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Smelter demands that blocked electricity contract be honoured

Sydney Morning Herald

Friday February 18, 2011

Brian Robins

THE operator of the Kurri Kurri aluminium smelter, the Norwegian-owned Hydro Aluminium, says the future of its smelter in the Hunter Valley is in doubt because of a lack of government commitment.Late last year the state government blocked Delta Electricity from signing a contract to supply Hydro, after two years of negotiations, because the privatisation of the state's power assets was moving into the final stage.In a media release last week the state government instructed Hydro to talk to Macquarie Generation about a new supply contract. Telephone calls from Hydro to the government have gone unanswered.Macquarie already supplies the rival aluminium smelter Tomago. Supplying Kurri Kurri as well would pose significant risks since more than 30 per cent of its output would be tied up in two companies.If any of its generators encountered mechanical problems, Macquarie might face difficulties obtaining enough electricity from other suppliers at a competitive price in an emergency for any period of time.It is believed Hydro has held preliminary talks with Macquarie for a possible contract, but finalising a new contract is likely to be a slow process. The new contract is to run for 10 years, from 2017.Hydro said yesterday that it had reserved the right to seek compensation from the state government because it had blocked Delta from finalising a contract. Any such claim for compensation might be very substantial, it said."We have a contract with Delta, and we want that honoured," a Hydro executive, Trevor Coombe, said yesterday. "Both boards have agreed to it."Hydro is already beginning to shelve capital spending plans due to the lack of certainty in finalising a new supply contract, raising questions about the future of the smelter.In December the government sold output from the Wallerawang and Mount Piper power stations near Lithgow to TruEnergy, but it received no bids for output from its two power stations on the central coast, Munmorah and Vales Point.Hydro's existing contract with Delta runs until 2017, although there are question marks about its ability to keep on supplying, since Munmorah, one of the oldest power stations in the state, is to be shut down by the middle of 2014.Delta has approvals in hand for a $500 million rebuilding of its generators at Munmorah, although under existing government policy, all new investments in power stations are to be undertaken by the private sector.

© 2011 Sydney Morning Herald

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