Are your PPAs NEG Ready?

Given the news coming out of COAG’s meeting today that further negotiation on the design of the NEG will take place, it is timely to consider whether the PPAs of the past are “NEG Ready” and the current evolving approach to NEG under PPAs entering the Australian National Electricity Market (NEM).

The NEG proposes to mandate that electricity retailers and some large customers who purchase electricity directly from the NEM will be required to meet both reliability and emissions reduction requirements.

As the NEM is an energy-only market, “in front of the meter” PPAs in NEM-connected projects are typically structured as financial contracts and do not provide for physical supply. However, with the increasing uptake of corporate PPAs, the typical financial contracts between generator and purchaser may also be supplemented by standard or bespoke retail arrangements.

Parties (whether offtaker or “customer”) to existing PPAs and those looking at new PPAs will need to be alive to the risk allocations under their PPA arrangements if the NEG is adopted. In particular, the impacts on price and the response (or otherwise) of any contractual provisions relating to legal and/or regulatory changes.

Generally in the past 12-18 months, renewable PPAs whether with retailers or corporates have typically adopted a two-pronged change in law regime:

• protections specifically for “RET” risk or sometimes, more recently, an extended category of “green schemes” (relating to cessation, repeal, amendments etc, to the Renewable Energy Target (although not applicable for LGC-only offtakes) or broader category of “green scheme”); and
• protections for general changes in law (although these are typically limited if provided at all and may or may not deal with any cost implications associated with such changes).

Whilst we would caution against considering a one-size-fits-all approach to the treatment of NEG under these existing regimes, and each PPA would need to be considered on its individual terms as to the impact of the introduction of the NEG, there are some key aspects to consider in each case:

Will the introduction of the NEG trigger general change in law protections under existing PPAs?

This will turn on multiple considerations including:

• the extent of the change in law coverage under each PPA;
• whether or not the process requires parties to engage in good faith negotiations to find a common position they can both accept;
• whether the general change in law regime extends to cost impacts; and
• whether there are prohibitions / limitations to the change in law regime (for example, whether the parties have agreed that changes in law comparable to “RET” risk or a broad category of “green schemes” fall outside the ambit of the general change in law mechanism)

Will the introduction of the NEG trigger “green scheme” protections under existing PPAs?

This too will turn on certain considerations including:

• the extent and nature of “green schemes” included in the particular regime under the PPA;
• the extent of the obligations or commitments from the parties under the PPA to work together or take on regulatory requirements that are introduced for new “green schemes”; and
• much like general change in law regimes, the extent to which costs associated with this are borne by the contract parties or otherwise excluded from impacting variations to the current agreed position.

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.