On Thursday, the federal and New South Wales governments jointly announced a deal to bail out the Tomago aluminium smelter, at a cost of A$2.5 billion over ten years.The smelter is Australia’s largest single user of electricity. Its majority owner, mining giant Rio Tinto, had been warning higher electricity costs may force it to close.Since coming to power, the federal Labor government has stepped in to save a number of struggling industrial facilities around the country – to the collective tune of billions of dollars. However, this new deal to future-proof the Tomago smelter is different to those previous bailouts. It’s the result of more than a year of negotiations, with a return to the taxpayer, the workforce, the shareholders and the planet.Avoiding leaving a ‘smelter-sized hole’Tomago is Australia’s largest aluminium smelter. It contributes $2.2 billion to the Australian economy each year, with exports of around $3 billion. The facility employs more than 1,000 full-time workers directly, and supports many more in local supply chains. Tomago is not only crucial to the Hunter region’s manufacturing base. It is also an important part of the national energy transition. Aluminium is vital to the jobs and industries of the future. As Industry and Innovation Minister Tim Ayres said in May: The full benefits of new industrial firms and technologies are less likely to materialise if there are smelter-sized holes in regional industry. Australia’s biggest power billHowever, the fundamental challenge for Tomago is its power price, which is around 40% of its total costs. This is the largest electricity load in Australia, representing 12% of NSW’s total electricity demand. Tomago has announced it wants to shift to 50% renewable energy by 2030 and 100% by 2035. This makes good sense. Solar and wind are now recognised to be the cheapest form of new power generation. However, with its electricity supply contract expiring in 2028, Tomago needs to secure power, either coal-fired or renewable, at a commercially viable cost. The prospect of closure loomed with a massive loss of jobs and industrial capacity. After bailouts of smaller facilities around the country, the federal government was reluctant to directly subsidise a global company of the scale and profitability of Rio Tinto. But nor could it allow Tomago to close.A different kind of bailoutThe government was in a bind, until an ingenious solution emerged.This solution is based on the government’s ability to create so-called “specialist investment vehicles” (SIVs). These provide equity or loans across a range of co-investment opportunities – including clean energy – and are governed by independent boards. What if the government were to use one of these specialist investment vehicles to provide electricity to Tomago at a price that enabled it to remain competitive in global markets? This is the approach the government has chosen, and it offers a further benefit. The investment vehicle can also provide concessional loans to investors prepared to build the renewable energy capacity that would supply the electricity. Government-backed finance lowers the cost of capital for new projects, guaranteeing Tomago a stable, long-term power price. Snowy Hydro is the entity selected to perform this role. Its business model is already geared up to provide renewable energy and to optimise its use through pumped hydro. And it is well positioned to bring more renewables into the grid by de-risking investment.Crucially, for every 1% reduction in the cost of capital, end-user energy costs are reduced by around 10%.Reviving a 1980s solutionThis is not a new idea. It’s a proven financial structure, used by Neville Wran’s NSW government 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. However, there will inevitably be a gap at the initial stages between the market price for electricity and the price negotiated as part of a “power purchase agreement” with the company. And this is where the federal and NSW state governments have committed to underwrite the difference. They will provide $250 million a year from 2028 over the following ten years in a time-limited arrangement, with the prospect of the governments recouping their investment through a combination of aluminium revenues and the contribution of Tomago to stabilising the grid. In other words, there is every chance this arrangement will be cost-neutral over the decade, while at the same time turbocharging the energy transition and economic diversification of Australia’s most prominent industrial region.A blueprint for other interventionsToo often in the past, governments have leaned on economic orthodoxy to justify inaction, or at most to confine themselves to addressing market failure. The consequence has been a hollowing out of Australia’s manufacturing capability, declining business research and development, and stalled productivity growth.The approach taken to save Tomago aluminium smelter is an example of how governments can also shape markets. Once underway, it’s an approach that can be replicated and built upon in other places, such as Whyalla. Importantly, it provides confidence that Australia can address the task of diversifying its narrow, resources-heavy trade and industrial structure and lay the foundations for a high-productivity, high-wage economy.Emeritus Professor Roy Green AM is Chair of the Advanced Robotics for Manufacturing (ARM) Hub and on the boards of CSIRO, Industry Capability Network (ICN) and the Australasian Space Innovation Institute (ASII). He was recently funded to undertake a review for the Australian Government of the Energy Industry Jobs Plan and is current engaged (with Dr John H Howard) in a report on AI and Productivity, funded by Google.org Foundation.