Future proofing energy contracts: Clean energy change clauses (Article #2)
Found in: Blog
Found in: Blog
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:
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:
This leads to a common pitfall of traditional change event clauses – they often do not deal with reductions in cost or loss of benefits.
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:
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.
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:
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.
Phone +61 8 6500 4300