THE state government and Alcoa have stitched up a secret deal to trigger more federal compensation to pay for Victoria's increased costs under the carbon tax, generated by subsidising the aluminum giant's electricity use.

The deal could also deliver tens of of millions of dollars in extra government benefits to Alcoa at the expense of Victorian taxpayers.

Details of the deal are shrouded in secrecy, with the two parties signing a confidentiality agreement. The value of financial dealings over electricity between the government and Alcoa have long been undisclosed.

Alcoa spokeswoman Nichola Holgate said a ''mutually beneficial agreement'' had been reached earlier this year, but would not provide details, citing confidentiality.

The deal follows a federal-state $44 million bailout of Alcoa's Port Henry smelter at Geelong earlier this year. Alcoa has also received just under 6 million free carbon permits as federal compensation for the carbon tax.

Alcoa's two smelters in Victoria - at Point Henry and Portland - employ almost 1200 people. The industry uses around a fifth of the state's electricity.

Under arrangements signed in the 1980s, the State Electricity Commission - a corporate shell used by the state government to manage contracts supplying electricity to Alcoa - subsidises power for the two smelters based on the global aluminum price.

As the carbon tax pushes up power prices, the state government's bill under the Alcoa power arrangements increases, potentially by hundreds of millions of dollars, but it is not eligible for federal compensation.

Alcoa, however, is. It is understood negotiations on the deal centred on moving some of the electricity onto Alcoa's books, triggering federal carbon compensation because it is deemed an ''emissions-intensive, trade-exposed'' company.

The deal means the state government will cover some of the higher electricity costs on the subsidised Alcoa power contracts, which end in 2014 and 2016.

While much of the extra compensation would be passed back to the state to cover its increased costs, during the negotiations Alcoa made it clear it wanted to retain some of the compensation.

A senior source told Fairfax Media in June that Alcoa was arguing it should be allowed to keep a proportion of the extra federal compensation because the carbon price would reduce the working lives of its smelters.

''There is a negotiation about how much we can pass through to Alcoa. That is significant,'' the source said at the time. ''They only want to give 80 to 90 per cent back.''

Last week, neither party would say what compensation Alcoa had been allowed to retain, if any.

Treasurer Kim Wells refused to say how much the agreement would cost taxpayers.

His spokeswoman, Stephanie Ryan, said the commission was party to an agreement that may have exposed the Victorian taxpayers to a significant carbon tax liability. ''The state negotiated amendments to the electricity supply agreements in relation to the Portland and Point Henry smelters in July. The government is limited in what it can say given the commercial nature of these arrangements,'' she said.