The Clean Energy Regulator (CER) has released the details of its proposal to allow sellers to exit Fixed Delivery Carbon Abatement Contracts with the Commonwealth Government. The plan proposes to offer an alternate pathway for sellers, predominantly landholders, to achieve the market spot price for Carbon Credit Units (ACCU).
Fixed Delivery CACs
Early adopters of Carbon projects predominantly entered into Fixed Delivery contracts that involve agreeing to provide a set number of ACCUs at a fixed price for the duration of the contract. For many, the fixed price is around $10 per ACCU, however the spot market price has been consistently trending above $30 per ACCU for the past year.
If sellers cannot meet their agreed deliverables under a contract, they are required to pay a default fee known as “Buyer’s Market Damages”.
Proposed Exit Strategy
Under the CERs proposal, Buyer’s Market Damages can be utilised as an exit payment, and Landholders can apply to pay the exit fee instead of delivering all or part of their deliverable ACCUs. The exit fee will be calculated by multiplying the contract price per ACCU by the quantity of ACCUs that will not be delivered.
Subject to CERs approval, successful applicants will pay the exit payment and then be “released” from their obligations, and able to take the undelivered ACCUs to market.
Who is eligible?
In determining whether a seller is eligible for the fixed exit strategy, the CER will assess and consider:
A. Milestone delivery dates – to control the release of ACCUs to the spot market, sellers must apply during their relevant milestone delivery window.
B. Seller’s compliance with their contract– the policy suggests that if there are no outstanding contractual obligations related to prior delivery failures, the seller will most likely be eligible.
C. Whether the seller is in good standing with the CER – sellers must have negotiated in good faith with the CER regarding their contractual obligations.
D. The benefit sharing framework – the CER has released a framework to ensure that any proposed windfall profits achieved by sellers accessing the open market are shared between the seller and relevant third parties, including carbon service providers (CSP).
Given the proposed exit strategy only applies to contracts between sellers and the Government, it is surprising that the CER is so concerned with the interests of third parties operating under private commercial agreements. CSPs have no doubt been heavily involved in the consultation process.
The first “window” for applications to exit opened between March and June 30, 2022 for sellers with delivery milestones falling in that period.
Provided sellers have considered their relevant eligibility, the next steps are to:
- Apply – submit an application to the CER identify the ACCUs to be released;
- Obtain Conditional Approval – CER will determine a Landholder’s eligibility, and if satisfied, will issue an invoice for the exit payment that is conditional on payment being made by the milestone delivery date; and
- Settle – make payment prior to the milestone delivery date.
Thynne & Macartney is dedicated to advocating for Landholders considering, and engaged in, Carbon agreements. Partner Alex Ramsey is an approved Carbon Advisor under the Land Restoration Fund Scheme that provides grants for Landholders seeking legal advice in the area.