Meridian Energy's new contract with the country's biggest electricity consumer, New Zealand Aluminium Smelters, will provide the industry with certainty about future generation requirements, chief executive Keith Turner says.
Meridian and NZAS on Monday ended almost three years of negotiations by inking an agreement for the continuous supply of 572 megawatts of power to the Tiwai Point smelter near Bluff for the period 2013 to 2030.
The amount of power involved represents about 15 per cent of the country's entire output, and most of it will come from Meridian's giant Manapouri hydro scheme.
Turner, who helped negotiate the existing contract with the smelter's operators in 1993, said the "quite complex" discussions over a new deal began in 2005.
"We've had to negotiate in the context of an electricity market as distinct from the bilateral arrangement we had in 1993."
The deal would "provide certainty for every participant in the industry going forward that we've got to be prepared to build new capacity to meet growth in demand and we can't sit around hoping the smelter might go away to give some headroom".
Neither party would disclose the price NZAS will pay for its power under the new contract, but Tom Campbell, chief executive of NZAS's majority owner Rio Tinto Aluminium NZ, said it was "substantially more than we're paying now".
Turner said the price was "significantly higher" than the 4.7c per kilowatt hour reported yesterday.
He said the price was also linked to the price of aluminium, the price of electricity on the wholesale market and was also indexed to inflation.
"Clearly if the aluminium market is going strongly then we'll do quite nicely too, and if the cost of electricity rises then we're not lagging behind that too far." The linkage to the wholesale market meant carbon charges would find their way into the price NZAS paid for its power, despite Meridian being a "carbon zero certified supplier".
"That's an attribute which I think they will find very valuable internationally."
Aluminium smelting is energy intensive with electricity accounts for 40 per cent of the Bluff smelter's production costs and considerable greenhouse gasses are emitted during the process.
But Campbell said the Bluff operation was among the top 5 per cent of the world's 250 aluminium smelters in terms of low emissions.
Moreover, the certainty provided by the new contract allowed NZAS to commit to upgrading the smelter.
Campbell said it was planned to spend $150 million over the next five years on making the plant more energy efficient.
That was why the new contract was for a lower amount of power than the plant currently consumed.
Mining giant Rio Tinto owns almost 80 per cent of the smelter, with the balance being held by Sumitomo Chemical of Japan.
The smelter has 787 full-time workers, 133 contractors, is responsible for more than half of the total cargo volumes through Bluff's port and produces more than $1 billion worth of aluminium each year.
* Meridian Energy has struck a deal with New Zealand Aluminium Smelters' plant at Tiwai Point.
* The amount of power involved is equivalent to 15 per cent of the country's entire output.
* The agreement is for the continuous supply of 572 megawatts for the period 2013 to 2030.