Future proofing energy contracts: Clean energy change clauses (Article #2)

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In this series, we explore how to future proof energy contracts, to provide maximum protection against unwanted consequences of a changing legislative and regulatory landscape. 

In the first article of the series, we covered the key advantages and disadvantages in using specific carbon clauses vs general change event clauses (read HERE).  Given the current uncertainty in the clean energy landscape, the preferred way of addressing risks associated with legislative change generally seems to be change event clauses. 

When trying to future proof a contract against a clean energy scheme change (including a future scheme, or changes to the current scheme), there are several key issues to consider.  These issues will all influence how a change event clause should be drafted, to ensure all changes are captured and appropriately dealt with.  The first three of these issues are set out below:

1. How might the change be implemented?

Change event clauses are typically drafted so that they are triggered by a “change event”.  It is therefore critical to properly define the “change event” to ensure that the clause will respond to the relevant change.  Some key considerations when drafting include:

  • Ensure the definition of “change event” is sufficiently broad to capture any clean energy scheme change that may be implemented, and how it may be implemented – for example, through the introduction of a new law, an amendment to an existing law and the repeal of an existing law.  Consider expressly incorporating any changes that might be implemented through approvals and authorisations – for example, of any emissions limits that might be imposed as a condition of environmental approvals for a project.
  • Ensure the definition of “law” is drafted broadly to capture not only statutes, but other legislative instruments, as well as practices of professional bodies or other standards. 
  • Consider any exclusions that should apply in relation to a change event.  For example, it is common to exclude changes to specific types of taxes such as income tax and capital gains tax.  However, it is important to be careful about distinguishing between changes in law or tax (as practitioners may recall having to provide complex opinions to clients about whether the introduction of the Clean Energy Act involved a “change in tax”). 
  • Ensure a change event is also drafted to capture any existing legislative schemes (or aspects of such schemes) that have an in-built expiry date and may come to an end without a typical change event occurring.  For example, the RET scheme, as drafted, can effectively expire on 1 January 2031 without giving rise to a typical change event such the repeal of an existing law.  To overcome this issue, include specific clauses that outline any changes to the terms of the contract that will apply upon the expiry of a clean energy scheme, or expand the definition of change in law to specifically contemplate the expiry of a scheme without legislative amendment. 

This leads to a common pitfall of traditional change event clauses – they often do not deal with reductions in cost or loss of benefits.

2. When does the change need to occur to trigger the change event clause?

A change event clause will typically be triggered by a legislative change which occurs on or after a particular time (i.e. a “baseline date”).  This baseline date is often linked to the date the parties execute the contract, as it is presumed that the contract terms and prices have already taken into account any costs and obligations that existed at that time.  Some alternative approaches to the baseline date include:

  • Adopting a fixed baseline date – i.e. at a particular date before execution, to avoid the risk of the parties not being immediately aware of change events that occur around the time of signing.
  • Excluding change events that occur after signing that were capable of some degree of anticipation before signing.  This approach is common in the lead-up to heavily anticipated changes in law (and was frequently seen before the introduction of the Clean Energy Act), where parties have already negotiated the contract taking into account the anticipated change. 

If adopting the second approach, take care to ensure the change event clause can still operate if the actual change differs from the scheme the parties were anticipating.  For example, changes in law may only be excluded to the extent they do not materially differ from the scheme that was contemplated in a specific white paper or draft bill. 

When a contract is extended or amended, it is also relatively common for the baseline date to be changed to the date of the most recent amendment.  This reflects an assumption that the contract takes into account all relevant laws and other matters at the time of that amendment.   Carefully consider the implications before making a change to the baseline date, and ensure the parties understand any changes that have occurred between the execution of the original contract and the amendment of the contract.  There are also certain circumstances where amending the baseline date may not be desirable – for example, where the contract provides for the financial effects of a change event to only be passed through once they exceed a certain minimum value.  If the baseline date is shifted to the date of amendment, then a party may inadvertently be barred from passing through costs at a later date when the relevant threshold is met. This is because the relevant change event will have actually occurred prior to the revised baseline date.

3. Who might be affected by the change?

A clean energy scheme change may directly affect a supplier by imposing (or removing) direct obligations on the supplier.  However, any change is also likely to have broader effects within a company group or joint venture, and along the company’s entire supply chain.  It is therefore critical to take into account effects on other parties, such as related bodies corporate, joint venture operators and upstream suppliers.  The change event clause should be drafted broadly enough to:

  • encompass effects on the suppliers’ related body corporate or controlling corporation;
  • where the supplier is in an unincorporated joint venture, allow it to pass through to its customer any effects that were passed through to it by the joint venture operator; and
  • permit pass through of any impacts on the supplier’s own upstream suppliers (which may be achieved by identifying increases in the supplier’s upstream supply costs, or allowing pass through of direct and indirect costs).  

The next future proofing article will explore the potential consequences that may arise out of a clean energy scheme change, including non-financial consequences, and how you may want to address these.

Don’t hesitate to contact Grondal Bruining to discuss your situation or for advice about future proofing your energy contract.

Yvonne Jansen, Principal

Grondal Bruining

Email: yvonne.jansen@grondalbruining.com.au

Phone +61 8 6500 4300