The Electricity Authority has made a permanent amendment to the Electricity Industry Participation Code to restrict generators from giving effect to certain large electricity contracts (including Power Purchase Agreements (PPAs)).
The change reflects the Authority’s view that generators may be incentivised to use these arrangements to ‘shore up’ demand to the detriment of day to day consumers, and replaces (with some important amendments) the interim restrictions introduced late last year.
Generators can no longer give effect to a “materially large contract” (including extending or modifying existing contracts) unless certain conditions are met, and must disclose all new materially large contracts to the Authority within five business days.
A “materially large contract” is defined as:
- a contract that:
- is not entered into through a derivatives exchange
- includes terms under which the buyer itself will consume electricity, and
- relates to a net quantity of electricity that equals or exceeds 150 MW consumed at a point in time, or
- two or more contracts between a generator (including its related companies) and a buyer (including its related companies) where:
- none of the contracts are entered into through a derivatives exchange
- at least one of the contracts includes terms under which the buyer itself will consume electricity, and/or
- taken together, the contracts relate to a net quantity of electricity that equals or exceeds 150 MW consumed at a point in time, or
- arrangements that meet these criteria and involve two or more generators and a buyer, or one generator and a buyer where some of that generator’s capacity is ‘backed’ under a contract with a second generator, and where those contracts rely on each other or are interdependent.
The Authority has sought to reduce the ‘anti-development’ impact of these provisions by carving out volumes of new generation from the ‘net quantity’ calculation, where it can be demonstrated that the relevant contract is “material” to the generator’s decision to invest.
For example, if a generator can show that the entry into a 170MW contract with a buyer is material to its decision to invest in 50MW of new generation, then the 50MW would be offset against the net quantity under the contract – taking it below the 150MW threshold.
The Authority’s commentary indicates that the link between new generation and the contract, can be:
- direct (e.g. where the contract is explicitly for capacity from the new generation site), or
- indirect (e.g. where the contract is from existing capacity, but is intended to underwrite investment in new generation).
However, it has provided little by way of context as to how a generator could show that a contract was ‘material’ to an investment decision for new generation, short of demonstrating that the investment would not have otherwise occurred.
Giving effect to a “materially large contract”
For a materially large contract to take effect, at least one of the following conditions must be met.
- The net value to the generator must be positive when compared to the value of the generator’s next best alternative.
- The buyer must be able to on-sell all unused MW quantities without incurring any worse terms than if it had consumed the relevant quantity itself.
- The Authority has provided clearance for the contract to proceed.
A generator must notify the Authority within five business days of:
- entry into a materially large contract
- any amendment to an existing materially large contract, or
- any changes to the volume or timing of the new generation which would put the contract above the 150MW threshold.
In notifying the Authority, the following must be provided:
- a copy of the materially large contract signed by the parties, and
- if Authority clearance has not been sought, a statement of reasons, with detailed evidence, as to how the value of the materially large contract is either net positive to the generator or the buyer can on-sell unused quantities.
The Authority considers that the amendment will catch very few contracts – “perhaps no more than two or three each decade”. However we think that its reach, based on market trends, will be much wider, potentially capturing:
- large corporate PPAs, including multi-site sleeved PPAs (for example, a large national corporate with many facilities may seek to consolidate its energy consumption (and procure green attributes) under a corporate PPA or PPAs which together cover a volume of 150MW or more)
- contracts which ‘step up’ in quantities of electricity to cater for the expansion or increase in production capacity of a buyer’s facilities (for example a contract which provides for 100MW in year 1 and 150MW in year 2 or following an expansion), and
- contracts which underwrite new generation development, where that new generation is delayed (currently very common) and therefore an indirect underwrite of new generation investment is more difficult to demonstrate.
If you are concerned about how this permanent Code amendment will affect you, please get in touch with a member of our specialist energy team.