Last updated:
May 24, 2024

Offtake Agreements

What are offtake agreements?

Offtake agreements are contractual arrangements between a producer and a buyer to sell and purchase a project's future production. They are prevalent in industries such as energy, mining, and now increasingly in the Voluntary Carbon Market (VCM). For carbon credit projects, these agreements provide companies with a guaranteed price and security in supply that might become scarce, while creating an opportunity for carbon projects to secure much-needed capital due to their proof of future sales, offering financial stability, and guaranteeing a future market for the project's outputs.

What is the difference between offtake agreements and spot credits?

Offtake agreements involve agreements to purchase credits at a future date (or other commodities) before they are produced, with terms and prices often fixed in advance. In contrast, spot credits are sold and bought where the transaction occurs immediately, and the prices can fluctuate based on current market conditions. Offtake agreements provide certainty, risk mitigation, and the possibility of locking in future prices, while spot credits offer flexibility and the possibility of higher profits/losses for investors willing to navigate market volatility.

What is the difference between offtake agreements and forwards?

While both offtake agreements and forwards are used to manage the risk associated with price fluctuations, they serve different functions.

  • Forwards are paid in advance, before delivery, and are dependant on the amount of vintages that the buyer wants delivered. Offtake agreements, however, are direct agreements between a producer and a buyer for the future sale of a product, focusing more on guaranteeing sales, locking in prices, and securing supply rather than financial speculation.
  • Offtakes are generally less risky, as they tend to be incorporated later on in the Project Development Curve compared to Forwards. However, this means that Forwards can earn the buyer a better price compared to offtakes due to the higher risks involved.
  • Forwards are traditionally more of a hedge and speculation tool, whereas Offtakes are more of a long-term supply securing mechanism.
  • Offtakes are primarily focused on securing a market for the credits produced by the projects. They provide a guarantee to the project developer that a certain quantity of their credits will be purchased to ensure multi year volume security, while forwards are primarily focussed on obtaining pricing advantages.

What are the benefits of offtake agreements?

Offtake agreements benefit both producers and buyers:

  • Producers gain financial security through guaranteed sales, which can improve project viability and access to early-stage financing.
  • Buyers secure a consistent supply of carbon credits, potentially at a favourable price locked in by the agreement.
Carbon credit price forecast

How to incorporate offtake agreements into your sustainability strategy?

Incorporating offtake agreements into a sustainability strategy can help organisations secure a predictable supply of carbon credits at pre-determined prices, enabling more accurate long-term planning and budgeting for sustainability initiatives, as well as potential long-term savings for carbon removals. Interested in locking in future prices today to neutralise your company’s unavoidable emissions? Contact Senken today to find out more about our offtake agreements.

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