Getting the First UK (HAR1)Hydrogen Projects Built (Part 3)

In the third of our series leading up to the Hydrogen Energy Association conference this week I continue the theme of looking at “Getting the First HAR1 (Hydrogen Allocation Round) Projects Built”.

As we have mentioned previously a fundamental aspect of getting the HAR1 projects built from the legal and practical side, is going to be the inter-relationship between the Low Carbon Hydrogen Agreement (LCHA) terms and the hydrogen offtakes, the green electricity supply to the electrolyser and the supply chain contracts.  All of these areas overlap and need to mesh together and if financing is required, it will be the key area of scrutiny.

In this third installment we look at the hydrogen offtakes. The key headlines to consider are;

• Volume risk- The LCHA throws the volume risk of hydrogen production onto the producer.  If you do not produce and supply the green hydrogen, you do not get the LCHA business model top-up available.    This means that the offtake contracts assume a huge importance.  If your offtaker walks away or defaults how do you get compensated? Do you have alternatives for your hydrogen sales?  With sales to risk-taking intermediaries and blending of hydrogen not permitted under the LCHA (the later may alter in due course) the options for an offtaker of last resort may be relatively limited. 
• Sales Cap- the LCHA has a sales cap concept which means if you hit that through your sales the LCHA terminates.  It also has an annual sales cap restriction as well.  So if your offtaker wants more hydrogen and is able to take it, you are restricted from providing it from the project you have.  You could think of adding more production lines outside of the LCHA existing project.
• The LCHA is a 15 year contract.  Finding an offtaker that will match that term is a challenge but the HAR1 projects are rising to this.  Of course, the longer the offtake agreement, the more debate there might be around key variations, price reopeners and terms such as change in law in the offtake agreement.
• Credit support- given the importance of a long term offtake for maintenance of your LCHA, what credit support mechanisms are in the offtake contract?
• Specification of Hydrogen- clearly to qualify for the LCHA price support it will need to be Low Carbon Hydrogen Standard compliant hydrogen, but does the offtaker have a particular requirement?  If they do this will need to be worked through in your supply chain contracts.
• In many cases the offtaker will need to install/change its own infrastructure to receive and make use of the hydrogen.  What is the programme for this and what if the works are not carried out in time? Who is paying for these works?  How do they interact with your own supply chain contracts? 
• Pass through obligations- the LCHA imposes obligations, which will need to be passed down into your contracts for the project, including such things as audit rights and access to data.  
• Pricing- this is not a legal issue but will need to work with the LCHA and any pricing adjustment mechanisms will need to be very carefully considered. 

Some of the above issues are similar to any other private wire or pipe energy or fuel agreements, so parties ought to be confident that solutions can be found and the agreements finalised.  However, with a new as yet untested, price support mechanism they do require a level of thought.