Following the rhetoric around the NEG late last year, the new wave of PPAs entering the market continue to evaluate how to treat the NEG in the risk allocation between parties and the contractual process adopted to deal with the NEG.
Whilst there may be multiple ways to address this contractually, many of which will largely depend on the parties’ respective positions on risk allocation and “must haves” versus “nice to haves”, one thing is clear, new PPAs should, at least for now, be contemplating the NEG expressly and incorporating a regime to deal with it, if and when it eventuates.
In our experience, particularly when we look back at similar assessments when carbon pricing was introduced, the key broad considerations would include:
- whether legislative and regulatory changes associated with the NEG will or will not trigger the ability to revisit PPA pricing; and
- whether legislative and regulatory changes associated with the NEG will or will not trigger the ability to revisit broader PPA provisions (including the ability for parties to discuss and amend the PPA in a way that fits the needs and wants of both parties).
The parties will need to consider their baseline requirements. For example, generators requiring debt finance, may have to reach certain bankability thresholds in terms of risk allocation to ensure certainty of their revenue stream and minimise or exclude erosion by unknown costs. Retailers and affected customers will consider the commercial impact to their business of the NEG requirements and whether or not they can internally manage that at no cost or minimal costs to the business or whether there are alternative ways to manage the risk without passing risk to the generators.
As always with change in law regimes, the balanced position will no doubt fall squarely within the envelope of the person “who is best placed to accept and mitigate the risk” taking that risk.
We have started reviewing existing PPAs to ascertain how the NEG will impact on the existing pricing arrangements, and are giving consideration to appropriate provisions for new PPAs. Please contact a member of our Energy team if you would like further assistance.