Supported by CBAM.Clarion.Engineer
Independent power producers (IPPs) negotiating renewable electricity contracts may receive a premium for supplying electricity backed by emissions evidence, while accepting contractual liabilities that substantially exceed the additional revenue. If a claim for installation-specific actual emissions fails, the fallback carbon exposure transferred to the project can outweigh the premium earned on eligible electricity deliveries.
The imbalance arises when the producer receives additional payment only for megawatt-hours accepted under the relevant eligibility conditions, but an indemnity covers a broader volume or a larger share of the buyer’s incremental CBAM liability. Weak liability caps, inadequate cure provisions and unclear causation tests can turn a limited revenue enhancement into a disproportionate financial exposure.
Current electricity CBAM requirements define the fallback risk
Under the current EU Carbon Border Adjustment Mechanism (CBAM) framework, default emissions values remain the standard route for imported electricity unless all conditions for installation-specific actual emissions are satisfied. These conditions include a qualifying physical power purchase agreement (PPA), the relevant network condition, a generating installation below the 550 g CO₂/kWh fossil-fuel-origin emissions threshold, firm nominations matched with production in periods of no more than one hour, and independent verification supported by at least monthly interim evidence.
Where an actual-emissions claim cannot meet the applicable requirements, the contractual consequences may extend beyond the loss of the premium associated with eligible electricity. Depending on the agreed indemnity, the producer may face claims linked to the buyer’s additional carbon costs.
The commercial assessment therefore needs to distinguish the revenue earned on qualifying megawatt-hours from the quantity and financial exposure covered by the indemnity. Liability provisions should establish a clear relationship between the producer’s contractual breach, the buyer’s demonstrable loss and the amount recoverable.
Contract structures must reconcile electricity, payments and evidence
The contractual transfer of title, payment flows and emissions evidence should be mapped separately and then checked for consistency. A structure may appear legally coherent while failing operationally if the electricity scheduler, importer or data custodian differs from the entity assumed in the PPA.
For projects supplying industrial steel or aluminium customers, the allocation of contractual benefits requires particular attention. Different agreements may cover renewable electricity attributes, CBAM evidence and electricity availability. The same megawatt-hour or financial benefit should not be promised more than once under incompatible contractual obligations and remedies.
Where several generating installations operate under one framework, each plant should have its own controlled schedule and allocation limits. Portfolio flexibility can support procurement, but substitutions must trigger a defined review so that replacement electricity is not automatically attributed to the original generating installation.
Lenders must assess indemnities against available security
Project-finance assessments should examine the maximum indemnity exposure, available security, insurance exclusions and timing of claims. These factors determine whether a contractual liability can be absorbed within the project’s financial structure.
Lenders and counterparties should also distinguish a verified loss actually incurred by the buyer from a theoretical avoided-cost calculation that did not materialise as a real expense. The contractual method for calculating damages should identify the relevant loss, the evidence required and the limits on recovery.
Contract managers should approve an arrangement only when the parties, title transfers, cash flows, data rights and fallback settlement formula can be reconciled without relying on informal assumptions.
EU reform proposal remains subject to negotiations
A separate reform proposal, COM(2025) 989, would change electricity treatment under CBAM, including the methodology for default values and parts of the conditions governing actual emissions values. It would broaden the concept of physical PPAs involving intermediaries and modify the congestion and nomination framework.
The Council adopted its negotiating position on 12 June 2026, followed by the European Parliament’s position on 15 September 2026. The proposal remains under interinstitutional negotiation and should not be treated as enacted legislation in current pricing or project-finance assumptions.
The European Commission published definitive-period sector guidance on 14 August 2026, including dedicated guidance for electricity, iron and steel, and aluminium. Its general CBAM questions and answers were updated on 15 October 2026. These materials explain implementation but do not replace binding regulations and implementing acts.
For an IPP, the bankability of a premium-backed PPA depends on whether the downside associated with that premium is clearly defined, appropriately capped and recoverable within the project’s financing arrangements.
