* Network reliability, price spikes undermine smelter
* S.Korea's Sun Metals plans solar plant for outback zinc
* Other refiners plan output cuts, withhold investment
By James Regan
SYDNEY, Feb 22 Fed up with unpredictable and
often exorbitant electricity prices, Sun Metals CEO Yun Birm
Choi plans to invest A$183 million ($140 million) to build a
massive solar farm to power his zinc refinery in the Australian
The decision by Sun Metals, owned by Korea Zinc Co
, to turn to solar comes as Australia grapples with
more frequent power failures and extraordinary price surges on
its mainly coal-fired wholesale electricity markets.
Australia mines more coal than almost any other country. But
a shift away from coal-fired power plants to meet a national 20
percent renewable energy target by 2020 has wreaked havoc on
smelting and refining businesses caught in the transition.
"There is no bigger factor for a smelter than disruption to
power supply," said Miles Prosser, executive director of the
Australian Aluminium Council. "A disruption for even just a few
hours can be almost catastrophic," he said.
While Sun Metals are looking to build their own generation
as part of an upgrade to boost production, other smelters plan
to cut output and withhold investment because of the
Mining giant Rio Tinto is set to shed jobs
and reduce output by 45,000 tonnes from its 35-year-old Boyne
Island aluminium smelter because of soaring power prices and
fear of interruptions, a spokesman said, confirming local media
Generators, grid companies and market operators have traded
blame for the shortcomings, while the federal government cites
"ideologically driven" renewable energy targets for the
When most of Australia's smelters were built in the 1970s
and 1980s they benefited from very cheap, long-term electricity
agreements with state-owned power companies - paying about half
the price paid by other large industrial electricity consumers.
Supply contracts for large consumers now typically include
clauses allowing generators to divert power to residential users
and essential services such as hospitals. That forces smelters
to bid on the open market, where prices can spike savagely.
Electricity futures on the price of Queensland base load
power have averaged almost $180 per megawatt hour (MWh)
this year, compared with an average of $63.45 in 2016. Prices
have topped A$13,000 per MWhmore than 70 times so far in 2017,
according University of Melbourne's Climate & Energy College.
By comparison, wholesale power prices for baseload delivery
next year in Germany cost 30.15 euros ($32.02) per MWh, while
U.S. prices are between $25 and $35 per MWh.
After a heat wave this month forced the Rio Tinto's Tomago
aluminium smelter 150 km (90 miles) north of Sydney to curtail
operations so power could be diverted to residents, the
smelter's chief executive lashed out at the "insufficient
generation" in the market.
"We should have the cheapest, most reliable energy in the
world and yet it's the most expensive and least reliable," Matt
Howell, told reporters. "It's a disgraceful situation that needs
to be fixed."
In October alone, blackouts cost BHP Billiton
over $30 million in lost output from its Olympic Dam
smelter in South Australia following a fierce storm.
When the lights went out again in December, BHP Chief
Executive Andrew Mackenzie said it was a "wake-up call" across
Australia on energy policy failure. Jobs and future investment
were at risk, he said.
"(BHP) is now saying that it's having difficulty competing,
and industry generally is saying that they're having difficulty
competing internationally because the electricity price in
Australia is so high," said Queensland Resources Council Chief
Executive Ian Macfarlane, a former federal resources minister.
At the nearby Port Pirie lead smelter - the largest source
of refined lead in the world - a back-up diesel generator kept
the furnace hot for the first hours of the October blackout. But
as the outage dragged on, the slag in the blast furnace
solidified, rendering it inoperable.
The smelter's Belgian owner, Nyrstar, put repair
costs as high as 5 million euros ($5.3 million).
Faced with high costs and tough competition from new, more
efficient Chinese smelters, Alcoa has already shut one
185,000 tonne a year aluminium smelter in Australia. In January,
the U.S. giant came close to shutting down a second smelter near
Melbourne after power outages cut operations by two-thirds.
Production was restored only after the government bowed to a
request by Alcoa for a $182 million aid package to defray power
After watching Sun Metal's energy bill balloon by 40 percent
to A$70 million in 2016 and encouraged by plummeting costs for
solar installation, Choi has expanded plans for the solar plant
from 100 MW to 115 MW. That would make it Australia's largest
The smelter will still need backup supply from the main grid
but might at least benefit when prices surge.
"Primarily, the electricity produced from the solar farm
will be consumed at the refinery," Choi said. "Subject to the
refinery’s operation and the price of electricity, it will also
sell electricity into the national energy market."
($1 = 0.9451 euros)
($1 = 1.3038 Australian dollars)
(Additional reporting by Sonali Paul in MELBOURNE and Henning
Gloystein in SINGAPORE; Editing by Lincoln Feast)