How to Solve the Problem of Decommissioning?

What are the issues?

Project proponents for wind, solar and battery projects are in a race to secure optimal land near transmission infrastructure for projects as the new energy transition and the race to net zero speeds up.

Often, negotiations to secure the land are with individual landowners who have been farming on the land as a family business for some time.

A key concern for landowners is to ensure that project infrastructure is removed at the end of the lease. Landowners are concerned that, in the worst case scenario, a project company might go bankrupt, leaving the landowner with decommissioning and make good costs.

Negotiations to solve this issue usually focus on bank guarantees, parent company guarantees or some form of decommissioning fund. See the Clean Energy Council’s page on decommissioning here.

Bank guarantees are not suitable because of the cost and the long term of a project lease (e.g. 30 years with a 10 year further term). Parent company guarantees are not suitable because they add too much to the cost of capital and make the project unviable. Internationally, there are insurance products available to cover the risks but these are not available in Australia. In other contexts, councils impose a development bond or similar type of security as a development condition. This is also difficult in the context of a long project life.

Generally, parties end up agreeing to:

  • make good and undertake decommissioning obligations without security; or
  • make good and undertake decommissioning obligations with a decommissioning fund as security.

The decommissioning fund works so that, for example, 5 years prior to the end of the term, the cost of decommissioning is assessed by an independent person, and the project proponent contributes 20% per year into an escrow fund that the landowner can call on at the end of the term if the project proponent has not met its decommissioning obligations.

This solution is also not entirely satisfactory since it ties up capital, requires fees and administration by a third party and does not give complete assurance as the arrangements are not established at the time the documents are signed. There is a risk that the process is not followed properly when it is set up.

How does the renewables industry avoid an unfunded decommissioning liability in 30 years time? How do we ensure that landowners feel assured about projects on their land? How do we continue with social licence by addressing community concerns about visual pollution from ‘rusty windmills’ in the future?

All of this made partners in the New Energy and Real Estate teams, Matt Baumgurtel and Margot King start to think about better solutions. Matt and Margot recently talked with Charmian Holmes, Partner in the Financial Services team about how a Discretionary Mutual Fund might play a role in solving this issue.

What is a Mutual Fund?

Discretionary Mutual Funds – often just called ‘Discretionary Mutuals’ – are usually set up by industry or professional groups, or by businesses or corporate groups, to cover common or similar property or liability risks.

Discretionary mutuals are similar to insurance, but members contribute to capitalising the fund, and members may claim on the fund to cover certain risks that are protected by them. It is a genuine peer-to-peer model where the members can share the risks and the costs of operating the mutual fund.

For example, the Australian Federation of Travel Agents set up a discretionary mutual to protect against ‘chargeback costs’ – i.e., costs that a credit card company passes on to the supplier when a customer cancels or disputes a transaction. This happens in the travel industry for example, when a travel service provider, like a tour company goes insolvent or for some other reason does not honour a pre-paid booking. Typically, the travel agent would bear those costs but the AFTA mutual was set up to allow the travel agents to address that risk by coming together to form a mutual that could protect its members for that cost.

There are many other examples where people use discretionary mutuals because of ‘hard to place’ risks or where there is no appetite at all in the local insurance market or because they need to create a product that is more innovative than what the local insurance market can support now.

Discretionary mutuals are often set up by an industry for their industry – as such, the advantages of them include:

  • having those with experience in a particular sector consider and approve protection claims which may result in a fairer outcome for the community in line with their industry standards;
  • providing products which cater to specific concerns and risks unique to a particular industry compared to what would be available from the traditional insurance market; and
  • reinforcing positive and communal methods of risk management which encourages the active participation of mutual members.

Discretionary mutuals can be a good alternative because:

  • discretionary mutuals are generally simpler and less expensive to set up and capitalise than an insurance company and do not require an insurance licence (although do require a financial services licence);
  • the discretionary power means that the mutual can manage their exposures in terms of structuring a risk program to maximise their buying power for excess of loss and stop loss (re) insurance – reaching beyond primary markets to access capital that is not normally available to them;
  • they have a lower tax burden than an insurance company or captive insurer and there are tax advantages because GST is payable but income tax and insurance taxes like stamp duty are not; and
  • mutuals can raise equity by issuing Mutual Capital Instruments (which are similar to shares) to investors.

How might a discretionary mutual work in a renewable industry and decommissioning context?

The potential liability for decommissioning of infrastructure in the future sounds like a good example of a risk that a discretionary mutual might be established to cover – it is industry wide, affects a number of stakeholders and it is not currently protected by a local insurance product.

Setting up a discretionary mutual does require industry co-ordination and co-operation. Generally, an industry body would drive the process by having some of the major participants commit in-principle. There would need to be an actuarial study to work out the feasibility of the pricing for the protection and to ensure it is appropriately capitalised to meet the potential liability.

How is a discretionary mutual structured?

A discretionary mutual can be set up as a public company limited by guarantee or a unit trust.

A public company limited by guarantee is useful where membership is to be offered to a larger number of similar businesses or industry stakeholders and not one corporate group. Instead of issuing shares, members apply for membership. Their rights are contained in a Constitution or a set of Rules (or both).

This structure is particularly efficient where the group membership will not change regularly or if the mutual is being managed by a leadership team which drawn from a not-for-profit entity.

Unit trust structures are more commonly used by commercial providers, such as trustee companies and insurance brokers, where there are smaller member numbers and no need for members to have management/leadership responsibilities. There are taxation advantages for both structures due to the operation of the principles of mutuality.

Are there any disadvantages?

The claimant may not be entitled to 100% recovery on the claim. The claimant in this case would be the member, not the landowner. The landowner would need to be assigned the rights of the member to the proceeds of any claim in the relevant project documents.

The key difference between insurance on the one hand and discretionary protection on the other is that:

  • an insurance policyholder has an absolute contractual right to have their claim paid if it is covered under the terms and conditions of the insurance policy.
  • a person protected by a discretionary mutual has the right to have their claim considered and for a decision to be made about the exercise their discretion – either in favour or against the payment of a claim. The governing body of the Mutual Fund (i.e., the board or the trustee) makes the decision and might have regard to the interests of all the members. For example, the Board might decide to pay out a percentage of every claim if the industry was hit by an industry wide event that triggered a lot of claims (for example, COVID-19 or a mass weather event) and they can’t make sufficient (re)insurance recoveries to fund a claim payment of 100%.

Both discretionary mutuals and insurance products offer a legitimate way of protecting someone against the occurrence of an ‘insurable’ event or risk

Discretionary protection is recognised by case law as a valid legal alternative to insurance.1

Although it is not necessary to have an insurance licence from the Australian Prudential Regulation Authority, because discretionary mutuals are a facility for managing financial risk, they are regulated as a financial product under Chapter 7 of the Corporations Act 2001 (Cth). In most cases, this means an Australian financial services (AFS) licence will be required.

Wrap Up

A discretionary mutual fund might be one way of driving some certainty on the decommissioning risk. If the risk could be minimised, this would alleviate concerns from landowners that are often the most difficult to resolve adequately in negotiations. It would also contribute to social licence and relationships with communities and ensure that future decommissioning liability is not left unfunded. In our view, if a full solution is not found, legislation or approval conditions will step in to fill the void. It would be great to see the industry develop its own solution in this space using more innovative alternatives to the traditional insurance market.

1Medical Defence Union Ltd v Department of Trade [1980] 1 CH 82. This English case was confirmed and considered in the Australian decisions of Bailey v Medical Defence Union (1995) 184 CLR 399 and The Barclay MIS Group of Companies v ASIC [2002] FCAT 606



Partner, Head of Funds and Financial Services