The Tiwai Point aluminium smelter (NZAS) and Meridian Energy have been given a green light on a deal to allow for greater demand flexibility from the smelter during peak periods.
Under the deal, approved by the Electricity Authority, Meridian could require the smelter to cut demand by up to 50 megawatts when the electricity system was under stress, such as winter peak periods or during power generation or transmission issues.
NZAS chief executive Chris Blenkiron said the approval formalised an agreement struck earlier this year.
"So the way that we do it is we effectively dial back our production, and that releases the energy into the market," he said, adding there was a compensation component in the agreement, which was confidential between the parties.
Meridian Energy chief executive Neal Barclay said NZAS had been flexible and constructive in its negotiation, while the authority had been quick to give its formal approval ahead of peak winter demand.
"If we do ask them to reduce production, we pay them an amount of money for every megawatt they don't use and that we think is a very efficient outcome not only for NZAS, Meridian but also the system overall.
"Simply put, this agreement means Aotearoa will likely need to burn less coal when a dry spell causes the hydro lakes to drop to low levels."
Barclay said the additional peak energy available was roughly equivalent to the power consumed by 50,000 average homes.
"When NZAS reduces consumption of electricity, that power can effectively be made available to other users.
"The net result is likely to be a reduction in carbon emissions from burning less coal and, just as importantly, a reduction in the overall cost of the electricity system, which ultimately reduces costs to customers."
The deal - first announced in April - will cover the remaining term of the supply contract between Meridian and the smelter, which runs until December next year.
"As New Zealand works towards a more renewable electricity system, we need to think creatively about how we can manage winter demand and dry period energy needs," Barclay said.
"Customers who can be flexible in how they use power and the development of alternate green fuels such as hydrogen and biomass, when combined with smart technology, will enable New Zealand to transition to net zero emissions far more quickly and more cost effectively than most other nations.
"It's good that we are getting on with it."
The Electricity Authority also agreed the smelter could on-sell any unused electricity to a third party.
"The authority determined the arrangements for which clearance was sought satisfy the on-selling test," authority chief executive Sarah Gilles said.
"For so long as the demand response agreement, and the amendments made in the two amending letters, remain in force and effect NZAS is not prevented from on-selling unused electricity. The decision to provide clearance reflects this."
Blenkiron said the negotiations on the peak demand response were separate from discussions around the contract renewal from 2024, when the current supply contract expired.
"They are complex discussions and they are taking some time, but we're working constructively with Meridian and a bunch of other generators through these discussions," he said.
Barclay said, "We're still talking and that is the main thing."