There are opportunities for energy and infrastructure companies to grow their business by focusing on the production of 'green' hydrogen, but contractors should expect to take on the majority of risks under project contracts while the market remains in its infancy.
Strict contractual obligations on safety and security and on the interface of works carried out by others are likely to flow from tight regulations and conditions imposed by financiers.
What is green hydrogen?
Green hydrogen is hydrogen that is produced using an electrolyser, powered by renewable energy, such as wind, solar, hydraulic or biomass plant. From an electrochemical reaction, the electrolyser will split water into dihydrogen and dioxygen and produce hydrogen. The mode of production is clean and does not produce carbon.
This differs from other forms of hydrogen product, notably so-called 'blue' and 'grey' hydrogen. Blue hydrogen is produced from natural gas and, unlike green hydrogen, results in carbon dioxide being produced, but this is captured by a carbon capture, utilisation and storage system. With 'grey' hydrogen, hydrogen is produced from using fossil fuels and the carbon produced in this process is not captured at all.
One of the main benefits of green hydrogen production, besides its clean carbon footprint, is the fact that the hydrogen facility is powered by the excess electricity produced during peak periods and which cannot otherwise be injected in a saturated power grid.
This excess electricity is not lost and is transformed into hydrogen, a gas, which can be stored in fuel cells and introduced back as power source for businesses or households. In France, for example, green hydrogen is used to power local public buses in the cities of Pau and Lyon.
Green hydrogen's growing importance
Hydrogen is in vogue today and is seen by many as the future of green power and as core to bringing about a significant reduction in carbon dioxide emissions and reducing the effects of global warming.
Eran Chvika
Partner
Action to grow the hydrogen market is already being taken by some countries in isolation and in partnership – the plans Australia and Germany have to explore a new hydrogen supply chain between the two countries is a prime example
Currently, however, most of the hydrogen that is produced is powered by fossil fuels – green hydrogen is not currently cost-competitive in comparison. However, the cost of green hydrogen production is forecast to reduce significantly as production is scaled up.
In Europe, impetus has been given to the green hydrogen sector by the European Green Deal, an EU drive towards a more sustainable economy and towards achieving 'net zero' emissions by 2050, in line with the commitments made by signatories to the Paris Agreement on climate change in 2015. The hydrogen strategy for a climate-neutral Europe, published by the European Commission in July 2020, is a major strand of the broader European Green Deal agenda.
The strategy is a roadmap with an ultimate objective of making green hydrogen competitive compared to fossil fuels through the creation of a favourable regulatory framework. The strategy is comprised of three phases – the first of which aims to increase the production of green hydrogen to 1 million tonnes, install at least 6 GW of green hydrogen electrolysers, and decarbonise existing hydrogen production, by 2024.
Phase two envisages green hydrogen becoming "an intrinsic part of an integrated energy system", with the aim of producing up to 10 million tonnes of renewable hydrogen, and installing at least 40 GW of green hydrogen electrolysers, by 2030.
The Commission's plan is for green hydrogen technologies to be "deployed at large scale to reach all hard-to-decarbonise sectors [such as aviation and shipping] where other alternatives might not be feasible or have higher costs" between 2030 and 2050.
A revised state aid framework; possible new incentives under the EU's Emissions Trading Scheme; driving demand by potentially introducing quotas for green hydrogen; a new certification scheme for hydrogen technologies; improving access to energy infrastructure for connecting supply of and demand for hydrogen – these are among the measures being considered by the Commission in pursuit of its strategy.
Action to grow the hydrogen market is already being taken by some countries in isolation and in partnership – the plans Australia and Germany have to explore a new hydrogen supply chain between the two countries is a prime example, while the UK government's recent energy white paper detailed plans to put green hydrogen at the heart of a more decarbonised energy system in the country. In France, green hydrogen has been expressly provided for in energy programs focused on the incorporation of decarbonised hydrogen in industry and the development of a clean mobility strategy. Pilot transport sector projects have been announced in the UAE and Saudi Arabia too with the market for hydrogen-powered vehicles tipped to grow in the coming years.
Strict regulation
Hydrogen is an explosive and flammable gas and so its production, storage and transport is subject to strict regulatory requirements.
In France, for example, hydrogen is subject to the so-called ICPE regulation, which applies to classified installations for the protection of environment. There is an authorisation process for producing hydrogen, which entails preparing environmental impact and hazard studies for assessment, as well as demonstrating the project owner's technical and financial capacities. A further declaration or authorisation process applies, depending on the quantity of hydrogen present, in respect of its storage and use.
Further stringent requirements apply under the EU SEVESO III regulation. In the case of highly dangerous installations, there is a need to have a technological risk prevention plan and a special intervention plan, which will cover in particular emergency management measures, incident control and procedures to protect public health and the environment.
Further legal frameworks are applicable to the transport of hydrogen, most notably the European Agreement concerning the International Carriage of Dangerous Goods by Road (ADR).
A number of international standards are also relevant to hydrogen production, storage, transport, hydrogen-powered equipment and the safety of hydrogen systems.
Engineering, procurement and construction (EPC) contracts for hydrogen projects
A complex contractual framework exists in typical hydrogen projects. Often this framework will include a shareholders agreement, especially with financial investors, as well as a financial agreement and a possible government grant. In a hydrogen project a consulting agreement for the design and technical aspects is also common.
Eran Chvika
Partner
Regulatory duties such as the preparation of a hazard study or security plan ... will also flow down to contractors
At the heart of the framework is a project company which will execute the financial agreements and implement the contract structure. This project company will pass most of the rights and obligations it has down into downstream contracts by allocating, responsibilities, obligations, risks, and cash flows to different contractors. In this context, engineering, procurement and construction (EPC) contracts tend to play an important role.
At the heart of EPC contracts will be provisions on safety and security. The project owner and the contractor will commonly be obliged to work closely with one another under the contract to establish and implement health and safety measures on site to address the risks of explosion, fire and leakage, and regulatory duties such as the preparation of a hazard study or security plan under the ICPE and SEVESCO III regimes will also flow down to contractors.
EPC contracts also commonly require contractors to manage risks on interfacing which can apply, such as in relation to coordinating the work it does with the work other contractors may be required to carry out on the same installation under operation and maintenance agreements.
'Change of law' clauses are also important in EPC contracts given the nascent nature of the sector, since legal and regulatory reform is anticipated in the years ahead. These clauses need to address the risk related to the enactment of new legislation or the amendment or modification of applicable laws and regulations governing the production, storage and use of green hydrogen, which would enter into force after the project has started, as the changes could require work to be re-performed to different standards with a knock-on impact on the timeline for and cost of the project.
EPC contracts will also commonly involve contractors in the connection of hydrogen installations to the electricity grid.
While a separate grid connection agreement will apply between the grid operator and the project owner, often project owners will seek to entrust the contractor with the follow-up of the works and coordination of their works with the grid connection works. Contractors are advised to carefully limit their scope of work in that respect.
In France, we are seeing exploration of the idea of injecting green hydrogen into the public gas network. The H2V59 project is an example, where gas company GRDF has been granted the right to inject a mixture of natural gas and green hydrogen into the gas distribution network in the urban community in Dunkirk.
The interconnectedness of Europe's gas networks mean further regulation in the context of these 'power-to-gas' projects is anticipated, and additional requirements put in place are likely to flow down into grid connection agreements and EPC contracts.
While many of the risks entailed with green hydrogen projects are likely to fall on contractors in the initial phase of growth in this sector, there are nevertheless opportunities for contractors to demonstrate early expertise in this area and position themselves to benefit from a more balanced sharing of risk as the market inevitably matures.
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