Aluminum power blues persist

In January Ukraine did not renew its transmission contract with Russia’s Gazprom.

Ukraine had been earning over $1 billion per year in transmission fees from the Russians for transporting Russian gas into Austria, Hungary, Moldova, and Slovakia. Ukraine transshipments of gas for the Russians represented about 5% of European gas supply. The EU has done an excellent job replacing Russian gas with liquid natural gas from Norway and Qatar, amongst other origins.

So, you ask, “how does this impact aluminum power prices”? Natural gas prices in the EU topped 50 euros per megawatt hour (MWh) on January 1 when the agreement ended. They have now eased back to around 46 euros/MWh but remain elevated year on year. Natural gas prices in January 2024 were around 30 euros/MWh.

The higher gas prices are reflected in day-ahead electricity prices across the key aluminum-producing countries of Western Europe.

Here are some day-ahead electricity prices in key aluminum producing countries:

You will recall that Western European suffered a host of primary aluminum curtailments in the aftermath of the Ukraine War starting and Russia suspending natural gas exports to Northern Europe. Western European production peaked at 3.9 million metric tons (mt) in 2019 and will be around 3 million mt during 2025. High gas prices and corresponding day-ahead power problems were the root cause.

This problem is demonstrated by Aluminium Dunkerque, the largest industrial electricity consumer in France. On January 3, 2025, the head of the company expressed his “need for long-term visibility on electricity prices that risk threatening the competitiveness of French industry.”

2025 is crucial to Dunkerque, who are worried about the end of the Arenh system on December 31, 2025. This system specific to France, allowed a cut-price tariff for Electricite de France (EDF) nuclear electricity for big consumers, i.e., 42 euros/MWh, on part of their consumption. If the Arenh system is not replaced with something similar going forward, Dunkerque must go into the open market and face the “buzzsaw” of competition from datacenters.

Data centers: Aluminum’s biggest competition for power

The aluminum industry worldwide has fought the problem of rapidly rising retail consumer demand for years. Regions that used to have ‘stranded power’ are shrinking. ‘Stranded power’ referred to situations where a large block of generation capacity existed with limited retail consumer demand to supply base load demand. This was the case in places like Brazil, Ghana and even Canada. Aluminum smelters represented the perfect solution to those assets. The smelter took a constant, large, base load of electricity 24/7 x 365 days a year. Fast forward to 2025 and those situations are rare. That generation capacity has more demand than it can generate, thanks to the population of many countries rising and retail power demand rising.

Now, the new threats are the data centers and AI. This demand seems insatiable and inelastic when it comes to the price tag of the power.

According to Goldman Sachs, demand from data centers will grow 160% by 2030. Data centers will consume 8% of all U.S. power consumption by 2030. Europe will experience similar growth, bolstered by unique EU decarbonization mandates pushing EV and broad electrification schemes. Electricity could represent 50% of the EU’s primary energy profile by 2030, compared to 20% in 2025.

What does this mean for aluminum power pricing: The Microsoft precedent

A frightening example of what data center trend could mean is the recent example of the Microsoft Constellation Energy deal in the U.S. The parties agreed to a 20-year deal on power to facilitate the restart of the Three Mile Island Unit 1 in Pennsylvania. Constellation will invest 1.6 billion USD to reopen the unit and market estimates are that Microsoft will pay 100 USD/MWh for this power.

This price makes primary aluminum production untenable in the U.S. That price is at least 2x what most people would say is the practical limit what a world class primary smelter can tolerate at current London Metal Exchange prices.

What can aluminum (or steel) companies do in this environment?

Development of Behind the Meter (BTM) generating capacity is being looked at. The Chinese did this successfully for a while in the past 2 decades, building in-situ coal-fired capacity before Beijing decided to force them out of the energy business under the guise of decarbonization. Companies such as Nucor are investing in small scale nuclear fusion reactor startups. Rio Tinto is doing due diligence in Finland, where substantial geothermal capacity is on the cusp of development. Both technologies offer the appeal of 24/7 base load. Wind/solar is still interesting as BTM solutions but would require other base load energy to compensate for the lack of battery storage today.

One thing is clear, baring a breakthrough in process technology that really slashes production costs or (and this is a really big lift), we see a quantum leap in aluminum prices, it is hard to see anyone building aluminum capacity in Europe or North America given the trends in power cost.

The powers blues are hard to shake, and a resolution is not yet in sight.