Carbon farmer sues MRP over $34.7 million in ETS credits row

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UPDATED: New Zealand Carbon Farming, the country's largest supplier of post-1989 bulk carbon credits, is suing Mighty River Power for $34.7 million over liability for carbon credits the listed energy company was contracted to buy as part of its efforts to offset carbon emissions from electricity generation. 

The case, currently underway in the High Court at Auckland, centres on a change to the methodology for working out the amount of carbon credits produced by forests under the Emissions Trading Scheme (ETS). 

"They are a very significant national organisation, but we have every intention of standing up for our contractual rights," said NZ Carbon Farming managing director Matt Walsh in a statement issued to BusinessDesk. 

"It is not appropriate to debate the issues in public, but are very confident about doing so before the Court," said Walsh. 

NZCF's legal claim relates to a contract dispute with MRP over carbon credits under a 15-year contract for NZCF's Harwarden Forest in North Canterbury. 

MRP is contesting the claim which would mean it would have to buy significantly more carbon units from the supplier than was originally forecast because the contract included a pro-rata scale up or down clause if the amount of carbon sinks produced by the forest was altered under new methodology. 

Shares of MRP rose 0.3 percent to $2.97, and have gained 41 percent this year. 

Mighty River Power's annual report in its notes to the financial accounts said only it was involved in a contract dispute over asset purchases which was currently before the courts and had a potential cost of up to $6.4 million. It now says that provision covers two years of the contract. The court was told yesterday the amount of carbon credits MRP was required to take using the new methodology had a significant financial impact, potentially near doubling the cost of the 15-year contract from $36.6 million to $71.27 million - a difference of $34.67 million. 

Justice Kit Toogood agreed to a MRP request for the price per unit under the contract to be kept confidential. 

The contract was signed in January 2012, with current MRP chief executive Fraser Whineray one of the signatories to the deal. It was already known then in the industry that the government planned to change the methodology from Look Up Tables, which simply measured carbon sinks from forests in particular regions, to a Field Measurement Approach (FMA) which measured each particular forest. What wasn't known at that time was how much difference that would make in the amount of carbon credits Harwarden Forest and others would generate. The FMA approach came into effect in early 2013. 

MRP's contract set minimum and maximum volume amounts of credits it would purchase each year, with annual delivery set for March 1 from 2013. The court was told MRP was an innovator among the energy companies in seeking long-term emissions reduction purchase agreements to offset its obligations. At the time the price for carbon units was expected to rise. 

New Zealand is one of the few countries that doesn't cap the use of internationally sourced emissions credits so when the price of international units collapsed in 2012, the price of local units also went down significantly to a low of $1.06 per tonne in 2012. Now that New Zealand has withdrawn from the Kyoto protocol. New Zealand emitters won't be able to buy international units from next year. 

NZCF director and shareholder Bruce Miller, who had previously worked for MRP, told the court there had been little discussion over the scale up clause in the contract, with negotiations in the latter stage more centred around what security MRP had over the contract in case the price rose to the point where NZCF might breach the contract and sell on the spot market. 

The forest was already mortgaged to the BNZ and MRP ended up taking a second mortgage security over it as part of the contract, he said. When the contract was being negotiated, NZCF had hoped to on-sell the forest, with a guaranteed revenue stream from the MRP offtake, to a German investment company but this deal fell through. 

Under the ETS, forest owners can file a voluntary emissions return annually. A mandatory one is required every five years and can result in a wash up of credits, higher or lower than what has already been claimed for. At issue in the court action is the extent to which MRP is liable for any additional credits. 

NZCF has 3,100 hectares of established forests purchased and converted to carbon sinks and 48,000 hectares under carbon lease with other forest owners to supply bulk carbon credits to large energy and oil companies. 

NZCF is one of around 10 companies that MRP purchases forestry-based carbon credits from to cover the company's annual emissions obligations under the ETS. The company's Southdown gas-fired station and its geothermal stations produce around 400 to 500 kt of carbon dioxide which works out to a current annual carbon credit obligation of around 200,000 to 250,000 credits. 

MRP's chief financial officer William Meek said the company maintained flexibility around its hedging of its carbon obligations. "Any additional units can be held for surrender against carbon obligations in future," he said. 

(BusinessDesk)