How Tomago can be a blueprint for industrial decarbonisation

Last December, the Australian and New South Wales (NSW) governments announced they would intervene to help ensure the Tomago aluminium smelter remains operational. They will underwrite the development of electricity infrastructure and provide a fixed-price, long-term power purchase agreement to the smelter that enables it to be internationally competitive.

The smelter is a significant employer and energy user in NSW. It is Australia’s largest aluminium smelter, producing more than a third of Australia’s primary aluminium, and employing more than 1,000 people directly. The smelter is the largest electricity load in Australia, representing 12% of NSW’s electricity demand.

Tomago’s electricity supply contract expires in 2028, and it announced early last year it wanted to shift to 50% renewable electricity by 2030 and 100% by 2035. The smelter’s CEO stated this would help “position the smelter for long-term success” in a changing landscape. Renewables are the cheapest form of new electricity generation, and equal cheapest when accounting for full integration costs.

However, last October, Tomago announced it had been unable to secure affordable new electricity supply, either coal-fired or renewable. With electricity accounting for more than 40% of its costs, the smelter was considering closing when its current electricity supply contract ends. 

Reducing the cost of capital can materially reduce electricity generation costs

While details of the deal are yet to be finalised, it has been reported that Tomago may be provided with power by Snowy Hydro from 2028. This would, in part, involve new build projects developed to supply the smelter, with Snowy Hydro acting as an offtaker. 

The government will likely lower the electricity generation cost for these new projects by reducing their cost of capital, using two levers: government credit support and concessional debt. The credit support element arises from the government or a public entity (in this case, likely Snowy Hydro) acting as an intermediary, contracting for clean energy directly, and then onselling it to the smelter. Given a public entity is considered a more reliable consumer than the smelter, renewable project developers can access lower-cost finance. The other lever involves renewable project developers accessing low-cost debt from public institutions such as the Clean Energy Finance Corporation (CEFC) and National Reconstruction Fund to further reduce the cost of finance.

This is not a new concept. Professor Roy Green, Special Innovation Adviser at the University of Technology Sydney, stated that, “It’s a proven financial structure, effectively used by [then NSW premier] Neville Wran in the 1980s to secure coal-fired power for industry, and it can be applied just as effectively today for the new era of clean energy transition.”

Reducing the cost of capital for renewable projects can make a very material difference to the price of electricity delivered. The estimated cost of capital for utility-scale solar and onshore wind projects in Australia ranges from 5.5% to 11%. This is based on estimates by Oxford Economics from late 2024, adjusted upwards by 0.5% to reflect the approximate increase in the risk-free cost of capital. 

The risk-free cost of capital is just below 5% (based on Australia’s 10-year government bond yield) and represents the lowest cost of capital achievable commercially. The higher end of the range for onshore wind and solar plants corresponds to the cost of finance for riskier projects; for example, those lacking offtake agreements, exposing them to market volatility, or those with offtakers perceived to be unreliable. Without government support, renewable projects supplying the Tomago smelter would likely attract high costs of capital.

Figure 1 shows the range of costs of capital results in very different levelised costs of electricity (LCOE). With a 5% cost of capital, the cost of the electricity generated is about 42% lower than with a cost of capital of 11%. Each percentage point reduction in the cost of capital drives an 8-10% reduction in the cost of electricity generated.

Source: IEEFA analysis based on CSIRO’s GenCost 2024-25 final project data tables, 2024 costs.

A scalable model to support industrial decarbonisation

Government support to reduce the cost of capital of new renewable electricity projects is a highly scalable and effective model to help industrial facilities decarbonise their electricity supply. It doesn’t rely on large and ongoing cash handouts, but instead leverages the government’s high credit rating to lower the cost of building the renewable projects themselves.

In the case of the Tomago deal, if any direct government financial support is required upfront, it could be repaid through aluminium price upside and battery trading revenues, as suggested by Oliver Yates, founding and former CEO of the CEFC. 

As such, this model could be applied to many other projects, facilitating access to cheap renewable electricity for industrial facilities seeking to decarbonise their operations. It could also be applied to reduce the cost of new green export markets. For example, electricity infrastructure represents about 60% of the capital costs of green iron production in Australia. Adding hydrogen production infrastructure increases the share to about 80%. Reducing the cost of capital for these infrastructure assets would have a very material impact on the cost of green iron production in Australia.

There can also be benefits for the electricity system, as large loads can help address minimum electricity demand concerns in the middle of the day, and can also improve the reliability of the system through demand-side response.

This model could also be applied beyond Australia to support global industrial decarbonisation, making the shift to renewable electricity affordable. For industrial manufacturers, this will deliver the added benefits of increasing their competitiveness in a decarbonising world, and protecting them from volatile fossil fuel prices.