Tomago Aluminium Smelter - Another Rescue Package For Large Energy Consumers

Tomago support

The Tomago smelter manages its electricity costs under a contract with AGL that expires in 2028. Reportedly, its owners, Rio Tinto, CSR and Norske Hydro, tested the market for interest in providing a new long term electricity contract from 2028 and found that power costs would double and firm supplies for all of the smelter load might not be available, making the smelter unprofitable. Norske Hydro was reported to have written down its investment to zero. A support package offered earlier this year, said to have a value of $2 billion, was reportedly rejected.

On 12 December the Prime Minister announced a commitment to work with the New South Wales government and the owners to help source a fixed-price power purchasing agreement and concessional finance to further support renewable energy generation and storage. Tomago would commit at least $1 billion over 10 years in capital investment and maintenance. Speculation has emerged that Commonwealth owned Snowy Hydro may play a role in the support package.

Energy intensive businesses under pressure

In recent years Alcoa's Pt Henry smelter and Kwinana alumina refinery have closed and the Bell Bay manganese smelter was mothballed in May. Rio Tinto recently announced that its Gladstone alumina refinery will reduce production by 40% from October 2026 as a required investment was not economically justifiable.

Other businesses which have closed include Qenos Altona and Botany, Dyno Nobel Gibson Island and Geelong, Dow Altona, Paper Australia Maryvale, Norske Skog Albury, Australian Paper Alphington and Shoalhaven, Opal Maryvale, Oceania Glass, Bega Kingaroy, Trident plastics and Kandos Cement.

Australia's oil refining capacity has materially reduced through the closure of Mobil Altona, BP Kwinana, BP Brisbane, Caltex / Ampol Kurnell, Mobil Pt Stanvac and BP Westernport. Remaining facilities receive a Fuel Security Services Payment to continue operating, among other forms of support.

The Commonwealth Industry Department recently released a heavily redacted report which references a schedule of "facilities at risk". Australia now has the lowest share of manufacturing as a % of GDP in the OECD and, according to the World Bank, ranks 140th globally, alongside Kiribati and Albania. The critical role of manufacturing was emphasised in the Prime Minister's conference at Tomago.

Rising energy costs and, as Tomago found, securing firm energy supply, is a challenge for many businesses, among other factors, including access to skilled workforces and State assistance rendered to competitors in other countries.

The challenge in securing competitive energy supplies is not just an issue for existing businesses. Reportedly, AirTrunk has been unable to secure sufficient firmed renewable energy supplies for its proposed Eastern Creek data centre and securing sufficiently firm access to transmission networks has also been cited as an issue for data centres.

Government assistance to energy consumers experiencing difficulty

Various forms of support have been provided by governments to industries experiencing "energy stress" or have been canvassed. These include:

• Grants to support specific capital expenditure: Bluescope Steel – $137m Pt Kembla furnace relining; $135m provided by the Commonwealth, SA and Tasmanian government to Nyrstar Pt Pirie and Hobart to support an $80m investment programme; and Orica - $432m grant for a green hydrogen plant in the Hunter Valley.
• Grants to incentivise companies to continue operations: Glencore (Mt Isa) - $600m to enable the Mt Isa smelter to continue operating for three years and the Whyalla steelworks rescue package ($2.4B so far, with speculation of a further $600m being required to provide additional gas transmission capacity) on top of a $64m 2024 grant from the Powering the Regions Fund.
• Loans to distressed companies: the Tasmanian government lent $20m to Liberty Bell Bay manganese smelter to assist in the purchase of raw materials but the smelter was mothballed in May 2025.
• Energy subsidies from State owned generators: the Tasmanian government's recent rescue (via Hydro Tasmania) of the Bell Bay aluminium smelter (14 months extended supply). Queensland state owned generators entered into a new contract with the Gladstone aluminium smelter in 2024, the details of which have not been released but are speculated to be attractive.
• Subsidies to support the production of low emission products: the Green Aluminium Production Credit (to the extent aluminium can be produced from renewable energy sources) may assist remaining smelters although end markets are said not to recognise a material premium for such products.
• Underwriting schemes: a variety of State and Federal schemes underwrite power generation or related services (principally renewable generation, storage or essential system services) with a view to improving the cost and availability of electricity. Some of these schemes are funded from government and others by customer levies.
• Extension of thermal generation retirement: the new Queensland government revised closure dates for State owned coal fired generation in its Energy Roadmap, believing this would deliver the lowest cost energy solution for customers (a view disputed by the Federal government). The strategy anticipates the plants operating to the end of their planned lives and possibly longer.
  
  NSW has an agreement with Origin Energy about the retirement of Australia's largest power station, Eraring, which Origin believed was potentially becoming unprofitable. Its retirement date has been extended to 2027 and Origin have indicated there are scenarios in which it could be extended again to 2029. If the plant's closure date is extended at government request, there is said to be potential for compensation but the plant is believed to be operating profitably. Agreements between Victoria and EnergyAustralia and AGL are in place regarding the retirement of the Yallourn and Loy Yang A power stations in 2028 and 2035 respectively. The 2035 closure date aligns with the term of a supply agreement with Alcoa's Portland aluminium smelter.
  
  South Australia recently agreed to make undisclosed compensation payments to AGL to delay the closure of three Torrens island B units totalling 600 megawatts from mid 2026 to July 2028.
  
• Government equity or direct investment: various project proponents such as InterContinental Energy and Orica have floated the idea of governments funding supporting infrastructure, underwriting unsold production or taking equity stakes in projects.
• Future Made in Australia: aims to build sovereign manufacturing capabilities, including the production of critical minerals and processing of other "future-facing" metals. An element of this could be energy cost assistance. It supports the Green Aluminium Production Credit.
• National Reconstruction Fund: able to invest in a range of industries. Examples of investments include Patties Foods, Liontown Resources, Arafura Rare Earths. Recently, a proposal has emerged under which the NRF would invest in renewable generation and batteries to support supply at prices well below market on the basis that if a "green premium" emerges for their products, this will be rebated to NRF. NRF might also be able to generate electricity trading revenues.
  
  Another proposal involves NRF taking major equity stakes in troubled smelters. The government has announced the formation of a $5B Net Zero Fund within the NRF (reportedly with a lower required rate of return target below the 4 year bond rate) to help heavy industry decarbonise.
  
• North Australian Infrastructure Fund: some investments support energy intensive industries or energy producers, e.g. Chichester solar gas hybrid, Alpha High Purity Alumina, Nolans Bore Rare Earths, Mardie Salt, Kidston Pumped Hydro, Kimberley cotton gin, Hudson Creek power station, Perdaman urea, Olive Downs coal, Pilbara Minerals and Clermont beef processing.
• Clean Energy Finance Corporation: some CEFC financing commitments have the effect of providing better terms than finance which could be obtained from market sources.
• Rewiring the Nation: loan facilities extended to network companies to provide cheaper sources of capital to support interconnectors and renewable energy zones.
• Powering the Regions Fund: a fund designed to assist regional Australia, used to fund Pt Kembla and Whyalla projects.

Policy initiatives which have potential to reduce energy costs

Aside from direct financial support, various policy initiatives are intended to help deliver more attractive energy costs, for example:

• Gas price cap: the Commonwealth government's 2022 policy of capping sales of gas to the domestic market at $12/GJ, which some consumers strongly supported, was intended to mitigate market factors leading to higher costs but has been said to have harmed investor confidence and questions have been raised about its effectiveness. Some customers have indicated $12/GJ does not support globally competitive manufacturing operations for them.
• Federal Gas Market Review: potential to make more gas available to domestic customers through an east coast domestic gas reservation requiring all LNG exporters to make available a minimum quantity of gas to the domestic market or buy credits from other producers who bring more supply to the domestic market. Some exporters are better placed to do this than others and some claim such a policy would threaten existing export contracts and harm investment confidence. A key issue is the timing for when any additional gas resulting from the policy would be delivered.
• LNG import initiatives: Squadron Energy's Pt Kembla LNG import facility has completed construction and is in commissioning. Other LNG importation facilities have been said to face commercial viability challenges. Victoria has reportedly been exploring support packages with the Commonwealth (potentially funded by market levies) or powers for AEMO to purchase LNG to help underwrite projects but other States oppose these measures. Different views have been expressed about the effect of LNG import facilities on gas prices.
• NEM Wholesale Market Settings Review (Nelson Review): electricity market reforms have been proposed to incentivise production of bulk energy, shaping and firming.

Conclusions

The cost, availability and reliability of energy is critical to much of Australia's manufacturing capability. Many businesses are reported to be experiencing difficulty and governments have been responding with a wide variety of bespoke measures, funding programmes and broader policy initiatives.

Arguably, there is scope for rationalising the many funding programmes to create a clearer framework for the provision of support to large energy consumers experiencing difficulty.

Questions are being raised about how much funding capacity governments have to continue expanding support commitments (both for large customer programmes and retail level programmes such as the Commonwealth's expanded home battery scheme).

If current policy settings deliver more competitive energy supply, the need for substantial ongoing government support in order to retain industrial operations may diminish. However, different views prevail on this topic and considerable uncertainty persists.

It can therefore be expected that, at least in the short to medium term, large energy consumers will continue seeking support for their operations and the associated investment decisions which owners need to make.