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Posts from the ‘Aluminum Industry’ Category

Aluminum smelters of the World (outside of China)

The aluminum industry has for years been plagued by over-capacity, often resulting in to much supply and depressed aluminum prices. The situation has lead to closure of number of smelters, not least in Brazil and in the United States. Several smelters are currently not being utilised at full capacity, which has limited the over-supply.

Below is a list of all the primary aluminum smelters in the world outside of China, listed by countries in alphabetical order. Soon we at the Independent Icelandic and Northern Energy Portal, will also be presenting a list of smelters in China, which will put the limelight on the much more severe over-capacity in the Chinese aluminum sector.

Given figures are for 2019. Main sources are annual reports for individual companies, information as presented by the International Aluminum Institute, and research by Askja Energy Partners. In some cases the presented information may not be exact, due to lack of reliable information. However, we are confident that this is currently (Sept 2020) the most accurate publicly available list of its kind.

No. Country Location Capacity* Owner**
1 Argentina Puerto Madryn 470.000 Aluar
2 Australia Boyne Isl., Queensl. 545.000 Rio Tinto (JV)
3 Australia Tomago, NSW 585.000 Rio Tinto (JV)
4 Australia Portland, Victoria 358.000 Alcoa (JV)
5 Australia Kurri Kurri,  NSW 180.000 Norsk Hydro
6 Australia Bell Bay, Tasmania 189.000 Rio Tinto
7 Azerbaijan Ganja 50.000 Ganja Aluminum
8 Bahrain Askar 1.540.000 Alba
9 Bosnia and Herzegovina Mostar 130.000 Aluminij Mostar  (JV)
10 Brazil São Luís 465.000 Alumar
11 Brazil Vila dos Cabanos 460.000 Albras
12 Brazil Sorocaba 455.000 CBA
13 Brazil Ouro Preto 150.000 Hindustan Alum. (JV)
14 Brazil Poços de Caldas 106.000 Alcoa
15 Brazil Santa Cruz 95.000 Metalisul
16 Brazil Saramenha 51.000 Novelis do Brasil
17 Cameroon Edéa 100.000 Rio Tinto (JV)
18 Canada Kitimat, BC 420.000 Rio Tinto
19 Canada Sept-Iles, QC 600.000 Rio Tinto (JV)
20 Canada Arvida, QC 230.000 Rio Tinto
21 Canada Grande Baie, QC 235.000 Rio Tinto
22 Canada Laterrière, QC 240.000 Rio Tinto
23 Canada Alma, QC 470.000 Rio Tinto
24 Canada Bécancour, QC 455.000 Acoa (JV)
25 Canada Baie Comeau, QC 300.000 Alcoa
26 Canada Deschambault, QC 285.000 Alcoa
27 Egypt Nag Hammadi 320.000 Egyptalum
28  France Dunkerque 285.000 Liberty Aluminium
29  France St. Jean de Maurienne 145.000 Trimet Aluminium (JV)
30  Germany Neuss 230.000 Norsk Hydro
31  Germany Voerde 96.000 Trimet Aluminium
32  Germany Hamburg 135.000 Trimet Aluminium
33  Germany Essen 170.000 Trimet Aluminium
34  Ghana Tema 200.000 Valco
35  Greece St. Nicolas 170.000 Aluminium de Grèce
36  Guinea Sangaredi N/A South32 (JV)
37  Iceland Reyðarfjörður 346.000 Alcoa
38  Iceland Grundartangi 312.000 Century Aluminum
39  Iceland Straumsvik 210.000 Rio Tinto
40  India Korba 570.000 Vedanta Resources
41  India Jharsuguda 1.750.000 Vedanta Resources
42  India Angul 475.000 Nalco
43  India Hirakud 213.000 Hindalco
44  India Renukoot 345.000 Hindalco
45  India Lapanga 360.000 Hindalco
46  India Bargawan 360.000 Hindalco
47  India Belgaum, Karnataka 390.000 Hindalco
48  Indonesia Kuala Tanjung 265.000 Inalum
49  Iran Arak (1 &2) 180.000 Iralco
50  Iran Bandar Abbas 1 110.000 Al-Mahdi Aluminium
51  Iran Bandar Abbas (2) 147.000 Hormozal
52  Italy Portoscuso 159.000 Alcoa
53  Kazakhstan Pavlodar 250.000 Kazakhstan Aluminum
54  Malaysia Mukah 120.000 Press Metal
55  Malaysia Samalaju 323.000 Press Metal
56  Montenegro Podgorica 75.000 Uniprom KAP
57  Mozambique Maputo 565.000 Mozal
58  Netherlands Delfzijl 180.000 Aldel
59  New Zealand Tiwai Point 360.000 Rio Tinto (JV)
60  Nigeria Ikot Abasi 200.000 Alscon
61  Norway Høyanger 64.000 Norsk Hydro
62  Norway Husnes 185.000 Norsk Hydro
63  Norway Karmøy 275.000 Norsk Hydro
64  Norway Årdal 204.000 Norsk Hydro
65  Norway Sunndal 400.000 Norsk Hydro
66  Norway Lista 127.000 Alcoa
67  Norway Mosjøen 222.000 Alcoa
68  Oman Sohar 390.000 Sohar
69  Qatar Mesaieed 645.000 Qatalum
70  Romania Slatina 282.000 Alro Slatina
71  Russia Boguchany 600.000 Rusal
72  Russia Bratsk 1.020.000 Rusal
73  Russia Kandalaksha 72.000 Rusal
74  Russia Khakas 300.000 Rusal
75  Russia Krasnoyarsk 1.025.000 Rusal
76  Russia Novokuznetsk 215.000 Rusal
77  Russia Sayanogorsk 545.000 Rusal
78  Russia Shelekhovo 420.000 Rusal
79  Russia Volgograd 70.000 Rusal
80  Saudi Arabia Ras Al Khair 740.000 Ma’aden
81  Slovakia Ziar nad Hronom 175.000 Slovalco
82  Slovenia Kidricevo 85.000 Talum
83  South Africa Richards Bay, Hillside 720.000 South32
84  South Africa Richards Bay, Bayside 100.000 South32
85  Spain San Ciprian 250.000 Alcoa
86  Spain Aviles 93.000 Alcoa
87  Spain La Coruna 87.000 Alcoa
88  Sweden Sundsvall 130.000 Kubal
89  Tajikistan Tursunzoda 450.000 Talco
90  Turkey Seydisehir 82.000 Eti Alüminyum
91  UAE Jebel Ali, Dubai 1.160.000 Dubal
92  UAE Taweelah, Abu Dhabi 1.500.000 Emal
93  Ukraine Zaporozhye 120.000 Zalk
94  United Kingdom Burntisland 120.000 Rio Tinto
95  United Kingdom Fort William 42.000 Rio Tinto
96  United Kingdom Holyhead 142.000 Rio Tinto
97  USA Hawesville, KT 250.000 Century Aluminum
98  USA Mount Holly, NC 229.000 Century Aluminum
99  USA Sebree, KY 220.000 Century Aluminum
100  USA Ravenswood, WV 180.000 Century Aluminum
101  USA Columbia Falls, MT 180.000 Glencore
102  USA Evansville.  IN 161.000 Alcoa
103  USA Newburgh, IN 270.000 Alcoa
104  USA Wenatchee, WA 144.000 Alcoa
105  USA Ferndale, MT 279.000 Alcoa
106  USA Massena, NY 135.000 Alcoa
107  USA St. Lawrence, NY 125.000 Alcoa
108  USA Rockdale, TX 176.000 Alcoa
109  USA Goldendale, WA 172.000 Goldendale Aluminum
110  USA New Madrid, MO 280.000 Magnitude 7 Metals
111  USA Hannibal, OH 270.000 Ormet
112  Venezuela Matanzas 448.000 Venalum
113  Venezuela Puerto Ordaz 170.000 Alcasa
114  Vietnam Lam Dong 600.000 Vinacomin
Total capacity 36.526.000
Closed capacity 5.002.000
Total operational capacity 31.524.000
Idled capacity 11% 3.622.000
Total production 89% 27.902.000

*    Capacity in tonnes/year.
**  Parent company (or strategically important owner, if joint venture).
Capacity figures in red mean the smelter has been closed.
Some of the other smelters are not operated at full capacity.
All numbers are in European format.

Higher electricity tariffs for smelters in 2017

The Icelandic national power company Landsvirkjun supplies three aluminum smelters with power. The graph below shows how the electricity tariffs in this business have developed in the past ten years. As clearly can be seen on the graph, the electricity tariffs paid by the three smelters were somewhat higher in 2017 than the year before.

The main explanation for the higher tariffs in 2017 is the rising price of aluminum. Two of the three smelters buying electricity from Landsvirkjun have their power tariff linked to the price of aluminum at the London Metal Exchange (LME), while the tariff to the third smelter (Rio Tinto / ÍSAL) is linked to US consumer price index (CPI).

In 2017, as ever since the re-negotiation of 2010, the aluminum plant of Rio Tinto (ÍSAL) in Straumsvík paid the highest power tariff. The lowest price was paid by the smelter of Century Aluminum (Norðurál), while the smelter of Alcoa (Fjarðaál) paid slightly higher tariff than Century.

RTA smelter the most important source of income

In 2010 the power contract of Rio Tinto Alcan and the Icelandic national power company Landsvirkjun, regarding the Straumsvík aluminum smelter, was negotiated. This new contract turned out to be a major step towards increasing profitability in the Icelandic electricity sector. In this article we discuss the importance of the contract from 2010.

Landsvirkjun referred to a paper from CRU

By 2010 there already were three large aluminum smelters in Iceland. The oldest of the three was a plant at Straumsvík in Soutwest Iceland, owned by RTA/ÍSAL. This smelter was originally constructed in the late 1960’s. and until 2010 it had been paying the lowest power tariffs in Iceland.

In preparing for the negotiations for a new power contract, Landsvirkjun commissioned the consultancy company CRU Group to review and assess the existing preliminary agreement with RTA (which had been reached shortly before Iceland’s banking crash in 2008). According to the information provided, CRU established that out of 184 aluminium smelters worldwide, Iceland provided the 14th lowest price and 3rd lowest out of 32 smelters in Europe (as explained in a report by EFTA Surveillance Authority, published in 2011). This meant that of the 184 aluminum plants worldwide, about 170 plants were paying higher power tariffs than the smelters in Iceland!

With regard to this information, the management of Landsvirkjun claimed that the power tariff in a new contract would need to change substantially from the then very low present tariff. This claim was a.o. based on less favourable credit rating of Landsvirkjun (following Iceland’s banking crash in 2008), high cost of capital, limited access to credit, and the considerable increased power price in the US and in Europe in the past years. Furthermore, the management of Landsvirkjun expressed it would be unacceptable risk for the power company to continue having the power price linked to aluminium prices.

The new tariff approaching 35 USD/MWh

The new power contract, which was ready in 2010, introduced a very different criteria for the price of the electricity. According to the old contract the base tariff was extremely low, compared to other similar contracts, and this old tariff was linked to the price of aluminum on the London Metal Exchange (LME). The new contract signed in 2010 had a starting price close to 30 USD/MWh and the tariff changes according to the US Consumer Price Index (CPI). Currently, the tariff to the Straumsvík smelter is now most likely approaching 35 USD/MWh, which is approximately double the tariff according to the old contract. Included in the power price is transmission cost (in Iceland average transmission cost to heavy industries is normally close to 6 USD/MWh).

The new power contract with RTA/ÍSAL will expiry in 2036. According to a special price equilibrium mechanism prescribed in the contract, the power tariff shall be revised once during the contract period (in 2024). This mechanism’s objective shall be “to keep a similar competitive position of the Straumsvík smelter as it was at the time of signing the new power contract” in June 2010. Also, Landsvirkjun is given the opportunity “to ensure that its power remains competitive in line with other energy producers” supplying power to the aluminium industry.

Fundamental difference from other contracts with smelters in Iceland

This new contract between Landsvirkjun and RTA/ÍSAL is the main prerequisite for Landsvirkjun’s positive operating profit in recent years. Now close to 1/3rd of Landsvirkjun’s revenues from electricity sales comes from the RTA/ÍSAL smelter in Straumsvík, while the smelter accounts for only 1/4th of Landsvirkjun’s electricity generation. These figures say a lot about the importance of the contract for Landsvirkjun; note the table below (and also note the graph above showing power tariffs of Landsvirkjun to aluminum smelters 2007-2016).

This proportion (1/3rd of revenues for 1/4th of power) is almost exactly the opposite of what applies to Landsvirkjun’s contract with the aluminum smelter of Alcoa/Fjarðaál in Eastern Iceland. That deal, which is from 2003, returns just 1/4th of Landsvirkjun’s electricity revenues although it accounts for about 1/3rd of all the energy sold by the company. This ratio explains clearly how much higher power tariff is paid by the RTA/ÍSAL smelter than the Alcoa/ Fjarðaál smelter.

The power tariff to the Alcoa/Fjarðaál smelter is linked to price of aluminum. To reach the current power price of the Straumsvík smelter of RTA/ÍSAL, aluminum prices would need to increase to about 2,800 USD/ton. Which is very far from the current price for aluminum, now close to 1,950 USD/ton (while the average price in 2016 was close to 1,600 USD/ton).

It is impossible to say if price of aluminum will ever reach 2,800 USD/ton in the near future. What is clear though, is that Landsvirkjun’s recent contract with RTA/ÍSAL has substantially decreased the risk for the power company and hugely increased its revenues and strengthen its profits and its financial situation. Thus it is no surprise that the contract has been referred to as “a miracle” for Landsvirkjun. For recent information in the media on power tariffs to smelters in Iceland, note this article by Aluminium Insider (“Is Winter Coming for Iceland’s Aluminium Smelters?”)  and this brand new article in the New York Times about electricity cost for smelters in Iceland. More detailed information about electricity prices according to Landsvirkjun’s power contracts, can be obtained from our consultancy services.

Alcoa’s tariff in Iceland renegotiated before 2028

The heady days of cheap power prices in Iceland may be nearing an end. With 4,600 GWh annual consumption the Fjarðaál aluminum smelter of Alcoa in Iceland is the largest electricity consumer in the country. The smelter has been enjoying one of the lowest power tariff to aluminum smelters worldwide. However, there are indications that the Icelandic national power company Landsvirkjun and Alcoa will renegotiate the power price no later than 2028. The result is likely to be a significantly higher tariff and a major increase in Landsvirkjun’s revenues and profits after 2028.

One-third of Landsvirkjun’s power generation

For Landsvirkjun the power contract with Alcoa is of major importance. This one contract covers about 1/3 of all the electricity Landsvirkjun generates and about 1/4 of all the power generation in Iceland. This one contract has a fundamental impact on the profitability of Landsvirkjun and thus a major impact on average returns in the Icelandic electricity industry.

Construction of the Kárahnjúkar dam.

The power contract of Alcoa and Landsvirkjun was signed in early 2003, the contract period being 40 years from the first delivery of power. To supply the power, Landsvirkjun constructed the largest hydropower station in Europe (Russia and other former republics of the USSR excluded). The Alcoa smelter in Iceland began operating in mid-2007, reaching full capacity some months later. The power contract covers the period until 2048.

It is known that the power contract includes provisions offering the option of revising the power tariff as early as 2028. When having regard to recent development of power prices to aluminum smelters in Iceland, there is a reason to expect that the power tariff to Alcoa in Iceland will increase dramatically already in 2028.

Development of electricity tariffs might justify huge price increase

The power contract between Alcoa and Landsvirkjun is confidential, but documents from the Icelandic Parliament (Alþingi) have shown that 18 years after Landsvirkjun started the energy supply to the Alcoa smelter, the contracting parties shall negotiate a revised energy tariff. The new tariff shall be decided according to market development and shall be in force the second 20 years of the power contract (2028-2048).

Only Landsvirkjun and Alcoa know how much scope the contract offers in changing (raising) the electricity price. What seems to be the ruling factor regarding this, is how the electricity market will evolve during the period from 2003. Having in mind the recent development of power tariffs to aluminum smelters in Iceland, it seems possible that no later than 2028 the price of electricity to Fjarðaál may more than double from the current tariff.

Such a price increase would have enormous positive impact on the overall profitability of Landsvirkjun. This scenario is, however, subject to various conditions and such a sharp price increase may not go through if aluminum prices will be very low.

The Icelandic electricity market is changing

Few years ago new competition arrangement was introduced in the Icelandic power market. The new legislation meant a major structural change, making the power market focused on financial sustainability (profits) rather than politics, i.e. now each power contract with heavy industries like aluminum smelters must fulfil minimum conditions of financial return. Otherwise the contract may be invalid due to illegal state support.

Possible development of Icelandic power tariffs.

Because of these structural changes, power tariffs in new contracts in Iceland have been rising substantially. Older contracts like the one between Landsvirkjun and Alcoa, ensure the smelter almost risk-free tariff while the power company bears most of the risk.

To give a clear example, we can refer to the current power price Alcoa is paying to Landsvirkjun and compare that price to more recent contracts Landsvirkjun has negotiated with two other aluminum smelters; those of Rio Tinto Alcan (Straumsvík smelter) and Century Aluminum (Norðurál smelter). During 2016, the average power tariff to the Alcoa smelter was close to 20 USD/MWh (the tariff is linked to the price of aluminum at the LME). At the same time the Straumsvík smelter of RTA was paying Landsvirkjun close to 34 USD/MWh, according to a new contract from 2010 where the tariff is fixed and  linked to US consumer price index; CPI.

The smelter of Century Aluminum in Iceland (Norðurál) pays Landsvirkjun according to an old contract from 1999, where the tariff is extremely low. During 2016, Century and Landsvirkjun renegotiated the pricing method. From 2019, the power tariff to Century will be closely aligned with the power price at the Nordic power market (Elspot at Nord Pool Spot; NPS) . Of course nobody knows for sure what the power price will be at the NPS in 2019, but Landsvirkjun is obviously aiming for moving the Icelandic power market towards the power markets in Northwestern Europe. Which would result in very interesting changes for electricity generating companies in Iceland. We at the Icelandic and Northern Energy Portal, will soon be writing more about the opportunities these changes will create for Icelandic power companies. Stay tuned.

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NB: The power tariffs to aluminum smelters quoted in this article are based on research by Askja Energy Partners Ltd. The figures given in the article are not exact and they are based on several assumptions we do not guarantee to be correct. However, we are of the opinion that the mentioned tariffs are very close to the real negotiated tariffs.

Power tariffs to the Century smelter at Grundartangi

The Norðurál smelter of Century Aluminum, at Grundartangi in Southwest Iceland, enjoys the lowest electricity tariff to aluminum smelters in Iceland. The only company in Iceland paying lower electricity tariff, is the ferrosilicon plant of Elkem, also located at Grundartangi.

All the three largest power companies in Iceland supply the Grundartangi aluminum smelter with electricity. The pricing arrangements in all the contracts are quite similar. All the contracts have the power tariff aligned to the price of aluminum on the London Metal Exchange (LME). In 2016, all the three power companies selling electricity to the Norðurál smelter where receiving an average price close to 20 USD/MWh (as shown on the graph at left). Note that transmission cost is included in the price shown on this graph.

For comparison, the graph also shows the power price from Landsvirkjun (LV) to the ÍSAL smelter of Rio Tinto Alcan (RTA) at Straumsvík in Southwestern Iceland. Of all the three aluminum smelters in Iceland, the Straumsvík smelter pays the highest electricity tariff. Which is not surprising, as the Straumsvík smelter has the most recent power contract. More information about recent power contracts with aluminum smelters can be seen here.

Most of the power consumed by the Norðurál smelter is generated by Reykjavík Energy, utilizing geothermal sources  (unfortunately Reykjavík Energy has been faced with major difficulties in sustaining its geothermal power production). Reykjavík Energy is called Orka náttúrunnar (ON) in Icelandic. It is a subsidiary of Orkuveita Reykjavíkur (OR), which is mostly owned by the city of Reykjavík.

The second largest power supplier to the Norðurál smelter is the national power company Landsvirkjun. Landsvirkjun generates most of its electricity in hydropower stations. In 2016, the company concluded a new agreement with Norðurál/Century, which will change the pricing method (the new agreement goes into force in 2019).

The third company selling power to the Norðurál smelter is the privately owned HS Orka, where Canadian Alterra Power is the major shareholder. Like Reykjavík Energy, HS Orka mostly relies on geothermal sources for its power generation.

As mentioned above, the cost of transmission is included in the power prices on the graph above. Each of the three power companies has to pay the transmission cost forward to the Icelandic Transmission System Operator (TSO), which is Landsnet. The graph at left should make it more clear what amount (price) the power companies are receiving for each megawatt-hour (MWh) of electricity sold. On this graph, we highlight the part of the tariff that is the transmission cost (the grey part of the columns). Finally, note that readers should presume a confidence interval (uncertainty limits) of 5% regarding the Landsvirkjun-tariffs presented, and a 10% confidence interval regarding tariffs from Reykjavík Energy and HS Orka.

Power revenues from smelters declined in 2016

The average price of aluminum in 2016 was lower than the previous year (2015), resulting in lower average revenues per sold MWh for the Icelandic power firms selling electricity to the aluminum industry. In this article we present updated information on the power tariffs paid by each of the three aluminum smelters located in Iceland. Note that readers should presume a confidence interval (uncertainty limits) of 5% regarding all the tariffs presented.

One of the three smelters, the ISAL / Rio Tinto Alcan (RTA) in Straumsvík, pays a fixed base-tariff which is linked to the US Consumer Price Index (CPI). The RTA smelter in Straumsvík (green column on the graph below) receives all its electricity from the national power company Landsvirkjun. The power contract of RTA and Landsvirkjun is from 2010, with additions in 2014. Before the new agreement in 2010, the RTA-smelter at Sraumsvík was paying very low tariff, which was linked to the price of aluminum. The power contract from 2010 was extremely important for Landsvirkjun, having very positive effects on its revenues and return. This contract reflects a start of Landsvirkjun’s new pricing policy, moving away from the risky price-connection with aluminum.

electricity-price-tariffs-to-aluminum-smelters-in-iceland_2007-2016_draft-feb-2017The other two smelters in Iceland – the Norðurál smelter of Century Aluminum at Grundartangi (red on the graph) and the Fjarðaál smelter of Alcoa at Reyðarfjörður (black on the graph) – have power contracts based on the old pricing-model. Both of these two smelters have contracts with Landsvirkjun, where the power tariffs are linked to the price of aluminum at the London Metal Exchange (LME). Thus, the power tariffs of Norðurál (Century) and Fjarðaál (Alcoa) fluctuate with the price of aluminum, As the price of aluminum has been low during the last few years, the power tariffs of Norðurál and Fjarðaál have also been on the downside, as can clearly be seen on the graph at left.

Landsvirkjun’s power contract with Fjarðaál (Alcoa) is the original contract signed in 2003. The current contract Landsvirkjun has with Norðurál (Century) is a re-negotiated contract from 1999 (original contract was from 1997). As we explained in a recent article, Landsvirkjun and Norðurál have reached an agreement on new power tariff for the period 2019-2023. The new tariff will be aligned to the Elspot tariff on the Nordic power market (Nord Pool Spot; NPS), replacing the current price-link with aluminium price.

This new contract with Norðurál was concluded in 2016 and becomes effective in 2019. The contract is likely to be an important step in bringing the Icelandic power market more in line with the power market in the other Nordic countries. The next step in this development is likely to be a new contract Landsvirkjun is currently negotiating with the Chinese owned Elkem, which owns and operates a ferro-silicon plant in Southwestern Iceland. The current power contract with Elkem, where the tariff is based on price development of ferro-silicon and the exchange rate of the Norwegian krona (NOK), runs out in 2019. In recent years, the power price for the Elkem-plant in Iceland has been extremely low (lower than the power price paid by the Norðurál smelter). Probably Landsvirkjun wants a major change in the pricing methodology, developing the tariff to Elkem towards the Nordic market spot pricing model.

century-aluminum_nordural-smelter-grundartangi-icelandFinally, note that the graph above only includes power contracts the aluminum smelters have with Landsvirkjun. Two other Icelandic power firms also generate and sell electricity to the aluminum industry in Iceland. These two firms are HS Orka and Orka náttúrunnar (Orka náttúrunnar is normally referred to as ON or Reykjavík Energy). ON is in public ownership, while HS Orka is privately owned. Both companies – ON and HS Orka – mostly rely on harnessing geothermal energy for their power generation. And both have long-term power contracts with the Norðurál smelter, where the tariff is linked to aluminum price on LME. The average power tariff in these contracts is slightly higher than the tariff in Norðurál’s contract with Landsvirkjun from 1997/1999  (the red column on the graph above). The Icelandic Energy Portal will soon be introducing more information about the power tariffs in the contracts Norðurál has with ON and HS Orka.

New power tariffs to Aluminum smelters

As we explained in a recent article, the Icelandic national power company Landsvirkjun has signed a new contract with the Century Aluminum smelter in Iceland (Norðurál). In this article we will compare the power tariff in this new contract with three other recent power agreements with smelters in Iceland and Canada.

aluminerie-alouette_sept-iles-smelter_quebec-canadaIn our comparison we analysed information about four recent power contracts. They are, in addition to the new Norðurál-contract, a contract between Landsvirkjun and ISAL/RTA regarding the smelter at Straumsvík in Southwestern Iceland, a contract between Hydro Québec and Alcoa/RTA regarding the Bécancour smelter in Québec in Canada, and finally a contract between Hydro Québec and Aluminerie Alouette regarding the Sept-Iles smelter, also in Québec. These four contracts were concluded in the period 2010-2016 and they came / will come into force in the period 2010-2019 (as shown on the graph below).

Each of the four contracts are different from the others. Both of the Canadian contracts are long-term and the price of the electricity in both of them is linked to the price-development of aluminum at the London Metal Exchange (LME). However, these two Canadian contracts are based on different prerequisites, as one of them (the Aluminerie Alouette contract) involves an obligation for conducting an engineering study for a potential later expansion of the smelter.

The two Icelandic contracts do not include any price-link with aluminum. The contract with ISAL/RTA from 2010 has a fixed starting tariff, linked to US consumer price index (CPI). The tariff in the more recent contract with Century’s Norðurál is linked to power price at the Nordic power market (Elspot on Nord Pool Spot; NPS).

The contract with ISAL, which was concluded and came into force in 2010, is a long-term contract of 25 years. The contract with Norðurál, agreed in 2016, will come into force in 2019 and only has a duration of four years. The contracting parties, Landsvirkjun and Norðurál, have offered no explanation about why the time-period of the new contract is so short, but an obvious reason is the new tariff being strongly aligned with spot market price of electricity on NPS (as explained in our last post).

electricity-price-tariffs-to-aluminum-smelters-in-iceland-and-canada_new-contracts_aep-2017The graph at left shows a.o. the approximate average tariff to the Straumsvík smelter of ISAL/RTA in 2016 (the tariff can be expected to rise steadily, as it is linked to the US CPI). The power price paid by Bécancour and Alouette depend on the development of aluminum price, and the blue columns reflect the average base-tariff for these two Canadian smelters in 2016 (when average aluminum price was close to 1,600 USD/ton). The light-blue part of the tariff shows how the Canadian tariff will rise if/when aluminum price becomes 1,900 USD/ton, as recently happened.

We should add that when there is a premium paid for aluminum, as has been the norm most of the time in recent years, the Canadian tariffs will increase, according to a certain formula in the two contracts. Note that the Canadian tariffs shown on the graph are as when the premium is zero. If/when there will be a premium, the power tariffs to the said Canadian smelters will be somewhat higher.

Due to limited information, it is still not possible to claim with precision what is the new base-tariff for the Norðurál smelter at Grundartangi in Iceland (which goes into force in 2019). We do, however, know that the new tariff will be linked or aligned to the electricity price on NPS. EFTA Surveillance Authority (ESA) has stated that “Norðurál’s payments to Landsvirkjun for the electricity each month will be tied to the market price for power in the Nordpool Elspot power market (Elspot System Price reference used)“. ESA also says that “pricing mechanism and the risk associated with using the Nordpool Elspot power prices is […] in line with standard commercial practices of competing power companies in the Nordic countries”, and that the “alignment […] with the Nordpool power prices, allows Landsvirkjun to sell power at the same prices as competing companies in the Nordic countries.”

grundartangi-nordural-century-aluminum-elkem-winterWith regard to the above mentioned statements by ESA, we can assume that the new tariff to the Norðurál smelter will be similar or even the same as the tariff paid by industries in the Nordic market. Furthermore, the statements by ESA strongly imply that the new base-tariff to Norðurál is actually the same as the spot price for electricity on NPS (or at least very close to the spot price). Thus, the new tariff to Norðurál shown on the graph above is the same as the average spot price on NPS in 2016 (Elspot) – with certain part of the transmission cost added (the part of the transmission cost which is not included in the Elspot-price).

Of course it is possible that the new base-tariff for Norðurál from 2019 may be somewhat lower than the full Elspot-price, as power companies on the Nordic power market may sometimes offer its largest customers a discount from the spot-price on NPS. However, when having regard to the statements of ESA, and with regard to Landsvirkjun’s tariffs to ISAL/RTA, it seems unlikely that the new contract will be offering Norðurál large discount from the Elspot-price.

Finally, note that the assumed new tariff to Norðurál shown on the graph(s) includes the transmission cost that the aluminum firm has to pay to the Icelandic TSO; Landsnet. And note also that Norðurál will continue to pay its current very low tariff to Landsvirkjun until 2019 (when the new power contract enters into force).

electricity-price-tariffs-to-aluminum-smelters-in-iceland-and-canada_new-contracts-and-current-tariff-to-nordural_aep-2017The power tariff Norðurál is currently paying Landsvirkjun happens to be one of the lowest electricity price enjoyed by any of the world’s two hundred-plus aluminum smelters (Norðurál also buys substantial amount of electricity from two other Icelandic power firms, where the average price is only slightly higher than the tariff it pays to Landsvirkjun). Last year (2016), the average price Norðurál paid for the electricity from Landsvirkjun was well below 20 USD/MWh (transmission cost included), as shown on the graph at left (the red column). So it is obvious that the new contract, coming into force in 2019, will increase Landsvirkjun’s revenues substantially – unless we will experience extremely low prices for electricity on the Nordic Elspot power market during 2019-2023.

Landsvirkjun and Century Aluminum agree on new power tariff

new power contract between Landsvirkjun and the Norðurál smelter of Century Aluminum at Grundartangi in Iceland, was negotiated in 2016. Landsvirkjun describes this contract as an extension of the original contract from 1997. That original contract was amended in 1999, extending the validity of the original power contract to 2019.

lv-nordural-ceo-new-power-contract-2016The new extension, concluded in May 2016, changes the terms of the older contract and will enter into force in 2019. This is a fairly short-time contract/extension, expiring already in 2023. This short time frame of the contract is interesting, as all the earlier Icelandic power contracts with aluminum smelters in Iceland have applied for much longer periods (usually from 20 to 40 years).

The new contract-terms include a major change of the pricing method for energy delivered to Norðurál. From 2019, the tariff will be linked to the market price for power in the Nordic power market (Nord Pool Spot; NPS). This replaces the previous price-link to aluminum prices at the London Metal Exchange (LME), which is used in the current power contract  from 1997/1999.

According to the EFTA Surveillance Authority (ESA), the electricity tariff in the new contract is “tied” to the monthly “market price for power in the Nordpool Elspot power market”. This clear reference to Elspot may not necessarily mean that the new price will be exactly the same as the spot market power price on NPS. However, it is clear that this new pricing method, replacing the previous/current price-link to aluminium price, will make the revenues of Landsvirkjun more aligned with power prices on the Nordic and European power markets. What is also new, is that this being the first power contract with an aluminum smelter in Iceland not having the transmission cost included. Norðurál will need to pay the transmission cost directly to the Icelandic TSO; Landsnet.

nordural-century-aluminum-smelter-grundartangi-iceland-in-winterLinking the power tariff to electricity prices abroad is a new approach in the pricing of Icelandic electricity to aluminum smelters.  This new approach is a clear sign of important changes in the Icelandic power market, moving towards the development on nearby power markets in NW-Europe. The result will probably be a doubling of the current power tariff to the Norðurál smelter, when the new extension comes into effect in 2019 (depending on price development in the Nordic power market).

The new pricing method may explain why the contract was only made for a four-year period (2019-2023). When negotiations between Landsvirkjun and Norðurál were ongoing, in 2015 and early 2016, the Elspot power price at NPS was very low (close to 21 EUR/MWh on average in 2015). The management of Norðurál most likely pushed for aligning the power tariff to the then current low electricity price in NW-Europe and/or N-America, in the hope of avoiding a higher tariff, like Landsvirkjun agreed with the ISAL smelter in 2010. The ISAL smelter in Straumsvík, owned by Rio Tinto, is now paying more than 30 EUR/MWh and a little under 30 EUR when transmission cost is excluded.

Although NPS did experience very low power price in 2015, it is quite possible that the spot price on the Nordic power market will rise in the coming years. Already in 2016, the average Elspot price on NPS was close to 27 EUR/MWh (up from 21 EUR/MWh the year before). So it was obviously quite risky for Norðurál to make a long-term contract based on the Elspot price; thus agreeing on a four year contract only.

Icelink-HVDC-UK-NG-nov-2013-4Landsvirkjun may also have wanted to avoid a new long-term contract, as the necessary power capacity is already available (no new investment in power generation is needed to deliver the power to the Norðurál smelter). The main reason for such a strategy of Landsvirkjun – going for a short-term contract – is the possible construction of an electric HVDC cable between Iceland and Britain (often referred to as IceLink).

If such a subsea interconnector will be developed in the near future, it might become operational around 2025 or few years later. Such an interconnector would offer Landsvirkjun the opportunity to sell power into the high priced electricity market on the UK.  Thus, a short time power contracts makes sense for Landsvirkjun, at this point, rather than making long-term commitments regarding electricity sales to aluminum smelters. This reflects the current strategy of the Norwegian power company Statkraft, which also is focusing on the spot market development rather than making new long-term power contracts.

We at the Icelandic and Northern Energy Portal will soon be analysing this new contract/extension of Landsvirkjun and Norðurál in more details, putting the new tariff into context with other new power contracts in Iceland and Canada. Stay tuned.

The most surprising energy fact?

Here at the Icelandic Energy Portal, we are very proud of the fact that power consumption in Iceland is almost totally based on renewable power sources. And when we look at gross energy consumption, Iceland is also the green leader.

iceland-coal-consumption-2015_askja-energy-partners-2017Therefore, it may be a surprising fact that Iceland is fast increasing its coal consumption. In fact the country is becoming a major user of coal (per capita).

According to information from the International Energy Agency (IEA), coal consumption in Iceland (per capita) is now almost on pair with the coal consumption in the United Kingdom (UK). As can be seen on the graph at left.

In the coming years, it is expected that coal consumption (per capita) in Iceland will grow quite fast. And soon become close to the present world average coal consumption (per capita).

Iceland has no coal power station. The reason for the growing use of coal in Iceland, is the heavy industries located in the country. They import and use the coal in their industrial process.

united-silicon-plant_helguvik-icelandIceland has a major aluminum industry and the aluminum smelters need carbon materials for the production. Also, Iceland has a fast growing silicon industry, which also uses coal in their production. These are the reasons why Iceland is becoming such a substantial coal consumer.

The growing use of coal in Iceland in the coming years, is all related to new and upcoming silicon plants. These industrial plants are the main reason why Iceland is scoring much higher on the list of coal consuming countries, than people in general may assume.

Low aluminum price resulted in lower power tariffs

Power tariffs to aluminum smelters in Iceland are among the lowest in the world.

Power-Tariffs-to-Aluminum-Smelters-in-World-China-and-Iceland-2016Due to low aluminum price in 2015, electricity price to aluminum smelters declined in most parts of the world during 2015. The world average smelter power tariff fell by 12% in 2015, according to CRU Group. This drop can primarily be attributed to a 15% drop in China’s average power tariff. The average power tariff in the World excluding China also fell in 2015, decreasing by 8.2%.

The average power tariff to smelters in Iceland also declined in 2015, although the decline was less than in some other areas of the world. The result was that during 2015, the average electricity price from Icelandic power company Landsvirkjun to the aluminum smelters in Iceland, was approximately 2/3 of the world average tariff to such smelters.