State-owned Meridian may need to negotiate a short-term discount on perhaps half the electricity it sells to the Tiwai Point aluminium smelter at Bluff if the plant is to remain open, a source says.
The smelter, majority owned by Australian miner Rio Tinto, and Meridian, which owns the Manapouri hydro power station supplying the plant, have been in talks about the electricity price.
The smelter operation has been hit by a slump in world aluminium prices, a high New Zealand dollar and increased international competition.
Rio Tinto was under "intense pressure" to get a solution to keep the plant going, but it was also in the Government's interests to strike a deal, the source said.
"My view is that there is a short-term deal to be done [on price]", the source said.
Rio Tinto put the smelter up for sale in October last year. It was still possible the smelter could be sold cheaply to an Asian buyer, who might refurbish the plant and aim to get another 20 years or more out of the operation, the source said.
Given flat demand for electricity, a surplus of generation and the challenges of getting power from Manapouri to other parts of the country, it would be in the Government's interest to strike a deal. That price would have to allow the smelter to operate profitably, rather than making a loss.
However, grid operator Transpower has said that if the smelter closed it would cost about $170 million to re-route the power out of Southland and electricity market prices throughout the country would fall as a result of the glut of supply.
But Rio Tinto would be well aware of the social impact of shutting down the plant employing about 800 people in Southland. So Rio Tinto was likely to keep the plant going if they could get a "slightly positive outcome" on the smelter's returns.
"I don't think you are talking about the whole power supply [being discounted]," the source said.
The electricity contract could for example be broken into half on the existing contracted price, and half at a lower price. The discounted price on electricity might have to be for a "fair period" but not for years.
World aluminium prices have slumped from US$3000 a tonne before the global financial crisis hit to US$2500 a tonne late last year, to just under US$2000 a tonne now.
"Rio is facing a pretty serious challenge . . . I would think they are under intense pressure to come to a solution," the source said.
Smelter general manager Ryan Cavanagh said yesterday that NZAS "continues to operate in very tough business conditions - a combination of the high New Zealand dollar, low metal prices and increased international competition.
"Much has been done to improve the smelter's competitiveness and viability over the years and particularly over the past year," he said, but would not comment directly on NZAS's accounts.
It is still possible that Rio Tinto will sell the smelter, possibly to a Chinese operator or another Asian smelter company.
"They would get it for a very cheap price," the source said.
The NZAS public accounts show the property, plant and equipment is valued at about $566m. If a new owner picked up the plant for a low enough price, it could afford to gut the cell lines and put in the latest technology which would have a dramatic impact on the plant's efficiency and profitability.