Agricultural Brief - Feedstock supply contracts: the key to a successful AD operation


20 May 2019

Anaerobic Digestion (AD) represents a potentially significant source of carbon neutral energy. Through the fermentation of organic matter, two by-products are produced: biogas and digestate, both of which are valuable commodities in their own right. 

Commercial AD plant operators repeatedly turn to purpose grown crops to feed their plants. Feedstocks such as maize, barley or rye have high calorific content and so maximise energy yields. This has given rise to a shift in the agricultural industry towards the production of feedstock which, in turn, benefits from the digestate produced in the AD process.

In this article we look at some of the key issues AD operators and feedstock producers will need to consider to ensure they have not only a viable, but successful, long term commercial relationship.

Quality

Feedstock quality will ultimately determine the success of any AD plant operation. Operators and producers alike will need to be clear as to the quality criteria feedstock is to meet.

Feedstock quality is often based on its dry matter content, but this is by no means the only measure. Irrespective of the qualitative method chosen, the parties need to be clear as to:

  • how quality will be checked
  • each party’s rights and obligations in the event that feedstock is defective
  • how disputes as to quality are resolved.

Clarity on feedstock quality will better enable the parties to work collaboratively to ensure the right quality feedstock is supplied in the first place; which will ultimately benefit both parties.

Price

Consideration will need to be given to pricing, particularly whether quality and price will be linked. Frequently parties will agree a base price, set according to certain quality criteria. A mechanism is then agreed allowing the price to increase or decrease according to whether the base quality criteria is exceeded or missed. 

Additionally, it’s common for parties to agree a general price review mechanism. However, the interests of the parties are likely to diverge. Producers will want prices to vary according to any increase in production costs. Conversely, operators will want prices to remain stable. Compromise is often reached by agreeing a form of index-linked price review mechanism.

Term

Both parties will probably want any arrangement to be relatively long-term. Producers will benefit from being able to plan investment based on having a secure purchaser. Similarly, (especially where third-party investors are involved) operators will require a secure supply of feedstock. Particularly so with long-term arrangements, the parties need to be clear on termination including:

  • whether unilateral rights are to be included
  • whether changes in regulation can trigger termination
  • what breaches will give rise to a right of termination
  • what consequences will flow from termination.

Risk, title and delivery

The party’s interests are likely to be at odds over delivery. Regardless of whether the producer or the operator is harvesting the crop, the producer will favour harvest in optimal conditions and delivery as the crop is harvested (day or night!). However, operators will need to be mindful of their capacity to harvest and accept deliveries including any specific site access or storage limitations. It may be that restrictions on delivery can be agreed where producers are reimbursed their reasonable storage costs if they are unable to deliver straight from harvest. 

The passing of risk and title in the feedstock could be another bone of contention. Producers will want risk to transfer on delivery but retain title until receipt of payment. Conversely, purchasers will want to stave-off accepting risk, but will want to receive title on delivery.

Additional considerations include agreeing who’s to be responsible for putting feedstock in clamp and where liability falls where clamping is defective. Further, delivery and quality (specifically the testing regime) will closely interact. Operators are likely to want to prevent further delivery where quality issues are detected. However, suspending delivery could materially affect a producer’s harvesting schedule. Producers will likely push back against such provisions, favouring quality issues to be dealt with by way of price adjustment.

Sustainability and regulatory compliance

Operators will benefit from one of the various government incentive schemes (Feed-in Tariffs, the Renewables Obligation or Contracts for Difference). Benefitting under these schemes requires compliance with certain sustainability requirements. 

Operators need to ensure feedstock is supplied in compliance with the relevant sustainability requirements and that they have appropriate remedies where feedstock doesn’t comply. Such remedies often include the producer indemnifying the operator for losses suffered where sustainability criteria are not met. Naturally, producers will want to resist giving such an indemnity. But compromise can be reached if the producers risk is balanced against, for example, an uplift in price where all sustainability requirements are met.

Digestate off-take

Frequently, producers will agree to remove digestate for their own use. However, any agreement will need to be clear as to when digestate is to be removed. Operators will want it removed at regular intervals as required by plant operations. However, producers, especially if located within nitrate vulnerable zones, will want to limit the amount they take during NVZ closed periods. 

Moreover, the parties will need to agree terms as to price and whether the operator is able to sell digestate on their own account if the producer is unable, or unwilling to accept any.

The agreement

Finally, it’s in both the operators' and producers' interest to ensure any agreement reached is clearly set out in writing. For the AD operation to be successful, operators and producers need to be clear as to their roles, obligations and liabilities. 

The process of negotiating and agreeing a form of agreement gives both parties the chance to be clear as to precisely what is being expected of them. This process alone can prevent disputes arising in the future. Further, a well-crafted agreement can save both time and cost being incurred by both parties if things do start to go wrong.

If you have any further questions on this article please contact Edward Bouckley or a member of the Corporate Team.

This article is from the spring 2019 edition of Agricultural Brief, our newsletter for farmers, landowners and others involved in agriculture. To download the latest issue, please visit the newsletter section of our website. Law covered as at May 2019.

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