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Electricity Authority Clears Mercury Contract

The Electricity Authority Te Mana Hiko has cleared a draft contract between Mercury and New Zealand’s Aluminium Smelter (NZAS).

Mercury sought clearance from the Authority of a draft agreement with NZAS under the materially large contract (MLC) provisions in the Electricity Industry Participation Code (2010).

Under the provisions in the Code which were made permanent in May 2023, parties must not give effect to MLCs unless certain tests are met.

Under the Code provisions any MLC must pass one of two tests:

(a) An economic test of whether the value of the MLC to the generator is greater than the value to the generator of its best alternative (net value test); or

(b) A legal test of whether the MLC allows electricity to be on-sold by the purchaser to a third party, on no worse terms than if the purchaser had consumed the relevant quantity itself (on-selling test).

Mercury’s application relied on the on-selling test.

The Authority, after considering the application and seeking additional information, has cleared the draft contract. The contract has now been finalised.

"The Authority determined the draft contract for which clearance was sought satisfied the on-selling test. NZAS is not prevented from on-selling unused electricity," says Airihi Mahuika, General Manager - Legal, Monitoring and Compliance.

A decision paper detailing the reasons for the Authority’s clearance of the draft contract will be available on the Authority’s website.

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Background:

In August 2022, we introduced an urgent Code amendment in response to a potential issue we observed during our review into competition in the wholesale market.

A permanent Code amendment took effect on 19 May 2023.

The Code prohibits generators giving effect to MLCs unless the net value from the contract to the generator is positive relative to the generator's best alternative, or the buyer can on-sell unused electricity under the MLC without the buyer being subject to any worse terms than if they had consumed the electricity themselves.

A voluntary clearance process is in place which gives generators the option to gain assurance that the MLC is not in breach of the Code.

The relevant Code provisions also provide the Authority with greater visibility of MLCs for monitoring and compliance purposes through the disclosure obligations.

Notes

The Electricity Authority is an independent Crown Entity with the main statutory objective to promote competition in, reliable supply by, and the efficient operation of, the electricity industry for the long-term benefit of consumers. The additional objective of the Authority is to protect the interests of domestic consumers and small business consumers in relation to the supply of electricity to those consumers.

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