The energy transition and climate crisis continue to be a hot topic in political and economic circles. Current global events only serve to demonstrate the need for nations to diversify their sources of energy. Whilst nuclear and traditional renewable power such as solar and onshore / offshore wind will play an important role in nations achieving their net zero goals, the energy market is also exploring new technologies such as floating wind and green hydrogen.
Although these new technologies are still developing, it is clear that the opportunities they offer market participants are significant. Floating wind projects will have the benefit of developing within a pre-existing market of offshore wind where developers and contractors are both familiar with the general technology, how to construct the project and associated contract structures. Green hydrogen project developers will however need to forge their own path and consider how best to structure project development.
This article will consider what structures developers and lenders may expect to see on green (or blue) hydrogen projects and whether any lessons can be learned from other (more mature) technologies.
In our experience, large scale and complex energy projects are often procured using an amended version of the FIDIC "Yellow Book", which is a standard form of construction agreement. We would not expect that approach to differ on a hydrogen project given that a FIDIC structure offers the flexibility needed to easily reflect the commercial/technical needs of the technology and is familiar to lenders operating within the energy market (it is easily amendable to be in a bankable form).
Developers must then decide whether to pursue an EPC wrap or multi-contract structure. In truth, no large-scale energy project is likely to be developed on a true turnkey EPC basis (i.e., where one contractor delivers the whole project under a single contract). The cost to the developer of that approach is likely to be prohibitively expensive given the premium that a contractor would attach to the offering to reflect the level of risk assumed by it (a risk which is unlikely to be commercially attractive to any contractor on the market).
In our experience, large infrastructure projects can be delivered on a:
As the hydrogen market evolves we may see that some contractors are willing to wrap more packages into subcontracts as the risk of any technology included in those packages becomes more known and/or quantifiable.
The developer will need to consider the development as a whole when determining the contracting strategy including considering technical, commercial and financing considerations. Common commercial considerations may include:
Notwithstanding the commercial implications of the level of multi-contracting deployed on a project, all construction contracts should look to mitigate the interface risk inherent in such a structure.
In this section, we will consider common pitfalls that the parties may come across in a multi-contracting structure and how the legal terms can protect their interests. These are all issues that can all be mitigated with the correct drafting.
Key considerations that developers may wish to address include:
The developer will need to balance the commercial and legal risk from the menu above to meet the practicalities of the negotiations.
Although hydrogen is a nascent technology, it is likely, looking at other technologies that projects will be developed on a multi-contracting structure (with degrees of varying package numbers). Looking at other energy technologies, we expect this will be a bankable approach provided that developers ensure the packages contain a balanced risk profile that protects against the inherent interface risk within the structure.
Please contact us should you wish to discuss any of the above points in relation to hydrogen development.