Failure to complete the negotiations could see the closure of the Tiwai Point smelter, causing job losses and flow-on social and business consequences for Invercargill, which is already dealing with job losses from the smelter.
The effects could be felt as far north as Dunedin as suppliers to the smelter found their contracts cancelled.
Meridian on Thursday started playing hard ball with Pacific Energy, a business unit of Rio Tinto, the majority shareholder of New Zealand Aluminium Smelters, which operates Tiwai Point.
Meridian chief executive Mark Binns said Meridian had advised Pacific Aluminium of its ''bottom-line'' position.
''Despite significant effort by both parties, there remains a major gap between us on a number of issues, such that we believe that it is unlikely a new agreement can be reached with Pacific Aluminium,'' he said.
In the event no agreement could be reached, Meridian would seek to engage with Rio Tinto and Sumitomo Chemical, the shareholders of the smelter company, who would ultimately decide on the future of the smelter.
During the day, State-owned Enterprises Minister Tony Ryall revealed the Government had already been in contact with Rio Tinto during the week to discuss ways to help bridge the gap in their positions over the short to medium term - if that could be of assistance in concluding an agreement.
The positions of Meridian and Pacific were ''reasonably close'' in terms of the short to medium-term electricity price. But they remained well apart in the longer-term, he said.
In the meantime, Mr Ryall understood Meridian's existing contract with Pacific remained in place at least until January 1, 2016, with significant financial and other obligations beyond that.
''As we've said previously, all relevant information - including about the smelter electricity contract - will be reflected in the Mighty River Power offer document which is currently being finalised,'' he said.
The Government is partially selling Mighty River Power, Meridian and Genesis Energy, with Mighty River Power being partially listed later this year.
The Green and Labour parties used the breakdown in contract negotiations to call for a halt in the asset sales process, with Labour leader David Shearer apparently unhappy that surplus electricity would flood the market, driving down electricity prices - one of the points sharebrokers contacted by the Otago Daily Times said would be a positive for economic growth and consumers.
Lower power prices would mean reduced operating expenditure for high-use manufacturers and lower power prices for consumers.
Brokers said there were good and bad aspects of the break-down in negotiations. If Meridian was serious about its bottom-line position, then Rio would need to be prepared to shut the smelter and consolidate operations on one of its other sites. The company was already consolidating its aluminium operations in Australia. That would lead to job losses.
Figures supplied by Mr Binns to a presentation in Australia showed that Meridian had 30% market share of electricity generation in New Zealand, followed by Contact Energy with 24%. Meridian's Benmore hydro dam could generate 500MW of electricity, enough to power 245,000 homes - enough to supply houses in Wellington and Hamilton.
Lower-than-expected economic growth, the fall in manufacturing because of the strong New Zealand dollar and the fall in use from some leading industrial users meant New Zealand might have a period of oversupply in the next five years. Meridian had cancelled some generation projects as a result.
The smelter accounted for 39% of Manapouri's sales and 14% of New Zealand's total power use. The smelter took all of Manapouri's 800MW.
''Manapouri remains New Zealand's lowest-cost producer of electricity so its generation will always be sold,'' Mr Binns said in the Australian presentation.
Pacific Aluminium chief executive Sandeep Biswas said in a statement negotiations with Meridian had progressed more in the past two weeks than in the previous nine months.
''We believe a commercial agreement that is in the best interests of New Zealand Aluminium Smelters, Meridian, the New Zealand Government and the people of Southland can be reached,'' he said.
Meridian Energy
• Has 30% of market share of electricity generation.
• Generation capacity depends on water levels in its key southern hydro lakes.
• Tiwai Point aluminium smelter accounts for 39% of Meridian's total sales and 14% of New Zealand's total power use.
• The smelter takes all of Manapouri's 800MW.
• The Engineering, Printing and Manufacturing Union estimates the Tiwai Point smelter is worth 3200 jobs and $1.6 billion a year to Southland's economy.
