Insights from session on 'Practical drafting tips on clean energy clauses

5 mins  06.11.2018 Darshini Nanthakumar

Australia continues to have a fluctuating clean energy landscape. This ongoing state of flux highlights the importance of future proofing carbon clauses in energy supply and associated contracts.

Australia continues to have a fluctuating clean energy landscape. This has been illustrated over the past decade by the failed Carbon Pollution Reduction Scheme, introduction and repeal of the Clean Energy Act 2011 (Cth), amendments to the Renewable Energy Target, operation of a range of State-based renewable energy schemes and most recently, the death of the National Energy Guarantee in its original form.

This ongoing state of flux highlights the importance of future proofing carbon clauses in energy supply and associated contracts. A recent session at the 2018 AMPLA conference on 'practical drafting tips on clean energy clauses' provides some specific contract drafting guidance, including:

Change event clauses:

  • Draft the definition of 'change events' broadly – cover introduction, amendment and repeal/expiry of law, legislative instruments and practices of professional bodies and authorisations, with specific carve outs as appropriate (eg changes to income tax);
  • Carefully consider when the change event clause ought to be triggered – generally the clause is triggered where a change event occurs after the execution date. However, in some cases parties may expressly exclude specific categories or types of future change events where such matters are sufficiently certain at the time of execution (eg, where a law is due to be introduced at a future date);
  • Assess whether associated parties who might be affected by the change event need to be captured as well – the impact of a change event on a related body corporate of a supplier, an upstream supplier or in the context of a joint venture should be worked through so that the impact of a change event on the contracting supplier entity can be appropriately passed through to the customer (ie, check that the drafting provides for a sufficient causative nexus between the clean energy scheme change and financial effect); and
  • Address both financial and non-financial consequences of the clean energy scheme change – non-financial consequences include scenarios where the change event is incompatible with the terms of the contract such that amendments to the contract are required. Without a mechanism to amend the contract in such circumstances (eg a deadlock procedure involving resolution by an independent third party where the parties cannot agree on the required amendments), the parties are often forced to rely on concepts of force majeure or frustration where negotiations break-down.

Pass through of financial consequences from supplier to customer:

  • Capture net rather than gross financial consequences;
  • Ensure that both increases in costs/reductions in benefits and decreases in costs/increases in benefits are covered;
  • Be wary of bundled commodity and clean energy pricing which may be difficult to unbundle where a clean energy scheme is repealed or varied during the term of the contract;
  • Consider minimum thresholds (eg dollar figure impact) for trigger of the pass through to minimise the administrative burden;
  • Assess inclusion and scope of supplier mitigation of costs obligations, including required mitigation steps and exclusion of pass through of penalties under the clean energy scheme;
  • In some circumstances, provision for the customer to discharge liability under the scheme in respect of its purchases may be sought, particularly where the customer considers that it is able to source free or cheaper credits compared to the supplier; and
  • Review the proposed mechanism for apportionment of net financial consequences of a change event between multiple customers to ensure it is appropriate, and include information sharing and verification procedures. Where confidentiality restrictions apply, aggregation techniques or use of an independent auditor arrangement may be warranted.

The above general drafting tips align with our own experience in drafting and negotiating clean energy clauses from both the supplier and customer side over the past decade. Where drafting for a particular clean energy scheme, further detailed and bespoke drafting is often required having regard to the particular circumstances of the deal, including:

  • to resolve the tension between verification, accuracy and fairness of allocation methodologies, and maintaining the confidentiality of contracting positions and other commercial in confidence information;
  • to develop contractual 'true-up' procedures where billing or payment processes do not align with the reporting and liability framework of the applicable clean energy scheme(s). Further complexities arise where contractual structures involve unincorporated joint ventures or other complex consortia arrangements; and
  • to cater for exemptions applicable to the customer or supplier in the context of the clean energy scheme or to provide the customer with flexibility to deal with its proportionate share of liability under a scheme by various methods (eg payment of pass-through costs to the supplier, direct participation in the scheme instead of the supplier or transfer of clean energy products/offsets to the supplier in substitution for payment of pass-through costs).

Drafting for these matters accurately requires details of a clean energy scheme to be known with sufficient certainty - a matter that is difficult in the current climate.

Ultimately, clean energy policy continues to be unsettled in Australia. Given this climate of uncertainty, the session concluded with the general tip to draft broadly for a myriad of schemes and revisit clean energy clauses in standard contracts regularly to check that they remain flexible and appropriate in light of policy changes and otherwise reflect current best practice.

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