Applications are open for the UK Government’s Hydrogen Business Model and Net Zero Hydrogen Fund Electrolytic Allocation Round, with an application deadline of 11:59 on 12 October 2022.
Prospective applicants may be well-aware of the eligibility criteria, set out in Section 3 of the Application Form, and will be taking steps to address each requirement in good time ahead of the deadline. Whilst these do clearly include a requirement that the developer has “identified an electrolyser supplier(s)”, delving into the depths of Section 5.3.6 of the Application Form, applicants will soon appreciate that they need to go slightly further than this in order to secure funding.
In particular, Section 5.3.6 requires that applicants provide:
“a concise explanation of the assessment of the supply chain, labour and skills needed to support the proposed delivery timescales for the Project and how any identified gaps will be closed”.
Specifically, applicants must respond to the following questions:
“1. Please provide an overview of the Project’s procurement / contracting strategy for contracts critical to delivery. This should include all critical supply chain relied upon to deliver the Project, including electrolysers, hydrogen storage, hydrogen transport, water connections, grid connections, etc…
2. Please provide description of the key challenges, uncertainties and risks linked to the supply chain, the consequential uncertainty in Project costs and timelines, and the plan for how these will be mitigated. This should include details and status of all long lead items and how these will be secured within the Project timescales.”
So, whilst clearly there will be a focus on identifying a suitable technology supplier, applicants would be well-advised to consider what wider supply chain might be needed and how the supply chain (including the technology supplier) will be engaged contractually and work with one another to ensure the success of the project.
We provide guidance below on factors to consider here.
1. Who will be appointed to the supply chain?
It is common for a number of energy technology suppliers to provide an ‘EPC wrap’, meaning the contractor takes responsibility for co-ordinating the entirety of the facility’s design, manufacture, commissioning and completion. An EPC contractor would typically manage technology supply, groundworks and grid connections, retaining responsibility for lower tier supply chain management and providing the developer with a single point of contact (and, crucially, liability should things go wrong). In particular, an EPC wrap is often the expectation on a project-financed scheme, with any sub-division of the supply chain at Tier 1 (e.g. instructing technology supply and civil works separately) generally seen as eroding a project’s fundability, due to the increased interface risk.
In a fast-developing industry, which is reliant on specialist technology, it is not uncommon to find that technology providers are resistant to providing an ‘EPC wrap’ of the whole project, and might only be willing to underwrite a certain part of the build out of performance requirements, for example the key equipment.
Early engagement with the supply chain and prospective funders will assist in understanding the risks associated with any proposed multi-contracting approach and whether those can be mitigated and/or suppliers’ concerns alleviated. Input from a developer’s professional team, including technical advisors, will also be valuable here, to ensure that there are no interface ‘gaps’.
2. What contract(s) will you need?
The design, manufacture, commissioning and completion of an energy infrastructure project is typically delivered under one or more EPC contract(s).
However, many developers find it beneficial to explore the option of entering into a front end engineering design (or ‘FEED’) contract with their preferred contractor, where the technical solution for the project is not entirely clear at the outset. A FEED contract provides a legal framework within which a contractor can develop the initial engineering solution in order to establish the feasibility (or otherwise) of a scheme. There is no commitment on either side to ultimately pursue the project, albeit that, for many, the FEED contract is seen as a precursor to the contractor being awarded the subsequent EPC contract.
For this reason, developers may experience challenges in ensuring that the procurement process remains competitive. That said, an alternative outlook on FEED might be that it strengthens contractor/developer relationship and helps the parties understand each other more fully, which is particularly important at a time when there are significant resource and pricing issues impacting projects. There are of course also practical ways to address concerns around reduction in competition, such as appending EPC heads of terms to the FEED contract and ensuring that alternative contractors are included in the EPC procurement process in a meaningful way.
3. What does/do the contract(s) look like?
This will likely depend on the parties involved and their respective backgrounds / experience. There are a number of industry standard contract forms prevalent throughout the energy sector, which have the credentials to form the starting point for negotiations.
However, we see a number of stakeholders looking to utilise the FIDIC suite of contracts, arguably the most flexible and commonly-used across energy sector technologies; we consider it is likely that the so-called ‘rainbow suite’ will have a vital role to play in the roll-out of hydrogen infrastructure in the UK for this reason. Other contract forms such as IChemE and NEC offer alternative options (and, again, we have had significant experience of deploying these with appropriate amendments). It is prudent for a developer to take legal advice on the optimum starting point in each case, project-by-project.
4. How can developers mitigate the risks arising under the Low Carbon Hydrogen Agreement?
At the time of writing, the Government has yet to issue its proposed form of Low Carbon Hydrogen Contract (“LCH Contract”), which will govern the Government’s relationship with successful bidders. However, the indicative heads of terms published on 8 April 2022 provide a helpful summary of the principles likely to be captured in it. The good news for developers and the supply chain is that, to the extent obligations relate to the design, construction and commissioning, these are not particularly novel, considered in the context of the requirements that might typically be expected on an energy infrastructure project, for example:
- a requirement to complete work within a specified time period;
- an obligation to ensure performance is in line with a specified baseline standard (in this case the Low Carbon Hydrogen Standard), which we anticipate may be subject to LDs; and
- a requirement to undertake regular reporting.
Of course, the devil will be in the detail, but based on the information available currently, it seems likely that liability gaps between the supply chain and the developer can be limited to a reasonable degree.
Burges Salmon is actively advising clients currently on the roll-out of documentation as part of bids into the Hydrogen Business Model and Net Zero Hydrogen Fund Electrolytic Allocation Round and has a wealth of experience advising on the procurement of hydrogen and wider energy infrastructure, in the UK and overseas.
For further information and support on the development of EPC and FEED contracts for hydrogen developments, please contact Lloyd James or Lauren Luscombe.