Prime Minister John Key says there could be some advantages to New Zealand if the Tiwai Point aluminium smelter closes over the coming years.
Majority owner Rio Tinto has rejected the Government's offer of a short-term subsidy and is continuing negotiations with Meridian Energy for a cheaper deal on power prices.
Tiwai uses 15% of New Zealand's electricity so if it closes, electricity prices would be expected to drop.
Mr Key says, over time, that could provide benefits to the rest of the country.
He says that would mean there would be extra electricity available for new ventures and less pressure to create new generation.
"It's quite possible that that power could be used either by new ventures that come to New Zealand or, alternatively, it would allow some less productive assets to be closed down or it would allow New Zealand not to build as much generation as might be required."
He says the Australian government subsidises six Rio Tinto-owned plants, which has resulted in the company receiving billions of dollars of taxpayer money.
Mr Key says, unlike Australia, the Government won't be providing long-term taxpayer funded subsidies to Rio Tinto.
And he says the Government will not be held hostage because of the possible implications if the smelter does end up closing.
He said earlier if there was no deal, the smelter could be shut down in about five years.
The New Zealand Aluminium Smelter plant in Southland is New Zealand's sole aluminium smelter and exports more than $1 billion worth each year. NZAS is 79.36% owned by Rio Tinto business unit Pacific Aluminium and 20.64% owned by Japan's Sumitomo Chemical Company.
Pacific Aluminium says in a statement it believes a power deal with Meridian can be reached.
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Mr Key told TV3's Firstline programme the Government was now out of the talks.
"Essentially we have no interest in a long-term subsidy of the smelter. If it can't stand on its own two feet then long term it shouldn't be there."
The Prime Minister said the Government had been offering a subsidy only for a short time.
"We do think it made a bit of sense on balance to try and support the process and that's where we've been simply because of the number of jobs involved and because of the power usage.
"But look in the end that hasn't been possible at the moment. Who knows where these things will go but the Government's not going to change its position."
State-Owned Enterprises Minister Tony Ryall last week said New Zealand Aluminium Smelters (NZAS) was offered a modest amount to bridge the gap.
Mr Ryall said on Tuesday the Government would not join commercial negotiations over the smelter.
Mr Ryall reiterated that the subsidy was the best offer of assistance the Government could make but it's not interested in any long-term deal.
Call off asset sales - Greens
Green Party leader Russel Norman says the Government will be in a much stronger position to negotiate with Rio Tinto if it does not go ahead with its asset sales programme.
"It can't go to the table and say honestly to Rio Tinto, well we can play a hard negotiating game because if the Tiwai smelter closes, then the Government's assets sale programme is in real trouble and that's why the Government needs to stop the assets sale programme so they've got a much stronger negotiating position with Rio Tinto."
Dr Norman says if the smelter closes it will lower the value of the state-owned energy companies up for partial sale.
The Labour Party says the Government has mismanaged the talks.
Labour's state-owned enterprises spokesperson, Clayton Cosgrove, says the approach by Mr Key and the SOE Minister has been shambolic.
Mr Cosgrove says transparency is needed, so that people understand what is needed to keep the smelter open.
"This should be done transparently, this deal, openly, so that people can judge what is the best for the national interest."
The smelter company has been in talks with Meridian since August last year about renegotiating cheaper power prices to cope with a downturn in the aluminium market.
Analyst against long-term too
An analyst with the investment management company Milford Asset Management, William Curtayne, told Radio New Zealand's Checkpoint programme there is a big difference between giving the smelter a long-term subsidy and a shorter one.
"To get a subsidy from the Government means that in effect you're subsidising Rio Tinto and their profit. I don't see why the Government would want to do that on a long-term scenario. And a benefit potentially of the short-term is that in three years' time aluminium prices may be a lot higher."
Mr Curtayne says if the smelter closed, the effect on share prices for Mighty River Power would not be huge.