The usefulness of contractual joint ventures for energy companies
In the free energy market, or technically in the free contracting environment (ACL), it is common to find at least three distinct actors working toward the broad production of energy. These are: the energy generation company, the energy trader, and the distributor.
It is intuitive, and pertinent to this article, to highlight that the role of the energy generation company is to generate the respective demand through the construction and operation of power plants – such as corporate entities dedicated to producing electricity from the use of water, sun, and wind. The energy trader, on the other hand, acts as an intermediary between the purchase of energy produced by generators and the end consumer or energy distributor. The distributor, whether public or private, is responsible for delivering energy to homes, workplaces, and any other locations.
Despite the existence of contracts usually signed between these companies, such as the Power Purchase Agreement (PPA) – commonly negotiated between energy generators and traders (when the latter act as off-takers, or buyers of the produced energy) – it is not uncommon for other business relationships to be required before the actual acquisition, resale, and delivery of the energy demand. Consequently, distinct business dealings between companies in the energy sector often lead to the need for other contractual arrangements, one of which is the joint venture business model.
The purpose of this brief article is, therefore, to answer the following question: How can a joint venture be useful for your energy company?
In general – and not only in the energy sector – companies seek to expand, increase profits, reach new customers, and produce and deliver more. To achieve these goals, it is not uncommon for companies to establish partnerships or form new entities through mergers with other businesses. A joint venture, as a way to represent this partnership between different companies and a new business model, is essentially a commercial agreement made with the purpose of generating or fostering a common economic activity.
There are two known types of joint ventures: corporate and contractual. In the first type, a new legal entity is created (with its own CNPJ and legal personality) to achieve a common goal pre-established by the “parent” companies. It is not a merger of two or more companies – they continue to exist, generating and producing their own business. The idea is merely to combine efforts and resources between companies for a common activity.
An example of a corporate joint venture was the partnership established in 2003 between BMW and the Chinese automaker Brilliance Auto Group. The BMW Brilliance Automotive (BBA) was created at the time to facilitate BMW’s entry into China, and the union of the companies generated billions in revenue for both.
On the other hand, in a contractual joint venture, no new legal entity is created. There is simply a contractual relationship between the original companies to establish rights and obligations toward a common objective. It is not about providing services from one company to another or a situation of subordination between the companies. Both, using their own expertise and know-how, assist each other toward something potentially beneficial.
In the context of a contractual joint venture, the flexibility and liberality inherent in the arrangement open the door to a variety of potential partnerships between companies in the energy sector. For example, although energy traders typically act as off-takers (buyers) of energy produced by another company, nothing prevents them from using their customer portfolios to help build energy plants for energy generation companies, functioning as a kind of “broker” with their expertise.
As long as the regulatory issues of each company operating in the energy sector are respected, the union of efforts and the establishment of partnerships between companies face only one limitation: a lack of creativity and ideas for generating new and potentially successful business opportunities. Once the cooperation between the companies is defined, their obligations, rights, the duration of the joint venture, and clauses regarding issues like non-competition and confidentiality are the most sensitive aspects to consider when establishing the partnership.
