Meridian Energy, which generates electricity through hydro and wind, has signed a four-year electricity hedge contract which gives it access to buy power from the wholesale market to cover years with low rainfall.
The agreement with Genesis Energy takes effect from the start of next year and allows for up to 150 megawatts to be available every year. Genesis operates the coal and gas-powered Huntly power station, and three hydro schemes.
If Meridian's contract with New Zealand Aluminum Smelters saw a reduction in volume, the agreement has a provision to terminate after the first two years.
The structure of the agreement allows for 100MW to be available year round, with an additional 50MW available from April 1 to October 30 in each year of the contract.
Meridian currently has a 200MW hedge contract with Genesis that ends in October.
Meridian's general manager, markets and production, Neal Barclay, said the new deal with Genesis came after a competitive process that Meridian initiated last December.
"This arrangement with Genesis is more flexible than the existing arrangement and gives us confidence that we will meet our commitments to customers if we experience a drought or face other market challenges."
Barclay said the new hedge contract was a financial contract to manage price, not a physical contract to buy power.
"We need to have something in place to cover the situation where we have a dry period and have to buy more power from the wholesale market, which could come from any generator."
The contract capped what Meridian would have to pay for the extra power, he said.
"This is one of the issues that any renewable gentailer [generator-retailer] needs to manage, otherwise the financial consequences could be severe."
The contract replaces one that has been in place with Genesis for the past five years. It had been used twice to cover dry years which severely hampered hydro-power generation.
"Most significantly, Meridian relied on the contract for two months during early 2012. The year ending June 2012 was one of the driest periods for Meridian's South Island hydro lakes in the 82 years the industry has been keeping records."
Barclay said Meridian was committed to generating only from renewable sources. However, being sustainable also meant being sustainable financially to ensure its customers received a good electricity deal.
"Our commitment is to generate from 100 per cent renewable sources wind and water. The hedge contract doesn't change this at all."
- The Dominion Post