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update on the carbon pollution reduction scheme and its impact on alcoa
For over a year Alcoa has supported the introduction of an emissions trading scheme in Australia that delivers reductions in greenhouse gases and does not compromise Australian jobs or the international competitiveness of our industry. Getting the detail right, within the CPRS, is critical to ensure Australia does not experience carbon and/or jobs leakage, particularly to countries where the emissions from production may be higher.

As part of our discussions with all stakeholders, including the Government and Opposition, we have consistently called for three key changes:
  • at least 90% carbon permit allocations to each of our emissions-intensive trade-exposed (EITE) operations (refining, smelting and rolling businesses);
  • no decay of EITE permit allocations until international competitors adopt a carbon price; and
  • resolution of inequitable impacts on the Point Henry and Portland smelters from the CPRS Electricity Allocation Factor (the way emissions from power stations, that supply our electricity, are dealt with under the CPRS. Read more below.)

For many months we have also said we want the Government and the Opposition to agree these outcomes as part of the normal debate and negotiation processes that accompany the passage of significant pieces of legislation.  Alcoa is very pleased to see that the Opposition has proposed amendments to the current CPRS framework that would address each of the three key issues above, by ensuring:

  • Our refining, smelting and rolling operations start at 94.5% initial EITE permit allocations (our mining and transport operations would not be considered EITE);
  • That the decay of EITE permits would not fall below 90% until most of our international competitors adopted a carbon price; and
  • The Point Henry and Portland smelters would not be disadvantaged by an Electricity Allocation Factor that we cannot achieve in future Victorian power contracts.
These outcomes are absolutely essential to ensure emissions trading in Australia does not lead to the premature closure of any of our Australian facilities and the impacts that this would have on our employees, the regional businesses that service our operations, and the communities that thrive on our contribution to their local area. 

These outcomes would be no free ride for Alcoa. Even after all of these provisions, Alcoa’s Australian operations would still experience a substantial new carbon cost (this could be more than $40 million by year 2 of the CPRS).

electricity allocation factor explained
Have you heard about the Electricity Allocation Factor (EAF), which is how indirect emissions will be dealt with under the Carbon Pollution Reduction Scheme (CPRS)? Below, our General Manager of Carbon Strategy, Tim McAuliffe, explains the EAF challenge under the Government’s current CPRS proposal.

“Once the CPRS is operating, power station operators will experience significantly increased costs associated with permits for their carbon emissions that they ‘pass through’ to power purchasers.

For Alcoa, a large user of purchased electricity from a brown-coal source, this ‘cost pass through’ represents a significant additional cost that could prematurely close Australian facilities.

To prevent such carbon and jobs leakage the draft CPRS proposes that assistance be provided to Emission Intensive Trade Exposed (EITE) sectors, to partially ameliorate these power price rises.

The formula proposed in the draft CPRS to calculate the amount of assistance includes an ‘electricity allocation factor’ (EAF). The EAF represents the carbon intensity of power generation (in tonnes of CO2 per megawatt hour (MWh)) that will determine how many carbon permits the power producer will need to purchase from Government or the market place.

Each permit the power producer buys will come at the traded value of carbon permits and they will seek to pass this full cost onto their customers. Example as follows:
 
  • ‘Power station X’ produces 8.5 million MWh p.a. and emits 1 tonne of CO2 for every MWh.  
  • ‘Power Station X’ is therefore required to purchase 8.5 million carbon emission permits for that year. 
  • A permit costing $20 each would represent an additional cost of $170 Million in that year. 
 
When not borne by international competitors, costs such as these would quickly drive some Australian business to closure. To avoid this, the draft CPRS proposes that aluminium smelters (as an EITE industry) would initially receive permits equivalent to 94.5% of this cost pass through – assuming an electricity allocation factor of 1.0 (1 tonne of CO2 per 1 MWh of generation).

the problem with an EAF of 1.0
The draft CPRS concludes that market forces will mean a power station can only pass on a maximum EAF of 1.0 because the market price of power may be set by power providers producing less than 1.0 tCO2 per MWh. In an unlimited market a customer would not buy more expensive power (with an embedded EAF greater than1.0) when cheaper (EAF less than1.0) is available.

However, Alcoa’s smelting facilities at Portland and Point Henry are defined by the following constraints in terms of their electricity supply:

1: They are dependent on maintaining long-term (20-30 years) electricity supply agreements;

2: They are financially constrained to relying on electricity sourced from within the Victorian
NEM region to meet their electricity needs; and

3: Within the Victorian NEM region, they are constrained to relying on electricity supplied by Victorian brown coal generators which typically produces around 1.25 to 1.6 t CO2 per MWh and because they cannot internalise the carbon price risk, they will pass this full amount through in any long-term contracts.

These constraints have been independently verified by KPMG in a 2009 review of the Electricity Allocation Factor Impact on Victorian Aluminium Smelters.

The net difference in initial cost to the two Victorian smelters from an EAF of 1.0 instead of 1.25 is around $40M and this would increase as the price of carbon rises above $20/t.

This dilemma could be solved by allowing the EAF to be changed, provided the smelter company could demonstrate they had taken reasonable measures to reduce the carbon intensity of their power supply to 1.0 t CO2/MWh. This is the position Alcoa is asking Government to support in the upcoming negotiations about the CPRS. The Opposition has recognised this in its proposed CPRS amendments.”

alcoa named component of Dow Jones Sustainability Index for eighth consecutive year
Alcoa has been selected for the eighth consecutive year as a component of the Dow Jones Sustainability Indexes (DJSI).

The DJSI follow a best-in-class approach and include sustainability leaders from industries worldwide and serve as an important guide for investors to assess a company’s sustainability portfolio. Selection to the indices is based on a thorough analysis of a company’s economic, environmental and social performance. The company was once again named a component of the North American Dow Jones Sustainability Index.

“To be included on this key index for eight years in a row clearly shows that Alcoa’s commitment to sustainability remains strong,” said Alcoa CEO and President Klaus Kleinfeld.

“We produce the ideal sustainable material – aluminium is lightweight and infinitely recyclable, and it will continue to play a key role in the sustainable life of our planet.”

Alcoa’s noteworthy 2008 sustainability achievements include: 

  • A 36% reduction in greenhouse gases from the 1990 base year – a 44% improvement over our target for 2010; 
  • Approximately 90% of our worldwide operations have community programs, putting the company within reach of its target of 100% by 2010; and 
  • We have been ranked by the Covalence Ethics Index sixth in ethical reputation among all companies worldwide and first in the Resources category.
 
Alcoa’s global 2008 Sustainability Report and reports from Alcoa regions worldwide can be downloaded at www.alcoa.com/sustainability

Alcoa of Australia’s Sustainability Reporting can be accessed at www.alcoa.com.au/sustainability

Since their inception in 1999, the DJSI have become a leading worldwide reference point for sustainability investing. The inclusion of companies in the indexes is based on a comprehensive sustainability assessment of more than 1,000 exchange-listed companies, based on economic, environmental and social criteria. The DJSI North America tracks the performance of the best 20 percent in terms of sustainability among the largest 600 companies in the respective regions.

nanotechnology breakthroughs
Nanotechnology breakthroughs will be essential in developing game-changing solutions to address world issues, such as energy shortages, environmental concerns and greater connectivity - according to Alcoa Executive Vice President and Chief Technology Officer Mohammad A. Zaidi.

“I believe that future growth drivers in business will focus on energy, environment, connectivity and the biomedical field,” Dr. Zaidi said.

“In all of these fields, we know that nanotechnology could enable huge opportunities for advancements. Based on what I’ve seen in the field of nanotechnology in the last five years, it’s obvious that the future rate of change will far surpass anything we’ve ever experienced to date.”

Dr. Zaidi’s comments came at Rusnanotech ’09, the second international nanotechnology forum held in Moscow this month, which was attended by more than 6,550 representatives of industry, government and science from 36 countries.

“At Alcoa, we are a world leader in light metals technology. We invented the commercial aluminium smelting process in 1888 and haven’t stopped innovating since,” he said.

“Nanotechnology enables us to explore new game-changing solutions for our customers, offering products that are more durable, scratch resistant, abrasion resistant, heat resistant and blast resistant. For our market segments, we see nanotechnology as a huge enabler of new functionalities and an enabler of energy and environmental efficiencies.”

Dr. Zaidi’s also highlighted a number of initiatives that Alcoa scientists, researchers and engineers are working on for the major markets that Alcoa services. Examples include nanotechnologies that enable stronger electrical transmission cables at higher temperatures, with greater electrical conductivity and reduced transmission losses to fulfil growing urban load demands, and nano-coatings for the oil & gas market that provide more durable oil risers and drill pipes enabling deeper off-shore exploration at lower cost.

“As a global, Fortune 100 corporation with operations in 31 countries around the world serving such a wide range of markets, nanotechnology offers Alcoa tremendous opportunities,” Dr. Zaidi said.

“In the same light, we believe that we offer the field of nanotechnology tremendous opportunities as well. Our breadth of market intelligence, combined with our expertise in material and design integration and our presence in both the US and Russia, enables us to be in a unique position to be an industrial test bed for the most promising developments in this exciting field of technology.”


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