Power play in court as Alcoa demands hardship price deal

Two of Australia's biggest companies, AGL and Alcoa, are squaring off in the Supreme Court over power supplies to the Point Henry ageing aluminium smelter.

Alcoa, which owns and operates the smelter, is suing AGL after it refused to implement hardship provisions under a multi-million-dollar power pricing deal.

Alcoa says it has notified AGL it was terminating its power contract.

AGL owns and operates the Loy Yang A coal-fired power station in the Latrobe Valley and has a deal to provide about half the power it generates at an agreed price to the smelter until 2036.

Power experts said the failure of such a major contract could hit power prices and even spark the early closure of Victoria's least efficient generators.

CME energy economist Bruce Mountain said it was difficult to gauge the impact, but power prices could fluctuate as AGL tried to make up for its losses and sell the spare capacity created.

Mr Mountain said if Alcoa terminated the deal and decreased its demand rather than secure an alternative power supply; it would increase Victoria's surplus power capacity and likely lead to less efficient brown-coal generators reducing power production.

"We've seen the mothballing of plant capacity over 2012 and that, ultimately, may turn into plant closures," he said.

The power play is scheduled to go before the Supreme Court on April 19.

Alcoa's contract with AGL includes hardship provisions that allow it to seek a reduction in power charges if it becomes uneconomic to produce aluminium.

To trigger the hardship provisions, Alcoa must show it would not generate positive earnings before interest and tax based on 90 days of historic performance and financial projections for 455 days. Within 30 days of a hardship notice, representatives of Alcoa and AGL are required to meet and renegotiate. After 90 days, if agreement has not been reached, an early termination of the contract can be sought.

In a writ lodged with the Supreme Court on Wednesday, Alcoa claims it notified AGL of its parlous economic situation in an email in February last year.

The writ says AGL claimed the hardship notice was not valid because it failed to provide evidence of the hardship, but appointed a negotiator, with four meetings from March last year.

In June, Alcoa says it notified AGL that the period of compulsory negotiation had expired without an agreement and it was entitled to seek early termination.