Carbon cost pass-through arrangements

01 Jul 2011Archived News Climate Change Matters

For several years there has been uncertainty surrounding the start date and format of a potential cost on carbon in Australia. As a result, most electricity retailers have developed contract clauses to enable them to recover costs from customers upon the introduction of any carbon scheme. The nature of carbon cost recovery clauses differs between electricity retailers. Given the lack of certainty regarding the structure of any carbon scheme, the clauses may result in carbon pass through costs that bear little correlation with actual costs incurred by the retailer.

There are three broad types of pass through clauses which electricity retailers are currently using as a basis for recovering carbon costs upon the introduction of any scheme:

1. Formula based: A formula is included in the contract to calculate a $/MWh carbon pass through cost. The formula typically calculates pass through costs by multiplying the average emissions factor of all generators in the market (in tonnes of CO2-e/MWh) by an average carbon permit price (in $/tonne of CO2-e). This style of pass through provides a transparent means of calculating pass through costs, but may not accurately reflect the retailer’s own carbon costs. The formula will be to the customer’s advantage in states where the emissions factor is higher than the national average (such as Victoria), and disadvantage when it is lower (e.g. Tasmania).

2. Pass through of carbon costs incurred: Rather than use a formula, some retailers use a clause which states that any costs incurred in relation to any carbon scheme will be passed through to its portfolio of customers. In some cases this is limited to the pass through of direct costs, in other cases the contract also permits the pass through of indirect costs. Whilst this clause does not provide a transparent means of passing through carbon costs, it is likely to be preferable to the formula based clause in areas where the emissions factor is lower than the national average.

3. Change in Law: Some retailers have not included a specific carbon clause in their supply conditions, and will rely on their standard Change in Law provisions to pass through carbon costs. This is typically the least clear of all the options, and could arguably entitle the retailer to pass through all upstream carbon costs incurred.

How can Energetics help?

It’s important that end-users understand the specific clauses contained within their electricity supply contract to recover carbon costs. When negotiating a supply agreement, most retailers are reluctant to amend their carbon clauses. Some retailers will offer a contract without any form of carbon cost pass through, but a price premium usually applies.
Energetics can assist customers in understanding their potential carbon pass through liabilities from their electricity contracts as well as across their business as a whole.

Energetics’ Energy and Carbon Markets team has been assisting customers in negotiating electricity supply contracts since the deregulation of supply. We can help you understand your energy supply agreements and assist in contracting future requirements. 

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