MRP rejects carbon farmer's carbon unit top-up claim, court hears

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

MightyRiverPower [NZX: MRP] has claimed in the High Court it shouldn't have to pay for carbon units issued for years prior to the start of its contract with New Zealand Carbon Farming in 2013, which it entered as part of its effort to offset 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 in Auckland on Monday, suing MRP for $34.7 million over liability for carbon credits the listed energy company was contracted to buy.

The 15-year contract for carbon units from NZCF's Hawarden forest in North Canterbury ran from 2013 to 2027 and is one of 10 long-term agreements in which MRP has to meet its surrender obligations under the emissions trading scheme (ETS).

Minimum and maximum volumes for the contract were worked out under the 'Look Up Tables methodology' in force when the contract was signed in January 2012. But new methodology the government later introduced - the 'Field Measurement Approach' (FMA) - 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.

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.

Pleadings just released by the parties after volumes and prices per unit were kept confidential 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 transferred to NZCF 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.

Phil Gibson, MRP's GM hydro wholesale responsible for its carbon emissions obligations, told the court today he would not have recommended the energy company sign the contract on the basis now being claimed.

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

But NZCF's scale-up clause states the contractual volume change occurs "for and from the calendar year in which such amendment takes effect," it said in its written pleading.

MRP paid the bill in March 2013 for the contract without realising it included what it called "stale units" unrelated to the actual forest carbon units for 2012.

Once it learnt mid-year of NZCF's intention to also invoke the scale-up clause, things turned sour. MRP then set off the disputed $425,000 from NZCF's March 1, 2014, bill, and is contesting a further $6.3 million invoice NZCF wants to charge for the top-up under the scale.

Professor Bruce Manly, an expert on forest measurement from the University of Canterbury, told the court there had been general understanding from 2010 of what the new FMA methodology would be and he staged workshops nationwide in 2010 and 2011 on what to expect.

He said that the expert NZCF used for its estimates on the forests had made a mistake at one point in mid-2012 that set the amount of likely carbon units too high and created unreal expectations over what it could deliver. These were later reduced.

MPR had done its own modelling estimates in order to have some comfort over the ranges included in the contract.

The case is continuing.

Shares of MRP fell 1.7 percent to $2.92.

(BusinessDesk)