Meridian Energy has resolved its negotiations with Rio Tinto subsidiary New Zealand Aluminium Smelters locking in the Tiwai smelter until at least January 2017 - with the help of a $30 million subsidy from the New Zealand government.
The deal, which has been a year in the making, will help clear the way for Meridian's $5 billion float on the stock exchange - expected to go ahead before the end of the year.
Resolution of the negotiations has been viewed as essential for the Government to get a good sales price for Meridian because the smelter is a key customer of Meridian.
It also makes up around 13 per cent of New Zealand electricity demand and closure of the plant would have impacted power prices across the board.
Meridian chief executive Mark Binns said in an announcement just released that it had reached a deal that was commercially acceptable to both parties and provided a greater level of certainty for Meridian.
The agreement includes Meridian cutting its electricity charges from July 1 2013 and allowing NZ Aluminium Smelters to reduce it contracted volume from 572 MW to 400 MW from 2015.
The smelter firm will also be able to terminate the contract completely from January 2017 provided it gives 15 months notice.
The deal does allow Meridian to increase its prices if the New Zealand dollar value of aluminium rises above agreed levels and the contract period remains until 2030.
The New Zealand government will chip in $30 million to secure the medium-term future of the smelter and provide greater certainty for the electricity market.
"Meridian is delighted that the parties could find a mutually acceptable position - and trusts that the new pricing framework and associated arrangements assist NZAS in establishing a competitive cost position for the future," Binns said.
Finance Minister Bill English and State owned enterprises Minister Tony Ryall have just issued a release saying the deal would "provide greater certainty for Tiwai Point smelter workers, the wider Southland region and the New Zealand electricity industry."
"While the contract remains until 2030, the revised agreement between Meridian and NZAS's shareholders demonstrates a commitment by NZAS to continue operating the smelter until at least January 2017," English said.
Ryall said the Government was not directly involved in the negotiations between Meridian and NZAS.
"Meridian negotiated a commercial agreement that included 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 NZAS's parent companies.
"NZAS shareholders approached the Government for further assistance to return the smelter to viability in current market conditions," said Ryall.
"The protracted negotiations caused a great amount of uncertainty in Southland and in the electricity market in general, prompting the Government to explore whether it could step in to support a positive outcome."
The Government funding will come from operating contingences for 2013/14. Ryall said the agreement will provide some relief for smelter workers and the Southland economy, and greater stability for the electricity market in New Zealand.