This is the fourth and final in our series leading up to the Hydrogen Energy Association’s Annual Conference this week on the theme of  “Getting the First HAR1 Hydrogen Projects Built”.

In this instalment we look at the construction supply chain, where we have seen recurring themes arise across the various hydrogen projects that we are advising on.  As before, this topic is very much interlinked with the other key project documents. 

The key supply chain issues and themes were are seeing at the moment include:

  • EPC vs Multi contract options 

Compared to other renewable technologies, hydrogen is in its early stages and is still subject to design development in many aspects. Contractors are therefore carefully considering what scope of design, supply and work they are willing to ‘wrap’ when bidding in to HAR projects. Legally, this means that suppliers and contractors in the industry are rarely willing to offer their services on a ‘turnkey’ basis (otherwise known as a full Engineering, Procurement and Construction offering).  As a consequence, developers are required to take a more active role (or enter into standalone project management appointments with intergrators) to manage contracts and mitigate interface risk.  This is not unusual for early projects, and we’ve see the same in biomass, tidal and other technologies so it can be pulled together but there is a strong need to understand the interface risks and ensure these are adequately catered for in the construction contracts.  

  • Market intersection 

Whilst the sector becomes established, various stakeholders are bringing their own viewpoints on contractual risk and responsibility, based on experience of procurement and delivery of infrastructure across various sectors. Green hydrogen in particular finds itself at the intersection of the UK’s renewable energy market and the oil and gas sector.  Both have different approaches to procurement and risk allocation.  For example, oil and gas/offshore contractors may be familiar with knock for knock liability arrangements, which are less common or applicable in onshore renewable energy procurements.  Parties need to work through to find a position that is acceptable to the supply chain and procurers/funders.

  • Electrolyser procurement and early supply chain involvement

The procurement of electrolysers and their integration with the project is vital to overall project success.  We are seeing procurers and developers seek to establish strong relationships with their supply chain so that they gain greater certainty for their pipeline of projects and ultimately benefit from economies of scale in the longer term.  We are also seeing projects engaging suppliers and manufacturers early on ECI/(pre) FEED contracts, to try and realise the benefits of early supply chain involvement, something which both the Government’s Construction Playbook and the private sector equivalent from the Construction Leadership Council ‘Trust and Productivity’ promote.  These contracts need to be aligned with the overall project procurement strategy and any later stage contracting approach.

Depending on the scope of what is being procured, parties may also wish to map out any performance guarantees and warranties for the project (or part of it) in the early stages, which will help smooth negotiations when it comes to the delivery phase.  We have seen technical discussions around metrics such as plant availability and performance, efficiency, power consumption and hydrogen flow and these are being reflected in HOTs and FEED stage contract discussions. 

  • Purchaser obligations

Whilst there is no universal approach to this, we often see developers take (or needing to take) a more discriminating view on what they want contractors and suppliers to provide, and what they themselves are willing take on ‘in-house’ – either by way of developer/purchaser obligation type provisions (see clause 4 of the IChemE Red Book), or clear ‘rely-upon’ information mechanisms within the contract.  This could also be achieved by way of a nuanced pricing model – with some fixed price elements and some target cost or cost reimbursable elements.  Developers may of course be constrained by funding models and what funders or other stakeholders will agree to.  Some of these approaches are being taken in response to what supply chain is able to offer in the context of overall project budgets.

  • Scale-ups and pilots

Whilst not unique to hydrogen, given the relatively novel technology in some cases it is worth noting that developers will often seek to complete smaller scale installations first (such as pilot plants), which once successful can be replicated or scaled-up.  We are seeing this in hydrogen and also energy from waste / waste to fuel, critical minerals and battery storage projects.  Proving the technology and the concept is a major milestone and will help unlock later expansion.  It is notable that a number of HAR1 and HAR2 developers have taken this approach, and we have helped developers negotiate and close electrolyser hire / pilot plant contracts with the option to buy at the end of a test period.

  • Critical Minerals

Certain electrolysers, namely Proton Exchange Membrane electrolysers, utilise critical minerals such as platinum and iridium for the cathodes and anodes. Critical minerals supply chain security is a topic for another day, but suffice it to say that the shortage of certain minerals is a hot topic for renewable energy including hydrogen.  The UK Government is seeking to mitigate this risk by utilising strategic partnerships with certain geographies responsible for supplying many of these materials, but we envisage that there may be some bottlenecks in the coming years as hydrogen technology becomes more prominent globally and the demand for critical minerals increases.

We are looking forward to attending the HEA’s Annual Conference again and hearing more from the industry in what is always an insightful forum – we hope to see you there.