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While environmentalists are celebrating the decision to the scheme on the Waitaha River, near Hokitika, applicants Westpower Ltd say they are "utterly stunned".
The community-owned company proposed to divert the river flow into the power scheme tunnel at the head of Morgan Gorge, with water being returned, below a powerhouse, about 2.6km downstream.
The project involved the construction of a weir, a 2km-long access road and other infrastructure, including the powerhouse and tunnel.
Commenting on the decision today, Environment Minister David Parker said the proposal would have significantly affected the area's natural character.
"The area is largely unmodified by humans. It is near to pristine and yet is accessible for recreation," Parker said.
"The area is valued for its natural beauty and wilderness qualities for recreation. The proposal would have significantly undermined the area's intrinsic values which people experience when they tramp and kayak there."
After considering expert advice and submitters' views, Parker concluded the adverse effects could not be "adequately or reasonably mitigated".
"Westpower's application was careful and comprehensive. I recognise it invested substantial time, energy and money in the process."
Forest & Bird, which was among hundreds of people and groups that submitted against the project, called the move a good decision.
"This is one of New Zealand's last truly wild rivers as well as pristine conservation land," spokeswoman Jen Miller said.
"More than 25 native bird species including kea, kākā and kārearea, plus long-tailed bats, and forest and green geckos make the Waitaha their home.
"There are already consented, unbuilt hydro schemes on the coast, so the economic case for this one was very weak.
"Given new technologies such as solar and battery storage, and the main transmission line's resilience to storms, the proposal to dam an ecologically significant area was entirely retrograde."
Westpower chairman Mike Newcombe however argued the decision had "swept aside" West Coast interests and long-term benefits.
"It calls into question the extent to which this Government really does have an intention to support regional economic growth and is genuinely committed to addressing the significant threats from climate change through renewable energy projects," Newcombe said.
"It certainly seems so when a great opportunity to create a renewable energy project and enduring benefit for the community and broader region – developed through more than a decade of planning and consultation – has been knocked back in capitulation to minority interests intent on locking up the West Coast forever to the detriment of the local community."
He said the scheme had been carefully planned to ensure a minimal environmental footprint and to address recreational users' concerns.
"We will be carefully reviewing the detail of the decision. It makes no sense – not least because of the Government's stated intention to be 100 per cent renewable in energy by 2035 (15 years) and its commitment to climate change."