Shares in South Island hydro power generators Contact and Meridian rallied after national grid operator Transpower said work would start on a network upgrade that will help mitigate the risk to their businesses if the Tiwai Point aluminium smelter closes.

Tiwai's majority owner, Rio Tinto, has the plant under review for possible closure. Its report on Tiwai - which uses 13 per cent of New Zealand's power supply - is due in the first quarter of next year.

Both Contact and Meridian have substantial hydro generating capacity in the south of the South Island.

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Transpower said speculation over the future of the Tiwai prompted it to restart construction of projects that will allow the increased transmission of power in the south of the South Island to points north.

The grid operator said it had entered into separate agreements with Contact and Meridian to commence further work on Clutha Upper Waitaki Lines Project (CUWLP).

Chief executive Alison Andrew welcomed the agreements with Contact and Meridian who, for $5 million each, will fund the immediate start of work on the link.

CUWLP consists of five projects approved by the Electricity Commission in 2010. Two critical projects were completed in 2016 before work ceased.

The project was to recommence once an increased northward transfer of South Island generation was expected to be required.

"Recent speculation and uncertainty regarding the future of the Tiwai aluminium smelter has led to a review of the transmission network and a decision by Transpower to recommence work on two of the remaining three projects," Transpower said in a statement.

Transpower will start tower strengthening works in the summer of 2019-2020, to enable duplexing of the Roxburgh - Livingstone circuits during the summers of 2020-2021 and 2021-2022.

Grant Swanepoel, head of institutional research at Craigs Investment Partners, said it was an "outstanding" move because the link was the biggest risk for Contact and Meridian, should Tiwai shut down.

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"What makes things hard for the country is that until you have this thing upgraded, you could potentially have 1000 to 1400 gigawatt hours of water spilling, which is just a waste.

"If Rio Tinto calls an exit in March or April, you would have missed a whole summer already, so if Transpower can get a summer done now, then you have two summers left for the upgrade."

"In effect, they will only be exposed to one summer of water being locked into the south of the South Island if Tiwai exits."

"For 10 million bucks Contact and Meridian have done something remarkable in terms of de-risking themselves for what could have been a two-year earnings debacle.

"Also it ups a negotiating point because Tiwai does not hold them over a barrel as much as it did beforehand."

By the close Meridian's share price had rallied by 19c to $4.82. Contact rallied as high as $7.26 before ending flat at $7.10.

Transpower said other works would also start, including the thermal upgrade of the Cromwell-Twizel circuits.

"This will expedite the completion of the CUWLP, allowing for the required northward transfer of generation, should Tiwai reduce or cease its operations and demand for electricity," it said.

"Once the remaining works are complete, it will alleviate existing constraints and significantly reduce the risk of renewable electricity not being dispatched, should Rio Tinto choose to close its Tiwai Point aluminium smelter in the future," Meridian chief executive Neal Barclay said.

If Rio Tinto decides to shut the plant, it needs to give a year's notice.

Contact Energy said the upgrade would be important if Rio Tinto's review results in curtailment or closure of the smelter.

"It's important for New Zealand and this sort of innovative thinking is what we need, especially with the uncertainty around the tenure of the Tiwai Point aluminium smelter," chief executive Dennis Barnes said.

"Our view remains that a disorderly exit of the smelter would be a poor outcome for New Zealand. Sudden closure will affect multiple stakeholders, including all generator retailers. It would also be detrimental to the Southland economy and the pursuit of our decarbonisation goals," he said.