UPDATE 1-NZ's Meridian agrees cheaper power deal for Rio-owned smelter
* Meridian cuts smelter power price and volumes
* NZ govt gives smelter owners NZ$30 mln subsidy
* Smelter guaranteed to open to 2017
WELLINGTON, Aug 8 (Reuters) - New Zealand's state-owned power Meridian Energy Ltd is cutting prices for its biggest customer, Rio Tinto's loss making aluminium smelter, with the government making a one-off payment to secure the smelter's immediate future, the companies said on Thursday.
Meridian, which is set to be partially privatised in the next few months, said a new contract, effective from July 1 this year and running to 2030, would reduce current power prices, and allow for price increases should the New Zealand dollar value of aluminium rise above agreed levels. It would be inflation-indexed.
"After a year of robust negotiations, we have reached an agreement that is commercially acceptable to both parties and provides a greater level of certainty for Meridian," said Meridian Chief Executive Mark Binns in a statement.
New Zealand Aluminium Smelters (NZAS), owned by Rio Tinto and Sumitomo Chemical Ltd, had guaranteed the smelter, which is New Zealand's biggest power user, would operate at least until 2017, and give at least 15 months notice of any closure after that.
The deal allows the Tiwai Point smelter, at the bottom of New Zealand's South Island, to reduce its contracted volume from 572 megawatts (MW) to 400 MW from 2015.
The New Zealand government will pay NZ$30 million to the smelter to secure its medium term future.
"This is a one-off incentive payment to help secure agreement on the revised contract because of the importance of the smelter to the stability of the New Zealand electricity market," Finance Minister Bill English said.
The 350,000-tonnes-per-year smelter had been a victim of dire market conditions caused by weak demand and high Chinese production that has sent world aluminium prices into free fall since mid-February.
The 41-year-old smelter is the country's biggest power consumer, using around 14 percent of national output, and exports around NZ$1 billion ($795 million) worth of aluminium a year.
London Metal Exchange three-month aluminium prices stood at $1,797.15 a tonne on Wednesday, down 17 percent from its 2013 peak of $2,174 on Feb. 15.
Rio Tinto has ring fenced its Australia and New Zealand Pacific Aluminium division into a separate entity with an eye towards selling or closing facilities.
"This new agreement helps our employees, business partners and other stakeholders to plan for the future," said NZ Aluminium Smelters Chairman Brian Cooper.
The deal clears the way for the sale of up to 49 percent of Meridian, most likely in September, which could raise as much as NZ$3.2 billion, and make it potentially as Asia's biggest initial public offer.
The government has said it is possible the IPO might be split into two tranches because of recent market weakness, and investor fatigue after a spate of large issues in New Zealand.
The smelter stand off had overshadowed the state asset sale programme, and raised fears that if the smelter closed it would lead to a glut of power and depress prices.
The New Zealand government had offered the smelter a short-term subsidy in April, which was rejected by Rio Tinto, prompting the Prime Minister to say the smelter should not be open if it could not stand on "its own two feet".