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Alcoa reaches low-cost electricity agreement with Hydro-Quebec

Alcoa and Hydro-Quebec have reached a long-term agreement that will see the multinational's three aluminum smelters continue to receive low-cost electricity as the company tries to tap into growing demand for the lightweight metal from the automotive industry.

Alcoa had threatened last October to close its facilities in Quebec if the provincially owned utility refused to lower its electricity rates.

As rumours of a spring provincial election intensify, Premier Pauline Marois travelled to Baie-Comeau on Tuesday to participate in the announcement of the deal with the U.S. metal producer.

No details were released on what Alcoa will pay for electricity.

The agreement runs through 2030 for smelters in Becancour and Deschambault and through 2036 for the smelter in Baie-Comeau.

As a result of the agreement, Alcoa says it will proceed with $250 million of planned investments at the smelters over the next five years to improve productivity.

The aluminum company said the investment will allow it to increase production of aluminum used for auto manufacturing while reducing production of commodity-grade aluminum at the Baie-Comeau casthouse as automakers turn to the lightweight metal for more fuel-efficient vehicles.

Alcoa said automakers expect that aluminum content in North American vehicles will quadruple by 2015 and increase tenfold by 2025 from 2012 levels.

"The agreement will help Alcoa achieve its goal of moving down the global aluminum cost curve and the casthouse optimization will help meet growing demand for aluminum in the North American auto market," said Bob Wilt, president of Alcoa Global Primary Products.

However, Alcoa (NYSE:AA) said it will no longer modernize the Baie-Comeau facility by building a new potline to replace the two Soderberg potlines it closed last year.

In a news release, Marois said the challenges facing the aluminum industry required that the 2008 energy supply agreement be reopened to preserve 3,000 Alcoa jobs in the province.

"I am particularly proud of the signing of this agreement, which marks a new beginning in our relationship with Alcoa in addition to ensuring the sustainability of its operations in Quebec and maintenance of quality jobs in our regions for at least 15 years," she said.

Under the agreement, Alcoa will provide its expertise in the design of vehicles using lightweight aluminum to support the Quebec government's electric transportation strategy by considering the Baie-Comeau facility as a potential source for emerging technology applications, including aluminum-air batteries.

Alcoa recently entered into a joint development agreement with clean technology company Phinergy to further develop its battery, which can be used in electric vehicles. Alcoa will also provide financial support and lend technical expertise to government-led programs focused on the use of aluminum to reduce vehicle weight.

"We want to use this new agreement as a springboard to make Quebec a world leader in electric transportation," Marois added.

In October, the premier accused Alcoa of being alarmist by threatening to close its factories unless it secured lower electricity prices.

Rio Tinto Alcan, another large aluminum producer with large smelting operations in Quebec, welcomed the deal with Alcoa and hoped it signals the province will be receptive to its request to have lower electricity prices for future projects.

"It shows us that the government sees the importance of regional development and the aluminum industry in the regions, so it's great news for us because we are mostly in the regions and we are investing lots of money year after year," spokeswoman Claudine Gagnon said in an interview.

The Montreal-based division of Rio Tinto (NYSE:RIO) expects to spend about $200 million this year to maintain its operations after completing a couple of large investment projects in Quebec, such as a new AP60 pilot production facility and turbine upgrade at Shipshaw. Several large investments are temporarily on hold until market conditions improve.

Gagnon said the company has asked the province to reduce the electricity rate for these projects to less than 2.65 cents per kilowatt hour, from the L-rate of 4.3 cents.

"We are asking that our future projects have a competitive price," she said. "When we look at the aluminum industry around the world, 75 per cent of the industry is paying less than what we are paying right now."

The agreement with Alcoa comes as Quebec's electricity exports face pressure from declining demand in the United States.

Electricity consumption stopped growing in the past few years in the U.S., according to a study released Tuesday by the American Council for an Energy-Efficient Economy.

Retail electricity sales in 2012 were 1.9 per cent lower than in the peak year of 2007. For the first 10 months of 2013, retail electricity sales were down 0.7 per cent from the same period in 2012.

The decrease is partly attributed on the 2008 economic recession, but the council said that energy efficiency programs also played a role in lowering demand.

— With files from Alexandre Robillard.

Follow @RossMarowits on Twitter

The Canadian Press

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