun’s revenues have often fluctuated dramatically – according to changes in price of aluminum on the London Metal Exchange (LME). Such fluctuation can clearly be seen on the graph above, especially with regard to the period 2008-2010. Note also that in 2006-08 the price of aluminum was exceptionally high, hence the power tariffs to the smelters in Iceland were unusually high in that period.

From 2019, more contracts with the aluminum smelters in Iceland will be expiring. With regard to the electricity price in the recent contract between Landsvirkjun and Straumsvík (RTA) and other new contracts with smelters in the world, it can be expected that the minmum tariff in renewed contracts with the smelters will not be under 35 USD/MWh (in 2014 prices), and possibly somewhat higher. We at Askja Energy Partners will be presenting frequent news and update on this interesting subject.