Electricity Authority Clears Smelter Contracts

The Electricity Authority has cleared two separate agreements involving Meridian Energy and Contact Energy and New Zealand’s Aluminium Smelter (NZAS).

Meridian and Contact sought clearance from the Authority of their electricity supply agreements and demand response agreements 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.

The MLC Code provisions mean that consumers are protected from potentially paying more than they should due to the impact of very large electricity contracts on wholesale electricity prices.

Under the Code provisions, MLCs are prohibited unless they 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).

Both applications, which were considered individually, relied on the on-selling test. The on-selling test makes it difficult for generators to charge large load users, such as NZAS, discounted prices, which can increase prices for other consumers. Where on-selling is allowed (and happens) consumers benefit from more electricity being made available, which may result in lower prices.

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

The applications were lodged with the Authority on 31 May 2024. Under the Code, the Authority has 45 business days to notify generators of the outcome of their application.

The Authority had earlier cleared a draft contract between Mercury and NZAS which was announced on 31 May 2024.

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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