* Rio Tinto, Meridian Energy at loggerheads over smelter power pricing
* Tiwai Point smelter uses up to 15 pct of NZ electricity
* Dispute comes as govt launches power asset sale programme
* Biggest potential impact seen on more costly thermal plants
By Gyles Beckford
WELLINGTON, April 9 (Reuters) - A row over demands by Rio Tinto for cheaper electricity to help keep its New Zealand aluminium smelter afloat is clouding government efforts to raise up to NZ$6.1 billion ($5.1 billion) by privatising the country's power companies.
The 350,000-tonne-per-year smelter is New Zealand's single biggest energy consumer, buying up to 15 percent of the national output at an already-discounted price. Even so, depressed demand for aluminium means the Tiwai Point smelter at New Zealand's southern tip runs at a loss and without even cheaper electricity, might close.
That risks swamping the electricity market for the country of 4.45 million with cheap power, reducing profits and asset values across the sector.
"The market hasn't been pricing in a big risk (of the smelter closing) but there would be a significant impact if it did," said a senior electricity market trader at a state-run generator who was not authorised to talk to media.
The timing of the stand-off between Rio's majority-owned New Zealand Aluminium Smelters and state-owned utility Meridian Energy Ltd could not come at a worse time for Prime Minister John Key, who is pushing through the sale of three major energy firms to boost the government's depleted coffers.
Offer documents for a float of up to 49 percent of Mighty River Power Ltd released on Friday showed the government valued the company at as much as NZ$3.9 billion, compared with analyst valuations of NZ$3.2 billion to NZ$4.1 billion.
The Mighty River float is set to conclude by mid-May, with the government keen to sell one of the other two state power companies, Meridian and Genesis Power Ltd, before the end of the year.
Genesis, valued at around NZ$2 billion, has a big retail customer base and is seen as the more likely second candidate for privatisation, given Meridian, worth around NZ$6.6 billion, has the uncertainty of the smelter hanging over it.
Meridian has said it doubts a deal over power prices could be reached after nine months of negotiations with Rio Tinto, prompting the New Zealand government to offer a short-term subsidy to the smelter.
Rio Tinto rejected the offer, saying it was still hopeful of reaching an agreement with Meridian, and the two are set to resume talking.
The prime minister has said there would be no further government offers and that the smelter would now "have to stand on its own two feet".
The smelter has been relegated to Rio Tinto's Pacific Aluminium unit, home to 13 under-performing aluminium businesses the company plans to eventually sell, close or spin off.
Last month, Pacific Aluminium's Gove alumina refinery in Australia narrowly averted closure with the loss of 1,400 jobs after reaching an 11th-hour deal with the state government over cheap gas supplies for 10 years.
The possibility of the closure of Tiwai Point, which directly employs around 700 people, was highlighted as a key risk in Mighty River Power's prospectus. But with more than 440,000 New Zealanders registering an interest, there is little threat of the power wrangling derailing the float.
Ironically, Meridian might also survive the loss of its biggest customer without excessive pain. Its southern hydro assets are among the country's lowest cost power producers and, although subject to some capacity constraints between the North and South Islands, can send their power to the more populous north.
"Potentially Meridian is a beneficiary," said William Curtayne, a senior analyst at Milford Asset Management. "They've said they won't sell at a lower price, so if they sell at a higher price to someone else, their valuation will go up," he said.
Genesis and former state-run Contact Energy could face greater risks.
"(Genesis) likely faces the bigger short term risk because of its mix of generation and customers," said an official for one of the Mighty River Power float's organising brokers, who asked not to be named because he was not authorised to speak publicly on the matter.
"If a whole lot of cheap hydro came on, there'd be other stuff at the top end of the cost curve that would get bumped out."
Genesis's 1,000 MW thermal Huntly station would be at risk, agreed independent energy consultant Bryan Leyland, and that in turn could make New Zealand more vulnerable to power shortages during a dry year.
"Genesis's Huntly station is presently the dry year reserve, but it won't be in the company's interests to keep the station sitting there doing nothing," he said.
Hydro-lakes, which are mostly in the South Island, provide as much as two-thirds of national output, sending much of their output through cables linking the country's two main islands, but they scale back when lake levels drop because of mild winters or droughts.
Industrial prices for electricity in New Zealand have climbed more than 50 percent on average since 2000 and residential prices are up a third, but remain below the average of developed economies, according to the Ministry of Business, Innovation and Employment.