Half of the coal being used at the site will be replaced with electricity to recycle scrap steel.
Prime Minister Chris Hipkins has announced plans for the project at a media briefing at the site in south Auckland this afternoon.
NZ Steel - which employs 4000 people in its New Zealand and Pacific operations - is the country's only producer of flat rolled steel products for the building, construction, manufacturing and agricultural industries. It produces about 670,000 tonnes of steel each year for products that include roofing and structural beams.
Under the announcement today, the company will receive up to $140 million from the Government Investment in Decarbonising Industry (GIDI) Fund and it will foot the bill for the rest of the cost, which has not been specified.
The agreement has three components:
•Base build funding support up to $110m
•An extra $10m commissioning funding incentive paid if NZ Steel can get the furnace running by January 2027
•A further $20m of performance funding paid if NZ Steel can achieve a further 800,000 tonnes of emissions reductions by 31 December 2030 above the base amount committed to in the agreement
The Government says the project means 800,000 tonnes of pollution can be removed from the atmosphere each year - the equivalent of taking 300,000 cars off the road. It will also achieve over 5 percent of all New Zealand's required emissions reductions between 2026-2030 and and 3.4 percent within the third emissions budget (2031-2035).
Energy Minister Megan Woods who accompanied the prime minister said the electric arc furnace would replace the plant's existing steelmaking furnace and two of the four coal-fuelled kilns.
This would enable the company to cut its emissions by more than 45 percent and all its steel products could then be considered as lower carbon.
"To understand the scale of this project, it reduces more emissions on its own than all the other 66 GIDI projects we have approved to date," Woods said.
"Our partnership with NZ Steel shows we can tackle the challenge of decarbonising even our hardest to abate and largest emitting industries. This investment would not happen without government support."
Hipkins said the project's size showed the government's determination to reduce emissions as fast as possible.
"This project dwarfs anything we have done to date. Alone, it will eliminate one percent of the country's total annual emissions.
"The plan means New Zealand businesses will have access to locally produced, cleaner steel, and high value jobs are protected that otherwise might have gone offshore."
Climate Change Minister James Shaw who also attended welcomed the decision to melt scrap steel using electricity, rather than shipping it offshore.
It would substantially reduce NZ Steel's emissions and "build a more circular, resilient economy", Shaw told those attending the announcement.
"This will put New Zealand in a much better position to meet its climate target of net zero carbon by 2050," he said.
The economics of the project stacked up, he added.
"The lifetime abatement cost is forecast at $16.20 per tonne. Current carbon prices are around $55 per tonne. In the long term this saves the government and the country money."
The supply of electricity required for the new furnace will also include a demand response arrangement in partnership with Contact Energy - where NZ Steel can scale down power supply from the electricity grid when needed to secure electricity supply in the region at peak times.
Details would be finalised in the next few months, the government said.
The GIDI was introduced in 2020 to ramp up decarbonisation of the country's industrial process heat while stimulating the economic recovery after the pandemic.
It enables partnerships between government and businesses to accelerate emission reductions by supporting energy efficiency and fuel switching projects.
