Alcoa Portland smelter under threat of closure as power subsidy axed by Victorian Government

The end of a decades-long power subsidy is threatening the future of Portland's smelter, putting at risk the Victorian coastal community's economy.

The fixed 20-year subsidy between the Victorian Government and global aluminium producer Alcoa seems unlikely to continue after November, with Treasurer Tim Pallas ruling out "open-ended engagements" with the company.

Enacted in the late 1980s by then-Labor premier John Cain, the subsidy was designed to provide electricity to both the Portland and now-defunct Point Henry smelters at a price linked to the world price of aluminium.

Mr Pallas said the subsidy had come at a significant cost to successive Victorian budgets. "If you look back at the time the arrangements were struck, it would have been seen that the level of liability the state was incurring was a reasonable one," he said. "But those numbers have grown so substantially that it was a subsidy well in excess of $100 million on some occasions."

Mr Pallas said although the Government would not maintain the existing arrangements, it would work alongside the company and consider other assistance measures. The announcement is another blow to the smelter, which is under significant pressure due to persistently low international aluminium prices. It also threatens to affect the wide community in Portland who have been dependent on Alcoa for years.

Alcoa closed its Port Henry smelter in July, 2014

Providing more than 2,000 indirect jobs — almost a quarter of Portland's total population — the company is the region's largest employer and biggest taxpayer. In February, the Australian Energy Market Operator rejected a bid by the company to secure a transmissions discount.Commodity market analyst Kelly Driscoll said Alcoa had already closed two loss-making smelters in the United States this year.

"However, two slated closures were averted as new power deals were agreed," she said.

In a statement, Alcoa said it would continue to find and implement cost saving measures for its Portland smelter, but its future would be decided by its ability to remain internationally competitive.

The Portland smelter's power comes from brown coal-generated electricity in the Latrobe Valley.

Prominent businessman and Committee of Portland deputy chair Steve Garner said the subsidy had been instrumental in shaping the industrial city. The smelter is estimated to consume between 8 and 10 per cent of Victoria's electricity, derived from brown coal and produced primarily in the Latrobe Valley. Victorian Greens leader Greg Barber said its potential closure would exacerbate an oversupply of power in the national electricity market, and put further pressure on coal-fired generators to close.