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Managing Risks in Cofiring Contracts

By Todd Taylor | August 23, 2011

Biomass cofiring with coal is a great idea. Biomass cofiring is a technology that is readily available, energy plant improvements are often minimal, and feedstock is abundant and often low cost. It also helps lower CO2 emissions, sulfurous gases and other harmful gases. As a supplier of biomass feedstock for cofiring systems, these are surely at the top of your sales benefit list.


But, when you are working on the sale, be aware of the risks and how they may impact your bottom line. Obviously, the cost of the biomass is a large issue. Make sure the price you quote your buyer is one you can manage during the life of the contract. If you don’t control the biomass, strongly consider trying to get a variable pricing structure from your customer so you are not squeezed between escalating costs on one side and a fixed sales price on the other. Think of this as well for other variable costs, specifically fuel if you have to deliver the feedstock. I had a plant client who had a fixed-price contract for feedstock, but not long after the contract started, the feedstock provider demanded more money because diesel fuel costs were rising. There was no provision in the contract for variable fuel costs and it created significant difficulties for the supplier, ultimately costing them the contract and their company. If you can’t get variable pricing for feedstock or key inputs, carefully consider your cost and pricing model so that you can survive reasonably expected changes.


Think also of biomass quality. Cofiring systems require the biomass to have certain moisture content, size, ash content and other quality issues. Not long ago, a renewable energy company with a biomass gasifier had serious difficulties due to feedstock quality issues and ultimately shut down the gasifier because it would not work on anything but high quality and expensive biomass. Know up front what your customer will need and make sure that the contract provides for that. 


Consider what happens if you cannot supply acceptable feedstock. Usually, the customer can cancel or suspend the contract and find an alternative source. Sometimes however, when a customer has penalty clauses in their power purchase agreement or would otherwise suffer losses from a failure to deliver feedstock, the customer asks for liquidated damages. This means that if you cannot supply the feedstock, you are liable for their losses. 


Pricing mechanisms are often a subject of negotiation and many mechanisms exist. Avoided cost basis, cost of feedstock, impacts of renewable energy credits or other tax or policy pricing, pricing for quality (both premiums and penalties), Btu variability, ash content and more are valid and often used mechanisms. Understanding how each works and will impact your business is important.


If you are a biomass cofiring technology provider, feedstock quality issues, including the quality and size requirements for your system, should be clearly listed in the contract. Emissions profiles, ash content and disposal, performance guarantees, warranties and indemnification are also important contract provisions that need careful consideration. Too often, performance guarantees, warranties and indemnification are considered “boiler plate” and not given the attention they deserve. But, they can all have significant impact on how fault, and thus financial responsibility, is determined. While your advisers can help you with many of these issues, you need to think of how these contract provisions will impact the relationship with your customer and your own business. An unfortunate example of this was a technology provider whose contract did not define many key terms related to performance and emissions. Because they were not defined, when a problem occurred, it was uncertain whose job it was to fix the problem. Uncertainty often leads to disagreements and disagreements lead to lawsuits, which help neither party.


Like most things, an ounce of prevention is worth a pound of cure. Asking your customers these questions may not be as fun as closing the deal, but both you and your customer will later appreciate your attention to detail … or you will both wish you had read that fine print.


Author: Todd Taylor
Co-Chair Clean Technology Group, Fredrikson & Byron P.A.
(612) 492-7355
ttaylor@fredlaw.com

 

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