A deal has been signed that allows aluminium production to continue at Bluff's Tiwai Point smelter, meaning a huge sigh of relief for Southland.

Meridian Energy has signed a variation to the existing electricity agreement with owners New Zealand Aluminium Smelters, but the deal could be terminated in 2018.



Contact Energy will also supply a portion of Tiwai's electricity, along with Genesis Energy and other power providers.



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* Tiwai Point smelter 'clearly in the black', analyst says

* Meridian gives Tiwai owners a month extension on power decision

NICOLE JOHNSTONE/FAIRFAX NZ The decision gave the region some much needed short-term security, said Southland Chamber of Commerce CEO Sarah Hannan.

The smelter is the largest consumer of electricity in the country, using 13 per cent of total power - equivalent to 680,000 households.



It employs about 800 full-time workers, but also affects about 3000 jobs in Southland.



Rio Tinto, the majority owner of the smelter, has been a hard-nosed negotiator during the past few years. It has not been afraid to hold out, knowing closure of the smelter would mean job losses and have an impact on electricity company profits.



In 2013, the smelter renegotiated its power contract with Meridian Energy to pre-2013 price levels.



It also received $30 million from taxpayers in 2013, when the Government agreed to pay the money to the subsidiary of corporate giant Rio Tinto to persuade it not to close the smelter.



Today's agreement comes after a one-month extension for NZAS to make a decision.



'BRILLIANT OUTCOME'



Invercargill Mayor Tim Shadbolt said the decision was a "win, win, win situation.

"It's a brilliant outcome."

While it could be seen as another reprieve for the smelter, the longer term prospects were very good.

"Good on the Government. They took a $30m punt that things would improve."

The prospect of a reduction in transmission costs for the smelter, a lowering New Zealand dollar and full hydro lakes were all positive indicators, he said.

"It's just all the planets have lined up in terms of (the smelter's) future survival."

Business and property confidence in Invercargill and the wider Southland region would improve, Shadbolt said.

Southland Chamber of Commerce chief executive Sarah Hannan said the decision gave the region some much needed short-term security - especially with the dairy industry downturn.

"The staff of Tiwai will be breathing a sigh of relief with a bit of certainty for them."

With the benefits the smelter brought to the region, and when families of workers were considered, up to 10 per cent of Southland's population was directly impacted by today's decision, Hannan said.

SHORT-TERM SECURITY

Tiwai Point contributes $524m to the Southland economy and earns more than 2 per cent of New Zealand's export income.

NZAS chief executive Gretta Stephens said people were feeling very pleased that the plant had some security.

"For every one of these jobs, that's a bread winner for a household."

The smelter had been an important part of the Southland economy for decades and employed generations of Southlanders, she said.

Smelter staff were informed at 8.30am on Monday about the new power deal.

"I've been getting a lot of emails from staff here and from smelters elsewhere saying how pleased they are."

The revised contract for 572MW until 2030 would allow the smelter's three potlines to remain fully operational.

"The agreement provides short-term security for the smelter and allows time for market fundamentals to improve."

The revised agreement is the latest in a long relationship between NZAS and the owners of the Manapouri Hydro dam, dating back to 1963.

During the past year, NZAS ran an exhaustive commercial process to understand if power could be secured from other generators. However, Meridian was the only one, as the owner of Manapouri, able to contract with the smelter to meet its energy needs, she said.

The contract had flexibility to maintain or reduce the load, or terminate the contract from 2018 based on market conditions.

"While we've taken a positive step today, our combined electricity and transmission prices are still not internationally competitive," she said.

Out of all external costs, Stephens said reform to transmission pricing had never been more important as NZAS' delivered cost of electricity was one of the highest for an aluminium smelter outside of China.

Last year alone, the smelter paid $64m worth of transmission costs.

"We believe those who benefit from the infrastructure they use should pay for it, which is not happening now.

According to the Electricity Authority's options paper, NZAS pays more than $50m every year for transmission infrastructure it receives no benefit from.

"Worldwide demand for high-quality aluminium is increasing through automotive and electronics manufacturers. If we can continue production at NZAS, we will be able to take advantage of this future market potential which is good news for Southland and good news for New Zealand."

ELECTRICITY DEAL

Share prices of all the listed power companies increased this morning after the announcement was made.

Meridian's increased by 5 per cent, trading at $2.37, Contact's increased by 2.6 per cent to $5.08, Genesis increased by 1.75 per cent to $1.74 and Mighty River Power shares increased by about 10 per cent, trading at $2.79.

Meridian chief executive Mark Binns said it had been a complex and demanding negotiation, but it was a good outcome for Meridian.

He had met with various other generators on an individual basis to help make the deal.

"I told them we needed support if we can put a price that is mutually acceptable on the table."

While there had been contributions from other power companies, Contact had made the most substantial price, for a longest duration.

NZAS had the right to terminate the existing contract today, taking effect from January 1, 2017, but by signing the variation that right had been waived, he said.

The variation commits Meridian to cover the full 572 MW currently used at the smelter from 2017 at more competitive rates for the smelter than would have applied if NZAS chose to rely on the previous arrangement.

"This variation will give the smelter the flexibility to operate at current production levels for the full contract period should it want to and provide Meridian with an improved overall price for its electricity."

Although the smelter already had the option of a contractual volume of 572 MW from January 1, 2017 prior to this amendment, pricing had meant NZAS was incentivised to reduce to 400 MW from that date, Binns said.

"Meridian has always been clear that the contract structure entered into in 2013 was intended to incentivise NZAS to obtain 172 MW from other generators and allow Meridian to achieve market prices for this volume, which would be released from the contract."

Contact chief executive Dennis Barnes said: "We are pleased that we have been able to support the continued production of aluminium at Tiwai."

The Green Party said while the deal was a relief for Southlanders, it wasn't a long-term solution.

"As long as New Zealand doesn't have a clear alternative jobs plan, foreign companies like Rio Tinto can hold us to ransom and demand huge subsidies to keep their New Zealand operations open," Green Party energy spokesperson Gareth Hughes said.



"Today's decision to postpone the smelter's closing date creates a window of opportunity to come up with a strong plan for a post-smelter future.



"The Government should show leadership and work with Southlanders to develop other economic opportunities. More dairy farming is obviously not the answer because Southland dairy farmers are already hurting from the global dairy price crash."