Electricity market reform: A chance to unlock investment in European aluminium production

Electricity is the lifeblood of aluminium production. Long - term certainty of supply and a competitive electricity price are crucial to unleash the growth potential of the industry in Europe.

European Aluminium welcomes the planned reform of the EU Electricity Market Design as an opportunity to accelerate the transition towards a more decentralised, low-carbon and competitive electricity market in Europe. This should go hand in hand with the creation of a compensation scheme that lifts the burden of indirect carbon costs passed on to Europe’s Aluminium producers.

Aluminium smelters offer great benefits to the power system, such as the ability to balance supply and demand. Their flexibility to reduce electricity consumption as needed contributes to grid stability and helps tackle intermittency problems that result from the integration of renewables.

Driven by the automotive, building and aerospace sectors, demand for aluminium enjoys solid growth worldwide and in Europe alike. Nevertheless, primary aluminium production in Europe has declined significantly over the last decade and is now limited to 26 sites, supplying just 31 percent of European consumption for this unique metal. To unlock the growth potential of European producers, significant and strategic investments are required. Yet with amortisation periods of 15 to 25 years for large scale investments, investors require long-term certainty of supply and competitive price of electricity. It is vital that the newly designed electricity market provides this security.

EA has a deep understanding of the functioning of electricity markets, it is said in a press announcement, and the industry stands ready to engage in the debate about a new electricity market design. EA proposes:

1. The energy market design reform should support the possibility of voluntary long-term electricity contracts in any EU wholesale market at a competitive price and alternative pricing based formulas should be encouraged at EU level. This would represent a win-win situation for power generators and large scale electricity consumers.

2. For the aluminium market segment, national governments should encourage predictability beyond 15 to 20 years by supporting mechanisms that shield electro-intensive industries from undue costs for CO2 and renewables. The rule of a minimum participation for these industries (usually in the area of 20%), leaving significant exposure to external risks, should be eliminated.

3. The reform should take into account that liquid financial forward markets will improve confidence among market participants, and support mid-term contract negotiations (5-10 years).

Realising the potential of Europe’s primary aluminium production is critical to make ambitious EU 2050 greenhouse gas targets a reality, EA says and points out that European aluminium’s carbon footprint is among the lowest in the world (8,7 tonnes of CO2 per tonne aluminium) compared to a global average of about 18 tonnes of CO2/tAl and approx. 25 tonnes of CO2/tAl in China. By making cars lighter and buildings more efficient, aluminium is also a key enabler of Europe’s transition towards a low-carbon and resource-efficient economy.

Global market conditions have changed drastically, with aluminium prices dropping about 25 percent since the beginning of the year, hitting 6-year lows. Now, more than ever, Europe needs to enable a level playing field on the cost side, for the European aluminium industry to weather these significant headwinds.