The lake takes its name from the Ruataniwha Station, a large sheep-station in the area, part of which the NZ Electricity Department purchased as the site for the township of Twizel (founded in 1968).

It was formed by the New Zealand Ministry of Works as part of the Upper Waitaki Power Project between 1977 and 1981 in a gorge created by the Ōhau River.

Connected to the Wairepo Arm by way of a culvert under State Highway 8 is Kellands Pond, whose 22 hectare area occupies further gravel pits.

In 1984 the lake was temporarily lowered by 3 metres while this weir was removed to improve the performance of the Ōhau A power station.

[7] The lake was developed by the Ministry of Works into a major recreational resource for the area with a large number of trees and a holiday park on the lakeside.

When pressure to complete the building before the official opening of the lake raised the cost to approximately NZ$130,000 he used project funds to temporarily bridge the gap until the Rowing Association made full payment.

Despite overwhelming support from the local community, he took early retirement rather than face charges under the State Services Act.

At the time Smith was voicing disagreement with the government's proposals to reduce the Ministry of Works' experienced construction workforce and to disestablish Twizel; all of which may have influenced the official displeasure.

The principal access road to the lake was named Max Smith Drive by the local community in his honour while the South Island Rowing Association made him its first life member.