Whilst many await the follow up to the UK government’s hydrogen strategy, there is a clear appetite across the energy, infrastructure and transport sectors to start building out and developing low carbon hydrogen projects. As the market grows, the UK supply chain is eagerly looking to see how they can be a part of an expanding international low carbon hydrogen market.
There remains a concern about who foots the bill for establishing a UK low carbon hydrogen market. As with any emerging technology, low carbon hydrogen is more expensive than its established counterpart, fossil fuels. However, if the UK is to succeed in achieving its net zero targets by 2050, a solution must be found to help kick-start the industry, with or without subsidies. Private investors are showing considerable interest in low carbon hydrogen, so the opportunities do exist for developers to become pioneers in this new market. Key to this is taking steps to ensure that their projects are “fundable”.
We outline below some of the key features of a fundable project.
Some commentators predict that the demand for low carbon hydrogen will, in time, be in the same order of magnitude as the current demand for gas, with a broad range of potential commercial and consumer uses, as well as opportunities for the UK to become a major exporter.
Until opportunities for widespread roll-out of heating solutions and national transport fuel infrastructure materialise, most developments will likely be responding to localised demand. There are clear opportunities, for example, around industrial clusters (particularly those with existing power generation assets) where one or more end users are seeking a long-term solution to their heat and fuel needs.
As part of its hydrogen strategy, the UK government has said it will consider and consult on a subsidy scheme similar to the Contracts for Difference regime, but details of this scheme are yet to be confirmed.
In the meantime, getting the right advice on the integrity of the proposed technology and the robustness of offtake and installation arrangements is even more integral to ensuring income certainty.
In the longer term, it is widely hoped that subsidies will then pave the way for greater investment and to ultimately build a competitive and resilient supply chain.
Allocation of Risk
In order for low carbon hydrogen projects to be bankable, developers will need to demonstrate to their funders that they have clearly considered and allocated the risks involved in the construction and operation and maintenance of a project and that all project interfaces are aligned.
The EPC contract must account for short-term cost, legal and regulatory risks, whilst the O&M must consider the longer-term risks and account for the potential need to retrofit in order to keep pace with emerging technology (the latter being especially important in the context of low carbon hydrogen, as most prototypes have a more limited life span). For green hydrogen projects, there is the added consideration of the fluctuation of renewable power and how to account for days when input is lower or higher than baseline assumptions (including whether additional storage is required).
Funders will typically be more comfortable lending on the basis of project structures and risk allocation they are familiar with. It is therefore likely that expectations for low carbon hydrogen projects will be somewhat akin to expectations in the context of renewable projects, or even LNG projects.
How we can help
At Burges Salmon we have a wealth of experience drafting suitable EPC and O&M contracts for renewable energy technologies and new, innovative technologies, including green hydrogen projects. We understand how to manage and allocate risks and appreciate the key concerns of funders who lend on these types of projects. If you would like to speak to us about how we can assist you with your hydrogen project (or any other energy assets) then please do feel free to get in touch.
Written by Lauren Luscombe and Tabitha Gould