Hydrogen Week: What’s involved in contracting a Green Hydrogen project?

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To reduce carbon emissions, significant changes are necessary in how our industries operate, how they draw power from the grid and how we heat our homes. Hydrogen emerges as a pivotal element in achieving net zero (NZ) emission goals. It serves as a low-carbon fuel, facilitating our transition toward a more sustainable future.

Developing a hydrogen economy holds the key to unlocking future investments, generating employment opportunities and enhancing supply chains. The Climate Change Committee (CCC) anticipates that by 2050, our nation will require 250 terawatt-hours (TWh) of hydrogen to make substantial progress in combating climate change.

Headed up by the North West Hydrogen Alliance (NWHA), Hydrogen Week, which runs from February 26 to 3 March 2024, aims to bring together all regions of the UK to progress the nation’s role in the emerging hydrogen economy, and capitalise on the opportunity the sector offers for meeting NZ targets, and driving green economic growth.

During this Hydrogen Week, we delve into the legal aspects critical for the success of new green hydrogen projects in the UK. For developers experienced in clean energy initiatives, transitioning to a green hydrogen project can be a blend of the comfortingly familiar and the intriguingly novel. 

Here are some of the key legal considerations that must be established to ensure the triumph of these projects:

Funding

Like all cutting-edge complex technology, electrolysers are expensive, and that means a hefty capital outlay is needed to get equipment manufactured. Project finance, a common route for delivering renewables projects, is more challenging for green hydrogen where the technology is less widely deployed. Crucially, hydrogen demand is less predictable than for electricity to grid, making robust offtake arrangements essential. 

Grant funding has been a staple of hydrogen project deployment in the past but, as we move from first-of-a-kind projects to larger-scale commercialisation, are no longer as widely available in the absence of a unique technology or use case (which provides its own challenges).

One option we are increasingly seeing explored is the establishment of joint venture arrangements between a project developer and its ultimate owner or offtaker, typically between a cash-rich industrial offtaker and a technology-rich delivery partner. In this way, each party can leverage the resources of the other, with both having an interest in the long-term success of the project.

Power in

Electrolysers are energy-intensive units, and there are two main ways to secure a connection large enough for the power – get a new connection, or piggy-back on an existing connection. 

Today’s green hydrogen projects are mostly located at the point of need so will most often be sharing an existing import connection. The key challenge in these circumstances will be the basis of the grid-sharing arrangements, since the site’s grid connection will be sized according to the needs of its occupiers, and there may be a decision to make between an (expensive, time consuming) upgrade to the import connection, or an (availability-sapping) arrangement to take only excess energy.

If a new connection is needed, a traditional grid connection is a comparatively straightforward route (legally speaking) for accessing the power needed to run an electrolyser on a consistent basis, however renewables developers are all-too aware of the challenges and delays associated with getting new assets connected to the grid, and these are not just export-related challenges. The rush to power EV chargers and other electricity-intensive applications like heat electrification means that it’s proving as challenging to get import connections as export connections.

The challenges and delay issues on grid can be avoided (or, at least, minimised) through collocation with a renewables project, but this brings its own challenges in terms of power (not least that, for most renewables projects, the generator is likely already committed to exporting all of the power it generates) and the legal arrangements needed to ensure access to a grid connection which is held by a third party project.

Directly connected “private wire” projects can offer the twin benefits of localised renewable production and a sizeable import connection (given that most private-wire power purchase agreements are connected to energy-intensive electricity users). 

Construction

Many electrolyser manufacturers offer containerised electrolysers – “just add power and water”. This can make the installation and commissioning of an electrolyser easy, but it relies on the customer being able to distribute or transport the hydrogen to where it’s needed. The equipment supply agreement with the electrolyser supplier should mark a clear boundary of responsibilities, and it will be the customer’s responsibility to ensure that it can interface with the equipment successfully.

Larger systems or more complete solutions will need more complex construction contracts. Hydrogen refuelling stations, for example, will need to include not only the hydrogen production element but also the distribution, storage and compression of hydrogen after it’s been through the electrolyser. The interface between contractors will be a key area of risk for a project developer. Although common in renewables, in green hydrogen we have seen fewer contractors willing to take on that interface directly and offer an EPC (Engineering, Procurement and Construction) wrap solution.

Offtake 

Every electrolyser needs to generate hydrogen, of course, but plant supplied for industrial have limited need for a formal offtake contract, provided the supply of equipment is backed up with sufficient guarantees as to the quality of the hydrogen produced. 

However, for projects where hydrogen (and not electrolysers) are the product, secure, long-term offtake arrangements will be critical. A long-term hydrogen supply agreement will tread a fine line between the legitimate interests of the consumer (guarantees as to quality, volumes and availability of hydrogen) and the developer (security of price, and long-term minimum volume commitments).

The expectations of both parties can be particularly difficult to balance given green hydrogen’s sensitivity to commodity prices – particularly as the current costs of gas and electricity in the UK favour production of grey hydrogen rather than green. This is, in part, why the government’s HAR1 scheme is intended to support revenues from hydrogen, but (aside from the relatively few projects supported by HAR1), there is still a need for a customer willing to commit to the purchase of hydrogen in the long term in order to make HAR1 support viable. 

Other considerations

The above are some of the key elements of transacting a green hydrogen project, but depending on the project, other important arrangements to consider will be:

Operation and maintenance

High capital costs and the importance of electrical efficiency means that maintaining the ongoing performance of electrolysers is extremely important. Long-term availability-backed maintenance contracts for green hydrogen are comparatively rare compared to the renewables industry, but as electrolyser technology and available operational data continues to improve, these are likely to become more common in the coming years.

Additionality and certification

The UK has adopted a definition of what “low carbon” hydrogen is, and the UK have relaxed their previously extremely restrictive requirements of “additionality”, but for mobility projects in particular, receiving renewable transport fuel certificates (RTFCs) is still challenging without a direct connection or a clear partnership with new renewables capacity. Assessing eligibility for mobility projects will be crucial and may lead to an increase in collocation.

Collocation

Hydrogen’s potential for energy storage and a curtailment-buster means that, inevitably, we are seeing more interest in the co-development of renewables alongside green hydrogen. This can increase opportunity but also risk by having both power and hydrogen as outputs. Optimisation services will be critical to ensure that the project is making the most of market conditions as time goes on.

Like all complex infrastructure, green hydrogen projects rely on a large volume of detailed legal documentation in order to bring the project to life, in the way its stakeholders intend. As green hydrogen projects become more common and more understood, legal teams will need to support the industry in developing project structures and to establish broad consensus around risk allocations to increase familiarity and ultimately open up routes to market for these projects.

Despite these complexities, on Hydrogen Week, it’s heartening to look back at how far the UK renewables industry has come in standardising an approach to project contracting in a way which supports rather than complicates the green energy transformation.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.

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