Are old ARENA projects really safe?

We now know ARENA's future is bleak, but a clause in its standard contracts provides the government with the power to also abandon already underway and funded projects. This could leave developers stranded with half-finished projects and big debts if they didn't make sure this clause was removed.

Yesterday the Abbott Government appears to have finally confirmed what everyone had come to expect, it will relegate its pre-election commitment that it “fully supports ARENA” to the non-core promise bin and abolish the agency in tonight’s budget.

At present there are no details of what, if any, of the Australian Renewable Agency's programs and associated uncommitted funding will be rolled over into the Department of Industry. One would suspect, given events over the last few months, that nothing will survive other than legacy projects funded under agreements already signed. By tonight with the release of the budget papers this should finally be resolved.

Of course, it’s worth noting that this may not be the end of the story. Similar to the Clean Energy Finance Corporation, ARENA’s funding is specified in purpose-built legislation. As explained in the article, Could ARENA defy Abbott's axe?, until such legislation is repealed, ARENA can theoretically draw funds from Treasury to operate its programs, even if the government removes its funding. 

However, with the Coalition winning three seats in the WA Senate election re-run, it is now likely to have the numbers to repeal the ARENA legislation. 

In spite of the repeated budget cuts and doubts about ARENA’s survival, there has always been an expectation that projects with existing funding agreements would be safe from cuts.

Yet a review of ARENA’s standard form funding contracts reveals a clause that grants the government almost a carte blanche ability to terminate agreements based on change of government policy.

This contractual clause states: .. if there has been a change in Commonwealth government policy, ARENA may, by notice, terminate this Agreement or reduce the scope of the Project. 

Importantly this clause also heavily constrains the amount ARENA would be liable to pay project developers for suddenly terminating a contract. It appears that ARENA, or rather the government, would only provide the proponent with the payments it had agreed to allocate up to the stage of construction which the project had reached. The government would not be obligated to provide the full amount of funding it originally agreed to pay to see the project through to completion. 

This wouldn’t be such an issue if the government was funding 100 per cent of the construction costs for the project. But ARENA has typically agreed to fund only 50 per cent or less of the project costs. So a project developer could find itself having spent several million dollars of its own money, and be left with a partly-constructed and inoperable project, with insufficient funds to complete it so that it could generate revenue. 

To illustrate, imagine you’d spent a few million dollars on transmission connection works, roads, metal framing and site excavation for a solar power farm. Then the government says, “Policy’s changed. I’ll pay you the 50 per cent of the cost for the work you’ve already done but won’t give you any money for the solar panels”. The work you’ve already done is only of value if the solar farm is constructed, you can’t sell it to someone else. But without money to help buy the solar panels you can’t complete the project. 

Based on my own past experience negotiating contracts, such unreasonable clauses usually don’t make it past the first negotiation meeting. They’re usually created by an overzealous lawyer with a view solely to their own client’s interests rather than getting a mutually acceptable commercial agreement. 

But sometimes they sneak through. 

ARENA’s chief executive Ivor Frischknecht and chair Greg Bourne have repeatedly assured stakeholders that funding is secure for those projects that already have agreements in place. But with ARENA abolished they may not be the people making the decisions. 

One hopes the government would recognise that invoking such an unfair clause would send a very poor message to investors that might be thinking of participating in other government programs, such as the Emissions Reduction Fund.