Offtake Agreements
An introduction to the instrument and its potential for climate tech startups
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Brief summary
An offtake agreement is a contractual arrangement between a producer and a buyer,
where the buyer agrees to purchase a specified portion of the producer's future production.
Purpose
It secures a guaranteed market for a portion of the producer’s future output, often before the production facility is
fully operational.
Importance in financing
It may prove critical for securing the financing of capital-intensive projects, as it provides future revenue certainty to
both lenders and investors.
Types of agreements
• Fixed quantity: Buyer commits to purchasing a fixed amount of product at pre-agreed intervals.
• Take-or-pay: Buyer pays for the product whether they take delivery or not, securing producer revenue.
• Tolling: The buyer provides raw materials and receives the final product, involving them more closely in the
production process.
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Implementation in verticals
Renewable energy Sustainable agriculture Carbon Capture and Storage (CCS)
(e.g., solar, wind, bioenergy) (e.g., organic farming, aquaculture) Provides guaranteed demand for captured
Facilitates financing by securing a buyer Guarantees market access and price carbon, facilitating compliance with
for energy outputs, reducing market risk stability, crucial for operations with environmental regulations and supporting
and stabilizing revenue, which attracts significant initial investments, and aids in technological advancement.
more investors. smoother supply chain integration
Green manufacturing Waste management and recycling
(e.g., sustainable materials or chemicals) Secures a market for products from
Ensures demand for innovative products, recycled materials or energy, providing
stabilizes operations through long-term financial stability and promoting
contracts, and enhances market credibility. sustainable waste management practices.
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Key elements I
Price Quantity
Agreed sales price or minimum sales price (depending on structure) • Fixed quantities vs. range
• Sales price can either be pre-agreed or structured as cost pass • Take or pay: Buyer typically has the right not to take off the
through in case of tolling agreement product but then needs to hold the seller harmless, e.g., pay the
agreed price and potential additional storage costs or compensate
In case of pre-agreed sales price seller if seller has to sell at lower price (e.g., as sufficient storage
• Fixed or minimum plus upside sharing capacity is no longer available)
• In case of upside sharing, sharing ratio of upside from minimum
price to pre-defined “market price”
• Potential inflation linkage
Warranty
In case of tolling agreement
• Definition of fixed costs (mostly depreciation of capex), variable • Product specification (e.g., min GHG reduction)
cost pass-through (esp. linked to power purchase prices, grid fees, • Regulatory confirmations (e.g., RED)
inflation), financing costs and equity return component • Production capacity of facility
• Agreement how future subsidies received by seller or buyer, • Facility availability (% of production capacity)
if any, are shared (at all) • Including concrete measurements in each case
• Caps, limitations etc (ideally mirrored by EPC contract)
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Key elements II
Conditionalities Facility construction and operations
• In case of “more binding” MoUs, list of specific conditions • Seller has operational control over facility
precedent which lead to the MoU becoming binding, e.g., • Involvement of buyer depending on overall structure, (much)
approvals, financing, FID etc. with certain timelines closer in case of tolling-style agreement or more at arms lengths
• Agreement which information is shared, whether coordination
committees are established etc during construction
• Agreement on reporting obligations during operations
Term Other
• Targeted COD, latest COD / long-stop date, first commercial • Potentially most favoured nation clause for (initial / cornerstone)
delivery date, buyer remedies in case of failure offtaker
• Duration of offtake • Minimum credit rating of buyer (e.g., investment grade) or credit
• Potential extension of initial term (1-3 years before end of initial support
term), e.g., Rofo, ROFR, good faith negotiation of adjusted terms • Changes in taxes, regulation or law
reflecting cost basis, financing terms, market terms at that point in • Force majeure
time • Dispute regime: typically international arbitration
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Structure
Decision criteria Detailed elements
Tolling agreement vs. fixed price/volume offtake Pricing and payment terms
• Tolling agreement: Suitable when the offtaker desires close • Fixed vs. range pricing: Can be structured based on preferences,
involvement, typically providing input or resources, reducing the market conditions, and risk appetite
project's consolidation risk • Inflation protection: Align long-term contracts with inflation
• Fixed price/volume offtake: Preferred when operational risks remain adjustments to safeguard against cost escalations
with the seller, offering predictable revenue streams
Contractual obligations and guarantees
Duration and flexibility • Warranty framework: Ensure back-to-back coverage with EPC
• Minimum term: Typically 10+ years to ensure long-term stability and contracts to protect against non-performance risks
return on investment • Performance obligations: Buyer might have rights not to take off the
• Extension options: Shorter terms may include one-sided extension product; however, must compensate the seller for market sales at
options that do not support the seller, emphasizing buyer flexibility potentially lower prices
Risk management Investor considerations
• Volume and price risks: Early avoidance of market risks through fixed • Equity and debt requirements: Ensure covering of debt financing
volumes and prices, minimizing renegotiation needs costs and repayments, aligning the structure to minimize equity risk
• Cross-commodity risks: Strategies to mitigate risks between market • Return on investment: The structure should cater to achieving a
variables like electricity prices and offtake product prices base case equity return, balancing between risk and reward
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Thank you for your attention.
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