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Forecasting Electricity Demand

Of The Region’s Aluminum Plants

Background

Direct Service Industries, or DSIs, refers to a group of industrial plants that have purchased 

electricity supplies directly from the Bonneville Power Administration. In the past, most of these 

plants obtained all of their electricity needs from Bonneville. Recently, many of these plants have 

diversified their electricity supplies, either by choice or because of reduced allocations from 

Bonneville. This discussion generally addresses the total electricity requirements of these industrial 

consumers regardless of source.

“DSIs” is often used interchangeably with aluminum smelters because aluminum smelters account 

for the vast bulk of this categories’ electricity consumption. If all of the region’s ten aluminum 

smelters were operating at capacity, they could consume about 3,150 average megawatts of 

electricity. Table 1 shows the smelters, their locations, their aluminum production capacity and the 

amount of electricity they are capable of consuming at full operation. 

Table 1: Pacific Northwest Aluminum Plants

Owner Plants County Capacity Electricity

Demand

(M tons/yr.) (MW)

Alcoa Bellingham WA Whatcom 282 457

Alcoa Troutdale OR Multnomah 130 279

Alcoa Wenatchee WA Chelan 229 428

Glencore Vacouver WA Clark 119 228

Glencore Columbia Falls MT Flathead 163 324

Longview Aluminum Longview WA Cowlitz 210 417

Kaiser Mead WA Spokane 209 390

Kaiser Tacoma WA Pierce 71 140

Golden Northwest Goldendale WA Klickitat 166 317

Golden Northwest The Dalles OR Wasco 84 167

Total 1663 3145

Source: Metal Strategies, LLC, The Survivability of the Pacific Northwest Aluminum 

Smelters, Redacted Version, February, 2001.

This amount of electricity is significant in the Pacific Northwest power system. The amount of 

power used by these aluminum plants in full operation could account for 15 percent of total regional 

electricity use. When operating, the electricity use of these plants tends to be very uniform over the 

hours of the day and night. However, the aluminum plants have faced difficulty operating 

consistently over the past 20 years because of increased electricity prices and aluminum market 

volatility.

Aluminum smelting in the region started during the early 1940s to help build up for the war effort 

and to provide a market for the hydroelectric power production in the region. Smelting capacity was 
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expanded throughout the 1960s and 1970s. Since then no new plants have been added, although 

improvements to the existing plants have resulted in some increases in smelting capacity. The 10 

aluminum plants in the Pacific Northwest account for a significant share of the U.S., and even the 

world, aluminum smelting capacity. The region’s smelters account for 40 percent of the U.S. 

aluminum smelting capacity and about 6 to 7 percent of the world capacity. Their presence in the 

region is largely due to the historical availability of low priced electricity from the Federal Columbia 

River Power System. Aluminum smelting is extremely electricity intensive. Electricity accounts for 

about 20 percent of the total cost of producing aluminum in the region’s smelters and is therefore a 

critical factor in their ability to compete in world aluminum markets.

Deteriorating Position of Northwest Smelters

The position of the region’s aluminum smelters in the world market has been deteriorating since 

1980. This is due to a combination of increased electricity prices, declining aluminum prices and the 

addition of more efficient aluminum smelting capacity throughout the world. 

Around 1980 the cost and availability of electricity supplies to the Pacific Northwest aluminum 

plants began to change dramatically. At the time, Bonneville supplied all of the smelters’ electricity 

needs at very competitive prices. However, between 1979 and 1984 Bonneville’s electricity prices 

increased nearly 500 percent. This illustrated in Figure 1, which shows Bonneville preference utility 

rates for electricity since 1940. The aluminum plants, along with other electricity consumers in the 

region, suddenly found themselves in a much less advantageous position with regard to electricity 

costs.

Figure 1: Bonneville Power Administration Preference Rates

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As the region’s aging smelters have struggled to stay competitive in a world aluminum market, the 

conditions of their electricity service have also been changing. During the 1970s, the region’s 

electricity demand began to outgrow the capability of the hydroelectric system. The fact that 

aluminum smelters had no preference access to the Federal hydroelectric energy meant that their 

electricity supplies were threatened. The Pacific Northwest Electric Power Planning and 

Conservation Act of 1980 (The Act) extended the DSI access to Federal power in exchange for the 
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DSIs covering, for a time, the cost of the residential and small farm exchange for investor-owned 

utility customers. In addition, the DSIs were to provide a portion of Bonneville’s reserve 

requirements through interruptibility provisions in their electricity service. 

Over the years since the Act, the DSI service conditions and rates have changed in response to 

changing conditions. Interruptibility provisions have changed, DSIs gave up their long-term 

contracts in exchange for increased access to the wholesale power market and for a while DSI 

electricity rates were related to world aluminum prices in an attempt to help smelters operate more 

continuously as some had become swing operations. Until 1996, aluminum plants in the region 

bought all of their electricity from Bonneville, with the exception of one plant that acquire part of its 

electricity supply from a Mid-Columbia dam. In the 1996 rate case, Bonneville reduced the amount 

of energy allocated to the DSIs to about 60 percent of their demand. In the 2001 rate case, it was 

further reduced to about 45 percent of their potential demand, or about 1,425 megawatts. The 

aluminum smelters are now required to obtain over half of their electricity requirements in the 

wholesale electricity market or from other non-Bonneville sources.

 Most new world aluminum smelting capacity has been added outside of the traditional western 

economies, often in countries where social agendas may be driving the capacity decisions as much as 

aluminum market fundamentals. The disintegration of the former Soviet Union and the 

liberalization of trade in China have had a significant effect on the development of a world 

aluminum market. The addition of more capacity over time and improving aluminum smelting 

technology is reflected in declining aluminum price trends. Figure 2 shows aluminum prices from 

1960 through 2001. Trends calculated over different time periods all show a consistent downward 

trend. On average, prices decreased by about 0.8 percent annually from 1960 to 2001. The 

downward trend is particularly pronounced from 1980 to the present. 

Figure 2: Aluminum Price Trends

Aluminum Association 2002

Long run price trends

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196019611962196319641965196619671968196919701971197219731974197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001

LME 3 Months, 2001$

Trend (1960-2001) -exp

Trend (1981-2001) -exp

trend 1990-2001

 Source: CRU International Ltd., Presentation to Aluminum Association 2002.
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The steady improvement in aluminum smelting technologies over time has meant that the region’s 

smelters have tended to grow relatively less competitive in terms of their operating costs as new 

more efficient capacity has been added throughout the world. By investing in improved technology 

some of the region’s smelters have been able to partially offset the effects of these declining cost 

trends. In addition, the worsening position of the region’s aluminum smelters relative to other 

aluminum plants is partly offset by the decreasing capital costs and debt as older plants and 

equipment depreciate. Nevertheless, a growing share of the regional smelting capacity has become 

swing capacity. That is, it can operate profitably during times of strong aluminum prices, but tends 

to be shut down during periods of weak aluminum markets or high electricity prices. 

Caught in the pinchers of decreasing aluminum prices and increasing electricity price trends, many 

of the region’s smelters have reached a critical point. Events since the spring of 2000, in both the 

electricity and aluminum markets, have had a dramatic effect of the region’s aluminum plants. By 

mid-summer of 2001, all of the region’s aluminum smelters had been shut down for normal 

production, either because of high electricity prices and poor aluminum market conditions or 

because Bonneville bought back the electricity to help meet an expected shortfall of electricity 

supplies. The elimination of aluminum electricity load played a key role in avoiding electricity 

shortages in the summer of 2001 and the following winter. Payments from Bonneville have helped 

ease the financial strain on aluminum companies and their employees of a long shut down. 

Electricity prices in the wholesale market have returned to normal ranges for spot electricity, but 

Bonneville’s rates are still higher as a result of the recent electricity crisis. And although wholesale 

electricity prices have returned to more normal levels, aluminum prices have remained depressed. 

As a result, only a small fraction of the region’s aluminum capacity has resumed operation. There 

does not appear to be much optimism for a quick recovery of aluminum prices. Some analysts 

expect the Global aluminum market to remain in surplus until 2005.

With aluminum market recovery uncertain, and electricity prices hovering near a critical point for 

aluminum plant profitability, future aluminum electricity use is highly uncertain. However, it is 

clear that the long-term outlook has deteriorated significantly since the Council’s last power plan. 

The ability of aluminum plants to operate may depend critically on the level of electricity prices. 

With the medium natural gas price assumptions, the Council currently is seeing draft spot market 

electricity price forecasts moving up to the $35 to $40 per megawatt-hour range (see Figure 3). Few 

smelters would be able to operate with electricity prices at that level. It is unclear how much of the 

aluminum load Bonneville might serve in the future, but Bonneville’s future electricity prices may 

also be higher than most aluminum plants can afford except when aluminum prices are especially 

high.
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Figure 3: Draft Medium Case Wholesale Price Forecasts for Mid-Columbia Electricity

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$2000 Per Megawatt-Hour

Aluminum Electricity Demand

Background

 In all previous power plans, the Council has assumed a range of DSI demands. The high DSI 

demand assumption was paired with the high economic assumptions and demand forecast. This 

pairing of aluminum and other forecasting assumptions was based on the theory that aluminum 

prices would be the key variable and that aluminum prices were likely to be positively correlated 

with rates of economic growth. Figure 4 shows the aluminum demand assumptions included in each 

forecast case for the Council’s 4th power plan. Only in the low forecast was there a large reduction 

of aluminum demand. It was assumed that Bonneville or other relatively affordable power would be 

available to the aluminum plants. Thus most of the plants were assumed to remain competitive, or at 

least operate as swing plants, in the medium case.

The expectation of higher electricity prices and rapid expansion of aluminum smelting capacity in 

China have changed the outlook for the region’s smelters substantially. Aluminum prices are still 

important, but the cost of electricity has become a critical element for Northwest smelters. Since 

electricity prices are related to natural gas prices in the long-term, and high natural gas prices are 

associated with the high economic growth case, it may now make more sense to assume lower 

aluminum demand in the higher economic growth cases. However, if high aluminum prices are still 

associated with higher economic growth, then it is possible that the high economic growth cases will 

favor aluminum plant operation given that electricity prices are not too high. In short, it is not clear 

how aluminum demand will be related to the economic growth conditions.
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Figure 4: Aluminum Electricity Demand Assumptions

 Compared to the Council’s 4th Power Plan

917

2103

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2974

3065

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The proposed solution to this dilemma is to forecast aluminum electricity demand separately from 

other demands for electricity. Since aluminum demands are very significant in the future electricity 

demands of the region, they are an important source of uncertainty that should be modeled and 

addressed directly in the Council’s resource planning process. Therefore, the Council proposes to 

model the aluminum industry demands explicitly in its portfolio model. To that end, a simple model 

of aluminum electricity demand was developed.

A Simple Model of Aluminum Electricity Demand

A simple model of Pacific Northwest aluminum plants was developed to relate the likelihood of 

existing aluminum plants operating to different levels of aluminum prices and electricity prices. 

Given an aluminum price, the model estimates what each aluminum plant in the northwest could 

afford to pay for electricity given its other costs. Then for a given electricity price, the electricity 

demand of the plants that can afford to operate make up the aluminum electricity demand in the 

region. Basic data for the model came from the July 2000 study cited as the source for Table 1 and 

advice from the Council’s Demand Forecasting Advisory Committee.

Figure 5 illustrates the relative competitiveness of nine of the Northwest aluminum plants as 

represented in the model. It is assumed that the 10th smelter in Troutdale Oregon will not operate in 

the future. Figure 5 shows the amount that each plant could afford to pay for electricity given an 

assumed aluminum price of $1500 per tonne (about 67 cents a pound), which is about the average 

aluminum price over the past several years.
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Figure 5: Affordable Electricity Price Limits of PNW Aluminum Smelters

At $1500 Per Tonne Aluminum Prices

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Smelter 1Smelter 2Smelter 3Smelter 4Smelter 5Smelter 6Smelter 7Smelter 8Smelter 9

$/Mwh

One aluminum plant in the region is very efficient and likely to operate under a wide range of 

electricity and aluminum prices. Three other smelters could pay around $30 a megawatt-hour for 

electricity if aluminum prices were $1500 a tonne, which is higher than aluminum prices have been 

in several months. The other smelters could only afford to operate at electricity prices less than $25 

per megawatt-hour.

There are some important limitations to this simple model. It is intended to represent whether 

aluminum plants would be willing to operate for an intermediate time period. The costs used in the 

model include an amount above the pure short-term operating costs to allow sufficient ongoing 

capital investments to maintain the plants capability to produce. But the costs do not include 

sufficient returns on capital to justify the long-term operation of the plant.

Thus, the model does not address the question of when a plant would be likely to be permanently 

closed. In order to remain in operation, a plant would have to be able to recover sufficient funds 

during periods of high aluminum prices and low electricity prices to recover an adequate return on 

investment. However, as plants depreciate, or as they are sold at discounted prices, capital recovery 

becomes a smaller part of the decision, and strategic positioning in global markets may enable some 

plants to remain available for operation when conditions are attractive enough. The implicit 

assumption in the model is that, if a plant can operate for the intermediate term under expected 

electricity and aluminum prices, then it will be able to recover sufficient returns during favorable 

cyclical market conditions to survive in the long term.

The model does not address the dynamics of temporary closures of aluminum plants or their return 

to operation. The dynamics of aluminum smelter operations are important considerations for 

assessing their potential value as demand-side reserves. The potential demand-side reserves that 

might be provided by aluminum plants include; very short-duration interruptions for system stability 
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purposes, interruptions of up to four hours during extreme peak electricity price spikes, and longterm shut downs of several months to a year or more to address periods of poor hydroelectric 

conditions or other periods of significant generation capacity shortages. These issues will be 

addressed outside of the simple aluminum model described here.

Model Results

By varying the aluminum and electricity prices over a range of possible values, the model can be 

used to simulate expected aluminum electricity demands under varying conditions. Aluminum 

prices were varied between $1050 and $2250 per tonne in $100 increments. For each aluminum 

price, electricity prices were varied between $20 and $40 per megawatt-hour. This generated 91 

different estimates of aluminum plant electricity demand under the varying aluminum and electricity 

combinations. Figure 6 shows the results of this exercise. 

A couple of bracketing points are evident. First, at aluminum prices below $1050 per tonne, none of 

the Northwest aluminum plants can operate profitably at any electricity price between $20 and $40 

per megawatt-hour. Aluminum prices have seldom been below $1200 a ton (in 2002 prices) in the 

past 20 years. On the other extreme, all nine smelters could operate at aluminum prices above $1900 

per tonne for electricity prices up to $40 per megawatt-hour.

If past trends in aluminum prices continue, aluminum prices might decline at about 1 percent a year. 

That would mean that average aluminum prices might average less than $1500 over the next 20 

years. Of course there will be considerable volatility around that trend. At this point in the 

Council’s planning process, we do not have a range of future electricity prices that match the range 

of natural gas prices we are assuming for our analysis. Preliminary analysis with the medium natural 

gas price forecast shows that wholesale electricity prices (see Figure 3) could be between $35 and 

$40 per megawatt-hour over the long term. In those ranges of electricity and aluminum prices, 

aluminum electricity demands may be less than 880 megawatts.

Figure 6: Spectrum of Potential Aluminum Smelter Electricity Demands

Viable Smelter Loads at Various

 Aluminum and Electricity Prices

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The results in Figure 6 include an assumption that one smelter will continue to have access to low 

cost mid-Columbia dam power for part of its electricity demand. Access to some lower cost 

allocations of Bonneville electricity and further investments in smelter efficiency may improve the 

ability of some smelters to stay in operation. The simple aluminum model was used to see what 

effect an offer of 100 megawatts of Bonneville electricity priced at $28 per megawatt-hour would 

have on smelter operations. Assuming an availability of electricity from Bonneville changes the 

model results for the 91 combinations of aluminum and electricity prices. In order to more easily 

illustrate these effects, an expected value of electricity demand was calculated for each assumed 

electricity market price. This was done by weighting electricity demand simulated at different 

aluminum prices by the percent of days in the last ten years that actual aluminum prices fell into that 

range.

Using just market electricity prices and the one mid-Columbia supply contract, expected smelter 

electricity demands ranged from 1,000 megawatts at $40 per megawatt-hour electricity prices to 

2,468 megawatts at $20 electricity prices. This is shown in the left-most bar for each electricity 

price group in Figure 7. Another way of characterizing an individual bar in Figure 7 is that it is a 

weighted average of the electric ity use in a individual line from Figure 6.

If Bonneville offered 100 megawatts of power priced at $28 per megawatt-hour to each smelter, it is 

estimated to have a relatively small effect on expected aluminum operations (See the middle bars in 

Figure 7). At market prices below $28 the expected electricity demand of aluminum smelters is 

actually reduced by the higher priced Bonneville power. If market power prices were $40, the 

availability of Bonneville supplied power at $28 per megawatt-hour is estimated to increase the 

expected value of aluminum smelters’ electricity demand of from 1,013 to 1,187 megawatts, a 

relatively small effect. If Bonneville could offer power at $20 (illustrated by the right-most bars in 

Figure 7) the estimated increase in electricity demand at the $40 market price would be 357 

megawatts. That increase is roughly the electricity demand of one additional smelter.

Figure 7: Expected Aluminum Plant Electricity Demand

(Effect of Bonneville Electricity Supplies)

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Market Electricity Price ($/MWh)

Expected demand (MW)

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The analysis above addresses the question of whether the existing smelters in the region are likely to 

operate under different aluminum and electricity market conditions. It does not address the 

likelihood of permanent closure. Historically, older and less efficient smelters are not frequently 

closed permanently. Their depreciated capital costs allow them to operate when electricity and 

aluminum prices are attractive. They may provide an inexpensive option for aluminum supplies in 

tight aluminum markets. In addition, permanent closure may involve expensive site clean up.

The result is that the region might retain a large, but uncertain, electricity demand. If such a demand 

is required to be served when they need electricity, it can be very costly for their electricity supplier 

to maintain generating capacity to serve the potential demand. If serving the demand is optional, 

however, through either interruption agreements or the smelters purchasing available power in the 

market, it can have attractive features that may reduce electricity price volatility. The future of 

aluminum operations in the region may depend on the ability of aluminum plants to find, and get 

value for, their potential for complementing the power system in a competitive wholesale market.

Aluminum Demand in the Portfolio Analysis

In developing the 5th power plan, the Council proposes is to model aluminum plants as uncertain 

loads that depend on aluminum prices and electricity prices. This will be done in the Council’s 

portfolio analysis model. As it simulates alternative futures, the portfolio model randomly selects 

different electricity prices and aluminum prices. These conditions will be used to estimate the 

aluminum plants’ demand for electricity.

The relationship between the aluminum plants’ electricity demand and electricity and aluminum 

prices is derived from the results of aluminum model simulations that were illustrated in Figure 6. 

The 91 aluminum model simulations were used as the basis for an equation relating aluminum 

smelter electricity demand to aluminum and electricity prices. Simulated aluminum electricity 

demands were regressed against the corresponding values of aluminum and electricity prices. The 

resulting equation is shown below.

De = -1752.73 + 2.875 Pa - 40.507 Pe

Where: De is regional aluminum smelter demand for electricity

Pa is the market price of aluminum in 2002$ per tonne

Pe is the market price of electricity in $2002 per megawatt-hour

By including this equation in the electricity portfolio model, strategies that address the risk posed by 

uncertain aluminum demand can be addressed directly in the power plan.

Mid-Term Aluminum Demand Assumption

The Council is required to include in its power plans a 20-year forecast of demand. The Council is 

also increasing its focus on the nearer term for purposes of reliability and adequacy analysis. For 

these purposes, a specific forecast of total electricity demand is useful. And for that a specific 

assumption about DSI demands is needed. This section presents such a best guess forecast, but it is 

important to keep the extreme uncertainty regarding this assumption in mind when evaluating 

reliability, adequacy, or long-term resource strategies.
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Figure 8 shows the assumed mid-term pattern of aluminum electricity demand through 2005 

compared to the Council’s assumption made in the summer of 2001. In the current forecast, 

electricity demand is assumed to recover to about 1,500 megawatts by 2005. This would be 

consistent with the 4 best aluminum smelters in the region operating. If the aluminum model is 

reasonably accurate, and if electricity can be acquired for $30 to $35 per megawatt-hour, this implies 

that aluminum prices would have to recover to $1,550 to $1,650 per tonne by 2005. That is in the 

range of average aluminum prices during the past 10 years, but given recent trends and events in 

world aluminum markets, should be viewed as reasonably optimistic assumption for the region’s 

aluminum plants.

In contrast, the summer of 2001 forecast assumed that there would be a reasonably rapid economic 

recovery, with a concurrent recovery in aluminum prices and a significant lessening of electricity 

prices as the effects of the electricity crisis of 2000-2001 were dissipated. Under these assumptions, 

all but two of the region’s aluminum plants were assumed to be able to operate by 2005. 

The forecast also is significantly more pessimistic about aluminum plants’ ability to operate than the 

Council’s 4th power plan. This is consistent with a prolonged period of low aluminum prices during 

2001 through 2004, with higher forecasts of electricity prices. It also is more pessimistic about the 

ability of some smelters to survive a prolonged period of high electricity prices, poor aluminum 

prices, and uncertainty about electricity markets and contracts. For the long-term medium forecast, 

the 2005 forecast level is extended to the end of the forecast in 2025. Although the loads after 2005 

are shown as constant, we would actually expect them to be quite volatile around that trend. In 

addition, since aluminum prices are expected to trend downward over time, and natural gas prices 

upward, it may become increasingly difficult for regional smelters to operate as the future unfolds.

Figure 9 shows the medium total DSI demand assumptions extended to 2025 compared to the 

forecasts in the Council’s 4th power plan. In this figure non-aluminum DSI loads of 60 average 

megawatts have been added to the aluminum forecast. Again, this forecast does not imply that 

Bonneville will serve all of this DSI demand; it has been labeled DSI for convenience. The medium 

case is 1,260 average megawatts below the forecast in the Council’s last power plan.
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Figure 8: Medium Case Assumptions for Aluminum Demand Recovery to 2005

(Comparison to Summer 2001 Assumptions)

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Figure 9: Demand Assumptions for DSI Industries Compared to 4th Plan Assumptions

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History

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