MRP faced scaling up risk on several carbon credit contracts, court hears

A contractual dispute over carbon credits that MightyRiverPower [NZX: MRP] is contesting in court is not the first time it's faced a scaling up of the carbon credits it was required to take as part of its plan to offset carbon emissions from electricity generation.

New Zealand Carbon Farming, the country's largest supplier of post-1989 bulk carbon credits, began a case in the High Court at Auckland on Monday, suing MRP for $34.7 million over liability for carbon credits the listed energy company was contracted to buy.

NZCF is claiming that new methodology for assessing forestry carbon credits near doubled the cost of the 15-year contract it had with MRP over the Hawarden Forest in north Canterbury from $36.6 million to $71.27 million - a difference of $34.67 million.

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.

The power company told the court the contract was signed on the basis that the new Field Measurement Approach methodology was coming in that year so the scaling up clause shouldn't be applied. And even if did apply, MRP also said it shouldn't have to pay for carbon credits issued for years prior to when its contract with NZCF began in January 2012.

MRP's general manager hydro wholesale Phil Gibson told the court yesterday he was surprised when informed by NZCF in mid-2013 that it planned to invoke the scale up clause and what that would mean to the listed energy company's uptake of carbon units. The information was given when NZCF approached MRP about renegotiating the contract and increasing the number of units it took.

Under cross-examination, Gibson admitted a number of MRP's other long-term contracts for carbon units included scale up clauses but not all had been invoked. He said once one supplier had indicated it would invoke the scale up clause, the company had looked at what its potential risk was on all the contracts and that was prior to the meeting with NZCF.

Gibson said the contract with NZCF was the last of 10 long-term contracts it had entered as part of its strategy of meeting its surrender obligations under the ETS and covered around 18 percent of the units it required. The contract was different to others, he said, because it was worked out a range of maximum and minimum units from the forest based on estimates of what the FMA tables would produce rather than the old methodology.

"MRP doesn't need the extra units and had sufficient security if prices rose as expected at the time of signing," he said,

Since the contract was signed the government indefinitely postponed energy emitters having to meet their full obligations for their carbon emissions rather than the current half and the price for units has dropped substantially locally and offshore.

Pleadings released by the parties after volumes and prices per unit were kept blanked out at MRP's request, show NZCF received a number of wash up credits when it filed a mandatory emissions return in 2013 as required every five years under the ETS.

While both parties knew and had modelled estimates on the carbon units likely from the forest under the new methodology, MRP told the court it was only required to purchase units that were transferred to NZCF under the ETS for the calendar year preceding the March 1, 2013 delivery date and was not required to purchase additional wash-up units for other years

It's understood NZCF's standard carbon supply contracts don't include that clause. NZCF told the court the scale up clause states the contractual volume change occurs "for and from the calendar year in which such amendment takes effect."

MRP has withheld $425,000 from its March 1, 2014 bill from NZCF on the basis some of the previous year's units remain under dispute and has returned them to the carbon farmer. It is also contesting a further $6.3 million invoice NZCF wants to charge for the top up under the scale up clause.

MRP's annual report in its notes to the financial accounts said 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 over two years.

The case is continuing.

(BusinessDesk)