If the UK is to meet its carbon and greenhouse gas emission reduction targets, it is imperative that the Renewable Energy Sector harnesses the potential of the Agriculture Sector as a source of sustainable feedstock.
Reciprocally, the Renewable Energy Sector presents the Agriculture Sector the opportunity to diversify the market for its products, turn current liabilities into assets, and move away from the price volatility associated with the more traditional markets of the Agriculture Sector.
Commercial issues in energy crop and biomass contracts
In many respects, agreements which relate to the sale and purchase of energy crops (of any sort, such as maize, grass, miscanthus and short rotation coppice) and animal wastes (such as litter, manures and slurries) should cover the same matters as one would expect in any other sale and purchase agreement.
There are, however, specific arrangements which need to be taken into account in the context of biomass provision contracts for renewables projects, especially where third party funders are involved in the renewables project and funders' desire to ensure that the project benefits from long-term supply arrangements (often referred to as “feedstock security”).
Generally speaking, a business is permitted to agree to any terms of a contract which it decides is commercially acceptable, and for this reason it is often the case that no two feedstock agreements are the same.
Quality, quantity, price and term
The factors of quality, quantity, price and term are often intrinsically linked from a commercial perspective. Investing a little time into considering how these elements interconnect will ensure that the agreement commercially incentivises parties to act in the desired manner, rather than rely on the threat of termination agreement and "penalties" (which may be unenforceable in any event).
Quality: Is quality measured in terms of dry matter content, volatile organics percentage, potential energy content, methane content, or some other method? What levels of “contamination” (including non-feedstock substances) are acceptable? If the quality criteria are not satisfied, what is the consequence - a price reduction or rejection of the delivery? Who is responsible for testing? If an independent third party tester is engaged to test the biomass, are the arrangements in place to ensure that the tester owes a duty of care?
Quantity: How much feedstock needs to be delivered? What is the measurement methodology (for example, flow meter, weighbridge)? When is measurement taken (see “storage” below)? What is the required delivery schedule?
Price: Are prices fixed (perhaps on a per tonne basis), or adjusted according to quality? If price is to be adjusted for quality, is the contract clear on how that adjustment is made? Are prices subject to indexation, market price review or any other adjustment during the term?
Term: What is the intended length of the relationship? In what circumstances may the agreement be terminated early? Will one or both of the parties be entitled to “break” the agreement at certain periods? What are the consequences of early termination? Can the ability of termination and its consequences be managed effectively?
Delivery and timing of payment
Delivery: When does “delivery” of the feedstock take place? Does ownership of the feedstock pass to the purchaser upon “delivery”, or at some later date (perhaps when it is removed from a clamp, barn or storage tank)?
Storage risk: Who is responsible for providing storage (both the infrastructure and the land on which the storage is located)? Who is responsible for in-store losses of quality: this should link with the testing regime. Who is responsible for insuring the crop (for example, against arson)? Who owns the facility in which the feedstock is stored, and does this match up with who owns the feedstock at delivery? Does the testing regime tally with delivery of the feedstock?
Consequences of non-delivery
The parties should consider what should happen if the contracted-for biomass fails to materialise. The (broadly stated) common law position is that damages for a breach of contract should put the purchaser in the position it would have been in had the contractual obligation to deliver been fulfilled. If the purchaser has not paid for feedstock which has not been delivered (which will be the case in many contracts), then the level of damages would be calculated by reference to the additional expense which the purchaser was put in procuring the undelivered feedstock from another source. In practice it might be better to set out in the agreement a mechanism through which the supplier can remedy any shortfall in delivery. Are there circumstances where the biomass supplier might fairly be relieved of its delivery obligations, such as flood, vandalism and disease?
Contracts for the supply of energy crop often require the feedstocks to be grown in a manner which complies with “sustainability criteria” imposed by the Renewable Heat Incentive regulations. Some purchasers may also require that their own sustainability criteria are complied with in order to fulfil the purchaser’s own corporate agenda.
Whilst both sets of sustainability criteria may be understood at the date the contract entered into, how will changes to these criteria be dealt with between the parties? Whilst nothing is certain, it is likely that government’s view of what constitutes “sustainable” will evolve(and become more restricted) in response to public opinion and pressure from various lobbying groups.
In addition, the parties should also consider who will bear the risk of changes in governmental and European farming policy. Will the supplier be capable of satisfying its feedstock obligations in the face of increased greening and environmental requirements? It must be remembered that eligibility for subsidies underpins the business case for many farming activities. How should the consequence of a “Brexit” be managed?
A common requirement in the context of anaerobic digestion projects, the following considerations may apply: in what quantities and at what frequency does the digestate need to be taken? Will the digestate be “whole”, or the liquid or solid fractions? Who is responsible for providing storage for the digestate? Is the quantity of storage sufficient for any applicable closed periods? Will there be any guarantee of quality of the residue (for example, PAS110) or its nutrient content?
Animal-derived (non-ABPR) feedstocks: Is the agreement sufficiently clear on what should happen in the event of outbreaks of notifiable diseases (such as avian/swine flu, foot & mouth) which limit feedstock production and/or its transportation?
Perennial crops: Crops such as miscanthus and short and long-rotation coppice require an extended period to get established, introducing specific issues and risks for consideration. Who is going to be responsible for the planting/establishing of the crop? Are suitable arrangements in place to ensure that the planting density maximises the yield per acre? Who will bear the cash flow burden for the initial period of reduced yields? Are the losses which would be suffered following an early termination of the agreement sufficiently covered in the agreement?