August 15, 2024 | Hannah Bebbington
This sounds simple enough: write a contract to buy X tons of carbon removal at Y price for Z years (often referred to as an ‘offtake agreement’). There are standardized, public contracts that do this for things like renewable energy or commodities. Most public contracts that exist today are designed to support technologies that are technically mature and already have a large market. However, carbon removal is still nascent—the technologies are much earlier, and the confidence in the market (especially when prices are high) is low. And yet, in order to get carbon removal to the scale scientists say we need, we have to start building—and learning—now. Carbon removal suppliers need offtakes today to help get new projects off the ground. So, the offtake agreements themselves need to be designed to work for carbon removal at its current stage, and thus manage more risks and unknowns than the existing contracts contemplate.
In order for an offtake with an early-stage carbon removal supplier to be catalytic, it needs to be:Bankable for project financiers, despite these technologies being very early: Project financiers need to know buyers will pay for the tons, so long as the supplier delivers. The revenue needs to be predictable and the risk of unexpected terminations very low. True bankability actually depends on project financiers getting comfortable with the technology risk, the execution risk, and the market risk associated with a project. Our goal with these documents is that these offtake agreements are robust enough to retire the market risk entirely, if 100% of the volume is contracted on this paperwork. Technology and execution risk have to be managed in other ways.
Flexible enough for early-stage suppliers, given building things is hard: FOAK project developers are, by definition, building something new. It can be hard to predict exactly how a project will develop. Suppliers need upfront alignment with buyers on which project details matter and they need generous and flexible expectations from buyers on delivery delays and shortfalls.
Attractive for early buyers, despite there still being unknowns about the project at the time of signing: Given the potential risk and uncertainty in these projects in the early stages, contracts need to protect buyers from buying carbon removal that doesn’t meet their specifications. Ideally, contracts also provide some incentive for early participation, like getting access to future, cheaper volume.
We’ve edited and refined our template over the course of seven offtake deals and ~$300M+ contracted. Today we’re publishing it in its current form, along with some notes on the core components of the document as well as some lessons learned along the way. This template is very unlikely to be the final form of carbon removal offtake agreements, but our hope is that it may help other teams save valuable time by providing a decent starting point.
The Frontier offtake agreement
Below we walk through the Frontier offtake agreement to show how we try to translate these goals into an actual contract. We’ll do this in three parts.First, we’ll lay out the timeline of a typical carbon removal project—this context is important for understanding how key contract dates map to what’s happening at the project level.
Second, we’ll walk through the key concepts in the contract.
Third, there is a link to the template itself where you can see how the key concepts show up in the contract. If you want to skip ahead to the template, you can do that here.
Timeline
The structure of the offtake agreement is designed to map to the stages of a project’s build timeline:
Commencement Date: Between the Effective Date and the Commencement Date, the supplier is finalizing the details of their project, such as completing engineering designs, securing their site permits, putting their energy source in place, etc. Some of these outstanding details are the “Conditions Precedent” in the agreement, meaning they must be demonstrably met and approved by the buyer before any delivery can happen. These are particularly useful for buyers who are committing to a project early and want confidence they’ll know how a project will develop. After the resolution of each outstanding item, the Commencement Date is met and the buyer is committed to paying for the carbon removal units (CRUs) when delivered according to spec.
Financial Close: Most project financiers will take the final investment decision on a project and transmit funds after the Commencement Date has been met. This is done so that the project financier can minimize the capital at risk while the team is still developing project specifications. Once a supplier receives the funds for their project, they can begin construction.
Commercial Operation Date (COD): When construction is complete, the project will achieve their Commercial Operation Date by demonstrating they can operate and deliver as expected.
Delivery: Once both the Commencement Date and COD have been met, the supplier can start delivering CRUs to buyers and buyers must pay for what is delivered, per the terms in the agreement.
Key contract concepts
Here we’ll walk through the key concepts that make our offtake agreement what it is and why we need each one. If you click “view in template” in the left-hand column, you can see these concepts in-situ in the agreement with additional commentary.
Key conceptWhat it isWhy we structure it this way
Fixed price & volume
The Frontier offtake agreement has a straightforward take-and-pay structure with a fixed price and volume. There are other alternative structures that work in different use cases—such as hell-or-high-water or contracts-for-difference–that may be worth considering depending on the specific goals of the buyer. For buyers: This structure makes it easy for them to budget for cash flow (dollars) and climate commitments (tons).
For project financiers: Predictable revenue gives them confidence to underwrite the project.
Project Description
This agreement requires that the supplier operate the project in a way that aligns with buyer expectations. The supplier and buyer typically work together on this product spec to describe the technology being used and anything else that may be important for the buyer (e.g., the type of biomass feedstock sourced, the type of energy used to power the facility, the site(s) that will generate the CRUs, etc.). The buyer is only on the hook to pay for CRUs that meet this description. For buyers: The pre-defined product spec gives them the comfort that the CRUs they think they are buying will be the ones they ultimately pay for. Even small changes to a supplier’s approach (e.g., changing the feedstock for a biomass pathway) might significantly alter the net climate impact of the delivered tons.
For project financiers: This also gives lenders confidence that there are clear expectations between buyers and suppliers about what the CRUs have to be at the time of delivery.
For all parties: This description also nicely delineates this project from future projects, which is important for the right of first offer (ROFO).
Conditions Precedent & Commencement Date
This agreement lists Conditions Precedent that must be met in order to deliver CRUs. The date at which all these conditions are met is the ‘Commencement Date.’ This list of conditions encompasses all the outstanding questions that may impact the supplier’s ability to operate the project as the buyer expects, and that the buyer wants to review and approve before delivery begins. Some of them are standard across all projects (e.g., the need for an approved Protocol and CRU Issuer) while others are project-specific (e.g., securing a site permit or meeting a technical development milestone). These Conditions Precedent ensure the project is developing in accordance with buyer expectations. For buyers: Visibility into the project development gives them the confidence that they can commit early to a project and it will develop as they expect. If any of these milestones are not met (and not remedied), the buyer can terminate.
For project financiers: Once the Commencement Date has been met, lenders can feel confident investing in the project. From this point, the buyer is committed to pay for any CRUs delivered.
Commercial Operation Date
To the extent the supplier is building a facility that requires construction, a Commercial Operation Date (COD) is useful. This is the date at which the facility is ready and able to start delivering CRUs to the buyer that adhere to the Project Description. For projects not building a facility, often the Commencement Date (outlined in the previous key concept) is sufficient to start delivery. For all parties: A clear COD aligns the parties as to when delivery can and should begin. This date provides clarity that once the project “turns on” and the supplier can start to deliver, the buyer is on the hook to pay for the tons.
Delivery
A CRU in this agreement is considered delivered when the buyer receives:The certification from the supplier that the removal has been completed and the CRUs are valid per the terms of the agreement
The issued credits from the CRU Issuer.
At the point of Delivery, the buyer takes title to the CRU. For all parties: A clear definition of Delivery is critical, as this moment triggers buyer payment. Importantly, delivery does not occur at the time of removal, but only once the CRUs are complete, verified, and issued.
Delivery shortfall & delays
The supplier can under-deliver proportionately to each buyer, so long as they exceed the Minimum Quantity (a percent of the total contract volume) in or by a certain year. If they don’t exceed this Minimum Quantity, there are simple termination rights for the buyer, but no damages.
The supplier can also get an additional six months to meet the Commencement Date if the delay is explained to the buyer (plus up to an additional X months at buyer’s discretion). For suppliers: Grace periods on certain milestones and limited damages for under-delivery are important as they deploy novel technology for the first time.
For project financiers: These provisions give them more confidence to underwrite a FOAK project, knowing the buyers are committed even if timelines or quantities shift.
Termination rights
Buyers have limited termination rights. They can terminate only:by mutual consent, or
if the supplier:cannot meet the Commencement Date or the Commercial Operation Date, or deliver the Minimum Quantity, and the issue cannot be rectified
has a Change of Control event to a Restricted Person (an outlined set of parties the buyer is uncomfortable with)
materially breaches any other term in the agreement (e.g., loses its right to operate the project), or
becomes insolvent. For project financiers: Termination rights need to be limited and very clear in order for the Agreement to be “bankable” (in other words, project financiers are able to underwrite and fund the project). All parties should understand the few circumstances where termination may occur and it should not be possible for a buyer to wriggle out of the agreement for any other reason.
Remedies
We limit punitive damages. If a project is demonstrably not going to work, we prefer to part ways quickly and kindly, without damages. Monetary damages are used sparingly and only where there is bad behavior or real injury to buyers. If a supplier acts in bad faith—e.g., delivers invalid tons, doesn’t offer the expected ROFO—there are specific remedies outlined to make the buyer whole. For all parties: This is an early market and it is inevitable that some technologies will not work. In the interest of attracting many more entrepreneurs, investors, and financiers to the space, we want to avoid a supplier facing enormous penalties if it turns out that their project doesn’t work as expected. As the market scales, and eventually new policy regimes exist, buyers may start to face real monetary damages if CDR is not delivered on-time-and-in-full, and the contracts may evolve to reflect that reality.
Protocol & credit issuers
A Protocol is the set of requirements used to measure the carbon removal being delivered. A Credit Issuer is the third-party entity that will verify the credits meet the Protocol and list them on a public registry. Both must be approved by the buyer as part of the Conditions Precedent to the Commencement Date. Once a project starts delivering, a supplier, buyer or Credit Issuer can request a change to the Protocol. The parties will confer on whether the change is advisable to ensure accurate verification and quantification of the CRUs. If the change is put forth by the CRU Issuer, the buyer can approve it. Otherwise, the parties have to mutually agree on a path forward. Note, this agreement does not anticipate that the price or quantity will be adjusted in the agreement as a result of a change to the Protocol. Adaptable measurement standards are critical for ensuring the best-available science is being utilized throughout the Term.
For buyers: In order for buyers to be comfortable committing early, while protocol and registry standards for carbon removal are still rapidly evolving, there must be mechanisms for updating these technical documents.
For project financiers: Changing the Protocol or CRU Issuer may impact the bankability of a project (as they may impact the price and capacity of projects), so these changes cannot be made unilaterally by one party.
Right of first offer
This Agreement gives the buyer a right to buy excess tons produced by the project delivering on this agreement and future tons delivered from new projects owned by or affiliated with the supplier. To make this fair and practical for the suppliers, we structure this as a right of first offer (ROFO), not refusal, so there can’t be an endless hold-out on volume. Additionally, the future tons offered are done so at a price and terms put forth by the supplier. For buyers: Getting access to future, cheaper tons is a great incentive to encourage buyers to participate in a nascent market. Earlier movers for a given project may get better ROFO rights.
Note, a ROFO is deal specific and may not make sense in every scenario. It is possible that ROFOs will become less common as the market matures, and there are more buyers/suppliers in the market.
There are some terms that are common in standard offtake agreements in other industries that are not included in our template. We thought it might be helpful to lay out our rationale for not including them. However, it is reasonable to expect that some of these terms could make sense in other categories of novel climate technologies or start to appear in more carbon removal agreements as the market matures:
Guaranteed volumes: It is common for large renewable energy developers to guarantee volume (i.e., if their project is unable to deliver the required volume under the agreement, they will source from other projects). While this is workable in the renewable energy space, the carbon removal market is still a nascent market, so there is not a liquid market to source from, and we are only interested in buying from specific carbon removal technology types (CRUs are not interchangeable). We’d rather just reallocate the capital to a project of our own choosing.
Liquidated damages: Liquidated damages are pre-defined damages, often paid by a supplier to the buyer in the instance of a delay or delivery shortfall. These are often specifically denominated in a $/unit, for example $/hour or $/MWh. They are meant to offer a way of aligning at the outset how to quantify what damages a party might suffer in a certain scenario. We do not include these types of contract damages in our offtake agreement because the real damages a buyer faces in a shortfall or delay scenario are very limited. For physical commodities, especially those with existing spot markets and lots of price visibility (like concrete), these may be required.
Delivery insurance: A number of insurance offerings have emerged in the carbon removal market to protect both buyers and suppliers in the instance of a delivery shortfall. Similar to insurance products in the renewable energy space, these products build confidence that participating parties are ‘covered’ even if the technology doesn’t work, the facility is delayed, or an unexpected event occurs. Some of these products compensate a buyer to replace undelivered credits or cover costs to find additional credits if a supplier doesn’t deliver. However, a policy may also insure the supplier, giving project financiers more confidence a supplier will have the resources to cover their debt payments even in the absence of credit sales. These products are nascent and we did not need any insurance to get all stakeholders to the table, and so the concept is not included in our template.
The offtake agreement template
View or download the full template. We’ve annotated it with the key concepts outlined above to make for faster reading.See the template
Some things we wish we’d known earlier:
Have at least one dedicated lawyer on your team. When we got started, we had 1 in-house lawyer and 1-2 partners at a law firm supporting the drafting of the original template and negotiations of the first few deals. It was important to have sustained support from people who weren’t just focused on getting a single deal over the line, but who could also see how our offtake agreements looked in aggregate and how agreements were performing in the field. Our lawyers were able to incorporate lessons across negotiations and maintain a single style across our documents.
Rewrite agreements often to streamline & simplify. Our first contract started with the bare minimum and, with input from others, slowly came to include the kitchen sink. Buyers, lawyers, suppliers, and investors added provisions to account for every possible edge case. The document became over-complicated, hard to parse and, most importantly, intimidating to parties who worried the density was masking ‘gotchas’. So we took that ‘Frankenstein-ed’ document and had a single lawyer rewrite it, capturing the key points from the original negotiations, but in a streamlined and simplified form. This cut negotiations from six months to two months. Limit the number of lawyers who have the ‘pen’ and rewrite in plain english as often as possible.
Get all relevant stakeholders, even those who aren’t signing, to give feedback on the terms. For example, project financiers are an important audience for these carbon removal projects. They are the ones who will provide the capital to build the projects that will deliver on these agreements, so it is important that these agreements work for them (in other words, it’s important the form is ‘bankable’). When figuring out who needs to be in the room, make sure you understand the whole ecosystem of stakeholders who care about this agreement (whether signing or not) and get them actually in the negotiations early. For other climate technologies, this could include homeowners, landowners, or regulators, to name a few.
Whether you’re working in carbon removal, thinking about building another AMC or scaling other novel climate tech, we hope this template saves your team valuable time. Please reach out to us at [email protected] with any questions.
A special thank you to Orrick, Herrington & Sutcliff LLP for the expert insight provided during the drafting and negotiations of this template.
Disclaimer: The offtake agreement template is intended to serve as a starting point only and should be modified to meet your specific deal and organization requirements. The offtake agreement template and related annotations do not constitute legal advice.