November 2012

Intalco BART SO2 Affordability 

Assessment

Final Report

Prepared for

Debbie Kline

U.S. Environmental Protection Agency

Office of Air Waste and Toxics

AWT-107

1200 Sixth Ave., Suite 900

Seattle, WA 98101

Prepared by

RTI International

3040 Cornwallis Road

Research Triangle Park, NC 27709

RTI Project Number 0212979.001.022
_________________________________

RTI International is a trade name of Research Triangle Institute.

RTI Project Number

0212979.001.022

Intalco BART SO2 Affordability 

Assessment

Final Report

November 2012

Prepared for

Debbie Kline

U.S. Environmental Protection Agency

Office of Air Waste and Toxics

AWT-107

1200 Sixth Ave., Suite 900

Seattle, WA 98101

Prepared by

RTI International

3040 Cornwallis Road

Research Triangle Park, NC 27709
iii

CONTENTS

Section Page

1 Introduction................................................................................................................... 1-1

2 Intalco Facility Economic Characteristics.................................................................... 2-1

3 Economic Methodology................................................................................................ 3-1

4 Sales Tests..................................................................................................................... 4-1

5 External Factors Influencing Benefits of Operating Intalco ......................................... 5-1

6 External Factors Influencing Costs of Operating Intalco ............................................. 6-1

6.1 Electricity Availability......................................................................................... 6-1

6.2 Electricity Price Forecasts.................................................................................... 6-2

6.3 Can Intalco Pass on Additional Costs to Consumers in the Form of Higher 

Prices? .................................................................................................................. 6-2

6.4 Ability to Finance ................................................................................................ 6-3

7 Conclusions................................................................................................................... 7-1

8 References..................................................................................................................... 8-1
iv

LIST OF TABLES

Number Page

4-1. Cost/Sales Ratios under Different Price and Utilization Scenarios................................. 4-1

6-1. Alcoa Credit Rating by Agency....................................................................................... 6-4
1-1

SECTION 1

INTRODUCTION

Alcoa’s Intalco primary aluminum smelter, located in Ferndale, Washington, is subject to 

controls of sulfur dioxide (SO2) emissions under the Clean Air Act’s Best Available Retrofit 

Technology (BART) provisions. The U.S. Environmental Protection Agency (EPA) has 

identified limestone slurry forced oxidation (LFSO) as a control technology for SO2 for this 

facility. In this report, we assess Alcoa’s claim that the cost of this technology is not affordable 

and that the Intalco facility would be subject to closure if this control technology is required. To 

date, the evidence we have collected and present in this report is consistent with this claim. Note 

that this report only considers the LFSO control technology. The affordability of other control 

options could be evaluated depending on availability of annualized cost estimates.

We evaluate the affordability of the LFSO technology using sales tests, by computing the 

ratio of annualized costs of the technology to sales revenue generated by the facility. The higher 

the cost/sales ratio, the larger the portion of total revenue represented by control costs. More 

details of this calculation are found in Section 3. Sales tests suggest that the cost/sales ratio range

is between 6% and 20% for the Intalco plant with installation and operation of LSFO, depending 

on market conditions and facility utilization. Although ratios are lower when all three potlines 

are operating, the ratios remain high. Current market conditions and uncertainty surrounding the 

availability of affordable electricity suggests only one to two potlines will operate in the next few 

years.

Alcoa is unlikely to be able to pass the control costs through to consumers. We base this 

conclusion on historical evidence that the firm has not been able to pass through similar cost 

increases (e.g. higher electricity costs). Alcoa’s current BBB- credit rating would make it 

difficult to finance the project, and the installation cost represents 8% of Alcoa’s current cash on 

hand. Without increases in the price of aluminum or a favorable electricity contract, the short run 

year-to-year utilization rates of the Intalco plant will remain uncertain over the next few years

and this will place pressure on the company to make more permanent capacity reduction 

decisions.
2-1

SECTION 2

INTALCO FACILITY ECONOMIC CHARACTERISTICS

This facility contains three potlines, two of which are currently active. Each potline has a 

capacity of 95,000 tonnes/year of aluminum, for a total capacity of 285,000 tonnes/year. The 

Intalco aluminum smelter uses electricity, labor, and other inputs to refine alumina, a raw input, 

into a final aluminum product. The cost of the electricity, labor, and other inputs needed to 

convert the alumina raw material into the final aluminum product is known as the conversion 

margin. In 2012, CRU Strategies Ltd. 2006 projects this margin to be $1,455/tonne. Aluminum 

production is electricity intensive, and electricity prices and availability will influence the 

profitability of individual potlines. Currently, Intalco purchases most of its power from 

Bonneville Power Administration (BPA), an operator of several hydroelectric facilities in the 

Pacific Northwest. Alcoa and BPA are currently negotiating a long-term contract that will allow 

Intalco to operate two potlines profitably over the next 5 years (Alcoa, 2011).

Alcoa is the world’s leading producer in primary and fabricated aluminum (Alcoa, 2011).

Currently, Intalco represents 6% of Alcoa’s global production and 18% in the United States. 

Should the plant operate at full capacity, Intalco’s share of total Alcoa production would increase 

by roughly 1%. If Intalco were to shut down production entirely, Alcoa would lose a significant 

portion of its aluminum production capacity within the United States. Alcoa generates 55% of its 

revenue in the Americas, 28% in Europe, 14% from Australia, and the remaining revenue from 

the Middle East.
3-1

SECTION 3

ECONOMIC METHODOLOGY

The primary measure we use to assess affordability is the sales test—the ratio of the 

stream of compliance costs to the stream of revenues over the control technology’s lifetime (30 

years). A comparison of costs to profits would be the best measure of affordability; however, 

facility profits are not often available. Sales data are more commonly used as a more readily 

available proxy for data on firm profits in estimating the economic burden of regulation (EPA, 

2006). The annualized cost per sales for a company or plant represents the price increase for the 

affected product needed for the company/plant to completely recover the annualized costs of the 

regulation. EPA has identified LFSO as a control option for SO2 emissions from this plant, and 

the estimated costs of this technology are $151 million for installation and annual costs of $15 

million. CRU estimates a conversion margin of $1,455/tonne in 2012 (CRU, 2006), resulting in 

revenues of approximately $276 million. We compared the present value of the costs and 

revenues using a 30-year time horizon under different aluminum price projections for aluminum 

and used a 7% discount rate for the present value calculation.

The sales ratios are computed as follows:

 ∑

 

( )

 

 

 

 ∑

 

( )

 

 

 

 

 

 

where T is the technology lifetime, r is the interest rate, CCt are capital costs in period t, OCt are 

operating costs in period t, Q is the quantity of output (in tonnes), and margin is the conversion 

margin in $/tonne.

We also supplemented the quantitative analysis of affordability with a qualitative 

discussion of other issues that independently affect the net benefits of operating the Intalco plant.

Overall market conditions for aluminum producers, electricity prices and availability, and 

Alcoa’s financing options for the Intalco project will interact and play an important role in 

closure decisions.
3-2
4-1

SECTION 4

SALES TESTS

To assess affordability, we have computed sales tests under several scenarios. These sales 

tests are the ratio of the present value of compliance costs to the present value of expected 

facility revenues and serve as a proxy estimate of the impact of profitability from applying the 

LFSO control technology. As discussed in Section 2, we consider a 30-year time horizon for this 

analysis and a 7% discount rate that is consistent with the annualized cost estimate for the control 

technology. To account for uncertainty, the scenarios consider different combinations of plant 

utilization as well as different aluminum price forecasts. The results of these tests are provided in 

Table 4-1.

Table 4-1. Cost/Sales Ratios under Different Price and Utilization Scenarios

Aluminum Price Forecast

LME CRU

Active Potlines

1 17% 20%

2 8% 10%

3 6% 7%

We used multiple aluminum price forecasts to scale the margin up or down to reflect

possible market conditions. The table reports results for forecasts taken from CRU 2006 and a 

forecast constructed from current London Metals Exchange (LME) futures contracts. We have 

also examined a World Bank commodity forecast, but the prices were similar enough to the LME 

forecast that the sales test results do not differ significantly.

We find cost/sales ratios of 6-20%, depending on the assumptions about utilization and 

aluminum prices used. These ratios are smallest when all three potlines are active. At current 

utilization, cost/sales ratios are 8-10%, depending on the price forecast used. The cost/sales ratio 

will change linearly with the costs assuming the sales estimate remains constant. For example, a 

reduction in the annualized compliance costs (including capital and operating costs) by half will 

yield a cost/sales ratio that is lower by half. In this analysis, we only consider full scrubbing, but 

the reduction in the cost/sales ratio when considering partial scrubbing would depend on the 

relative reductions in capital and operating cost of that technology. 
5-1

SECTION 5

EXTERNAL FACTORS INFLUENCING THE BENEFITS OF OPERATING INTALCO

Worldwide demand for aluminum has been projected to increase from 44 million 

tonnes/year in 2011 (USGS, 2012) to 65 million tonnes/year by 2020 (CRU, 2006), resulting in 

investments in and development of new capacity as well as increasing the viability of re-opening 

and/or maintaining higher cost existing production lines. The increase in demand is largely 

driven by urban investment in China. Plants with higher than average operating costs (like 

Intalco) may be better positioned to compete with a combination of higher electricity costs in 

other countries and demand increases, which will likely result in higher utilization of existing 

plants as well as investments in new smelting capacity, and possibly higher aluminum prices. 

However, the recent slowdown in the global economy has tempered demand projections. 

Additionally, Chinese producers have continued to add to inventories, causing prices to remain 

lower and Alcoa to reduce production at several marginal facilities (Elmquist, 2012). Despite 

these trends, Alcoa still projects demand to double by 2020 in their latest annual report (Alcoa, 

2011). All other things equal, an increase in demand would increase product prices and the

benefits of operating Intalco.
6-1

SECTION 6

EXTERNAL FACTORS INFLUENCING COSTS OF OPERATING INTALCO

6.1 Electricity Availability 

The ability of Intalco to operate multiple potlines profitably also depends on its ability to 

negotiate an electric power contract with BPA. Alcoa provides employment to the local area; 

however, their electricity demand competes with demand from consumer utilities. Alcoa operates 

a second plant in the area, in Wenatchee, that is older and higher cost. CRU 2006 suggests that if 

BPA cannot reliably supply enough power for continuous operation of two potlines at Intalco, 

operations may be expanded at Wenatchee rather than allowing only one line to operate at 

Intalco (CRU, 2006).

Intalco’s ability to run at full capacity depends on the availability of affordable 

electricity. Aluminum refining is an electricity-intensive process, with electricity typically 

representing around one-third of total production costs. Intalco uses 15.2 MWh of electricity per 

tonne of aluminum produced, about average energy efficiency for an aluminum smelting plant. 

The plant’s cost structure is determined by its energy use and the electricity price it faces. 

Electricity prices can determine the profitability of a production line, and it is expensive to bring 

lines in and out of production when prices change. Futures contracts are available for aluminum 

output on a 3- to 5-year basis, so ensuring similar length electricity contracts can help reduce 

uncertainty about future returns and profitability. If these contracts are available for electricity at 

fixed rates in sufficient quantities, all three of Intalco’s potlines can be run more efficiently than 

a single potline.

Intalco requires 483 MW of continuous power to operate at its full 285,000 tpy capacity. 

Each of the three potlines requires about 161 MW of electricity to produce 95,000 tpy. As of 

today, only two potlines are currently operating. According to the CRU report, average 

production costs per tonne would fall from $666 to $552 if all three lines were open. This 

amount of electricity may not be available, however, from BPA. The availability of affordable 

electricity can determine whether Intalco is able to run three lines profitably or only one line at 

higher cost per tonne. 

The price of electricity plays an important role in determining whether a potline remains 

idle. For instance, in 2004 to 2005, market prices averaged $50/MWh (5 cents/kWh). At this 

price, the Intalco facility would not be profitable at current utilization. For the facility to 

profitably run two potlines, electricity would need to be available at $41/MWh (4.1 cents/kWh) 

in sufficient quantities (CRU, 2006). Discussed below are forecasts for power costs.
6-2

6.2 Electricity Price Forecasts

The Energy Information Agency’s (EIA) Annual Energy Outlook (AEO) for 2012 

forecasts electricity prices in the Pacific region for industrial users to range between $20/MMBtu 

(6.8 cents/kWh) and $22/ MMBtu (7.5 cents/kWh) between 2009 and 2035. Prices in the 

Northwest Power Pool will range from 5.3 to 7.4 cents per kWh for end users. Conventional 

hydropower capacity and generation in the region are expected to remain nearly constant. As 

discussed above, at 5 cents/kWh, Intalco would be only marginally profitable when taking 

advantage of economies of scale and running all three lines, assuming that enough electricity is 

available at this price. Intalco’s profitability will, therefore, be greatly affected by Alcoa’s ability 

to negotiate long-term contracts at affordable prices with existing local hydropower facilities. 

According to Alcoa’s 2011 Annual Report, it has signed a contract with BPA ―providing 

for the sale of physical power at the Northwest Power Act mandated industrial firm power (IP) 

rate.‖ This agreement was set to expire in May 2012 but has been extended through September

as negotiations to potentially extend the agreement for 5 years continue. The 2012 rates 

published by BPA range from 2.5 cents/kWh to 4.5 cents/kWh depending on month and time of 

day (BPA, 2012). These rates are more favorable for Intalco than the market rates projected for 

the region, which is an intended outcome of the IP rate program.

6.3 Can Intalco Pass on Additional Costs to Consumers in the Form of Higher Prices?

Aluminum is a standard commodity traded on global markets, such as the London Metal 

Exchange (LME). This leaves little ability for producers to pass higher costs along to consumers 

of the final product. Futures contracts are available for up to 5 years, allowing producers to 

mitigate risk. The main inputs to aluminum refining are the raw input, alumina, and electricity. 

Alumina is also a widely traded, nondifferentiated commodity (CRU, 2006). Aluminum 

producers can negotiate long-term contracts with alumina suppliers but have little control over 

price. Electricity costs will then largely determine the relative profitability of aluminum 

producers. 

In general, firms will be able to pass on costs when the demand for their product is 

inelastic with respect to price compared to the price elasticity of supply. Without observing 

elasticities in the aluminum market, we note that the Intalco plant is not operating at full capacity 

at this time. If Alcoa could pass costs to consumers, their utilization rate for this plant would be 

higher. For instance, Alcoa runs only two potlines at Intalco with the electricity they have 

negotiated with BPA, rather than purchase additional electricity at higher market rates in order to 
6-3

operate at full capacity. This suggests that Alcoa cannot pass the higher electricity costs through 

to consumers in the form of higher prices. 

6.4 Ability to Finance

As of 2011, the credit ratings provided by agencies Standard & Poor, Moody’s, and Fitch 

reported Alcoa’s financial outlook to be stable. Although the outlook is an improvement over 

previous years, Alcoa’s ratings have remained the same since 2009. All three agencies rate 

Alcoa’s long-term debt at BBB- (equivalent to Baa3 on Moody’s scale) (Alcoa, 2007–2011). 

Standard & Poor defines the BBB- rating as ―considered the lowest investment grade by market 

participants.‖ (Standard & Poor’s, 2012). Alcoa’s short-term debt ratings for S&P, Moody’s, 

and Fitch were A-3, P-3, and F3, respectively, which is equivalent to the long-term BBB/BBB-

(Alcoa, 2007–2011).

Alcoa’s overall financial outlook was greatly affected by the global recession in 2008. 

Aluminum and alumina account for 75% of Alcoa’s revenue, and demand for Alcoa’s primary 

commodities dropped as LME-based aluminum prices plummeted 56% (Alcoa, 10-K Report, 

2009). Table 6-1 represents the 5-year change in Alcoa’s credit ratings and financial outlook.

This outlook may improve in the future if aluminum demand and prices increase as projected.

However, to our knowledge, no credit rating forecasts are available to the public.

Alternatively, Alcoa may consider financing the investment in control technology out of 

cash on hand or equity. According to the 2011 Annual Report, Alcoa had $1.9 billion in cash 

assets, up from $1.5 billion in 2010. The $151 million installation cost would represent a 

economically significant investment (7.8% of total cash on hand). To do this, the decision 

makers within Alcoa would compare the expected benefits of using the cash on hand to purchase 

pollution controls with the value of using that cash for their next best alternative (i.e. closing the 

plant and using the cash for other production investments that provide value to the firm).
6-4

Table 6-1. Alcoa Credit Rating by Agency

Year S&P Moody’s Fitch

Long Term

2011 BBB- Baa3 BBB2010 BBB- Baa3 BBB2009 BBB- Baa3 BBB2008 BBB+ Baa1 BBB

2007 BBB+ Baa1 AShort Term

2011 A-3 P-3 F3

2010 A-3 P-3 F3

2009 A-3 P-3 F3

2008 A-2 P-2 F2

2007 A-2 P-2 F2

Outlook

2011 Stable Stable Stable

2010 Negative Negative Negative

2009 Negative Stable Negative

2008 Negative Stable Negative

2007 Stable Stable Negative
7-1

SECTION 7

CONCLUSIONS

Even in the absence of regulation, the Intalco plant is currently operating at less than full 

capacity; operating the third potline is not economical given existing market prices for aluminum 

and electricity, limited availability of IP rate electricity, and potline production costs. BPA is 

only likely to provide enough power at IP rates to operate two potlines. Alcoa would then 

compare the benefits of operating the third, highest cost (CRU, 2006) potline with the costs of 

operating it at higher market electricity prices. This third line is not profitable at currently 

projected market electricity and aluminum prices. If Alcoa cannot negotiate for additional 

quantities of electricity from BPA at competitive prices, it will continue to operate at less than 

full capacity. 

If Intalco were to install the LSFO control technology, the cost of installing and operating 

the equipment will represent approximately 8-10% of the facility’s sales revenue over the 30 

year lifetime of the equipment at current utilization. The cost/sales ratios may be higher or lower 

depending on plant utilization and future aluminum prices, but are high in even the most

optimistic cases. 

Alcoa is unlikely to be able to pass these costs along to consumers, as shown by its 

historical inability to pass through higher electricity prices and operate its third potline. Alcoa’s 

BBB- credit rating may limit its ability to borrow resources to purchase pollution control 

equipment. Although cash reserves are available, the control technology expenditure would use 

8% of Alcoa’s cash reserves; Alcoa may decide those cash reserves could be better used in other 

ways that provide value to the firm. 

While we cannot definitively determine what business decisions Alcoa will make, should 

installation and operation of LSFO be required by EPA, it is our belief based on sound business 

practices that Alcoa would seriously consider other options rather than continue aluminum 

production at Intalco with LSFO (full or partial) installed and operated.
8-1

SECTION 8

REFERENCES

Alcoa, 2009. ―Turning Crisis Into Opportunity: 2009 Annual Report and Form 10-K.‖

Alcoa. 2010. ―Seizing Opportunity, Accelerating Value: 2010 Annual Report and Form 10-K.‖

Alcoa. 2011. ―Alcoa Won’t Wait: Taking Decisive Action in a Turbulent World: 2011 Annual 

Report.‖ 

Bonneville Power Administration. 2012. ―2012 Power Rates Schedules and General Rate 

Schedule Provisions (FY 2012-2013).‖ Available at 

http://www.bpa.gov/corporate/ratecase/2012/docs/FinalPowerRateSchedulesGRSPs_Upl

oad_01-17-2012.pdf. Accessed September 18, 2012.

CRU Strategies Ltd. 2006. ―Northwest Smelter Operating Outlook: A Report Prepared for 

Alcoa.‖ Available at 

http://www.bpa.gov/power/pl/regionaldialogue/alcoa_smelter_outlook.pdf. Accessed 

September 18, 2012.

Elmquist, S. 2012. ―Alcoa Sees Aluminum Cuts as Production Gains: Commodities.‖ Available 

at http://www.bloomberg.com/news/2012-04-09/alcoa-sees-aluminum-cuts-asproduction-gains-commodities.html. Accessed September 18, 2012.

Standard & Poor’s. 2012. ―Credit Ratings Definitions & FAQs.‖ Available at 

http://www.standardandpoors.com/ratings/definitions-and-faqs/en/us. Accessed 

September 20, 2012.

U.S. Environmental Protection Agency. 2006. EPA’s Action Development Process. Available at 

http://www.epa.gov/rfa/documents/Guidance-RegFlexAct.pdf, Accessed October 16, 

2012.