New Zealand's largest electricity producer and its largest user have struck a deal to reduce consumption, as hydro lakes run low.
On Wednesday morning Meridian Energy announced it had struck a swap deal with New Zealand Aluminium Smelters, to reduce the Tiwai Point aluminium smelter's consumption by up to 30.5 megawatts per hour, from now until the end of May.
Meridian, which supplies the smelter with electricity from the nearby Manapouri Power Station, has the ability to require it to shed load when water levels reach a certain point, but the deal announced today was described as voluntary and separate to other agreements.
"The swap operates to compensate NZAS for any load it voluntarily decides to reduce," Meridian said in a statement to the NZX.
"The swap does not replace Meridian's ability to call a smelter demand response if the dry year trigger level in the main Meridian / NZAS electricity contract is reached. Meridian and NZAS have also made a non-binding agreement to work together to ensure that any load reduction voluntarily made by NZAS comes off the total amount of load that NZAS is required to drop should Meridian need to trigger the Smelter Demand Response provisions in the contract as a result of ongoing dry conditions."
Currently lake levels in New Zealand's hydroelectricity systems, which provides the bulk of the country's electricity are well below average, reaching a point where the Government takes early steps to prepare for a possible conservation campaign in the event that the situation worsens.
When levels reach a certain point, Meridian can trigger a clause in its contract with would require the smelter to cut consumption by 80 megawatt
In a statement, Rio Tinto, which owns about 80 per cent of the smelter, confirmed the agreement and said it had already reduced its consumption marginally.
"We have already reduced load by around 6 MW by not replacing pots which have been taken out of circulation during the normal cycle on the potlines, and we have also during this dry period, not restarted the 50MW Line 4, which was shut down during the level 4 lockdown last year."
The smelter uses approximately 14 per cent of New Zealand's electricity production, around 570 megawatts, meaning the measures it has taken so far have reduced its consumption by just over 1 per cent.
While Rio Tinto threatened to close in August this year if it did not get major cuts in its electricity and transmission costs, analysts say a sharp recovery in aluminium prices means the smelter is likely to be highly profitable at the moment.
Enerlytica analyst john Kidd said the fact that the smelter had agreed to do so was positive.
"That said, I think they really had no choice but to step up," Kidd said, with hydro conditions in the lower South Island where the smelter draws its electiricity " weak and the market is stressed as winter nears."
With spot prices averaging more than $250 a megawatt hour, the fact that the smelter was paying around $35 was "a source of deep frustration" for electricity users exposed to the spot market, but it was the reality of the deal Rio Tinto struck with Meridian back in January.
Details of the deal have not been released but Kidd said it was unlikely that NZAS would have entered into the agreement "out of the goodness of its heart" given the strength of aluminium prices.
"Aluminium prices hit a three-year high overnight with most forecasts pointing to stronger prices yet to come. I'd expect NZAS will have made way with current market prices front of mind."