Meridian Energy reaches electricity contract deal with Tiwai Pt smelter

Meridian Energy has had to give up previously negotiated price increases and the government has chipped in with a $30 million ""incentive payment"" to keep the Tiwai Pt aluminium smelter open until at least January 2017.

Meridian chief executive Mark Binns announced the deal in a statement to the NZX, saying the renegotiated contract would "see a reduction in the current electricity charge from July 1, 2013, and allows for price increases should the New Zealand dollar value of aluminium rise above agreed levels".

Finance and State-Owned Enterprises Ministers Bill English and Tony Ryall described the new deal as ""returning the price of power paid by NZAS to around pre-2013 levels, in exchange for guarantees on the contract from or on behalf of New Zealand Aluminium Smelter's parent companies"".

The contract renewal looks likely to see a writedown in the value of Meridian ahead of government plans to sell up to 49 percent of the shares in its largest electricity company by September 30, which was independently valued at $6.5 billion in 2011.

The new contract will run to 2030, as did the contract it replaces, but appears to include a faster exit clause for the smelter, which is owned majority-owned by Pacific Aluminium, a subsidiary of the global metals giant Rio Tinto.

The new deal allows NZAS to terminate the contract after January 2017, with 15 months' notice, and will give the smelter greater flexibility about how much or little of its contracted load it has to take. It will now be able to reduce its contracted volume from from 572 Megawatts to 400 MW from 2015.

""Meridian is delighted that the parties could find a mutually acceptable position and trusts the new pricing framework and associated arrangements assist NZAS in establishing a competitive cost position for the future,"" Mr Binns says.

The smelter accounts for around 10 percent of the economic activity in Southland and produces more than $600 million in export receipts annually, but has struggled for profitability despite making a high-grade metal that attracts price premiums and pursuing productivity improvements and cost reductions.

A further cut in smelter maintenance staff is being negotiated at present.