This year will see major progress on the deployment of hydrogen. This represents a real opportunity for the UK in terms of reaching its Net Zero target and in capturing the economic and social gains from a growth industry.
Pulling together the constituent parts of a green hydrogen project presents different challenges to those we have seen in the last two decades of renewable electricity generation deployment. All of these challenges are surmountable with planning and thought at the outset. At Burges Salmon our focus is on the legal and regulatory aspects and we have a track record in helping new industry sectors roll out early stage projects and overcome regulatory hurdles. With that legal mindset, here are my top 10 things to consider if you are developer, funder or investor in green hydrogen projects:
1) Hydrogen is a product that needs to find a customer
Renewable electricity can feed into the grid. Put simply, you can install renewable electricity generation and plug into the system (although it is not quite that simple, you get the gist). Hydrogen may eventually feed into our gas pipeline distribution system but the producer needs to find demand for the hydrogen they produce. Those customers use hydrogen differently and may require different specifications. If those customers fall away, your market for the product may disappear. It is extremely important to have robust legal offtake contracts properly drafted to reflect this.
2) Consider how hydrogen will be transported
At present the gas pipeline distribution system does not help, so that leaves early developers looking at setting up green hydrogen production facilities that are co- located with the user or are sufficiently close that tankering the hydrogen or private pipelines can work. Legally, it is important to consider who pays for this infrastructure and when does risk in the product pass. This has implications on the supply chain and offtake contracts.
3) Consenting hydrogen projects is a different beast to electricity generation
The project may be looking at consenting not only the hydrogen production and associated pipelines, but the green electricity generation itself. Those that have years of experience in achieving renewable generation consents will know that it is rarely simple. With hydrogen projects we move from the requirement to obtain a single important consent (planning) to a need to apply for and obtain multiple key consents (planning, environmental and safety consents). That added dimension of environmental permitting provides a further challenge and ability for objectors to target a scheme. It also, as the waste sector will testify, brings developers into the realities of dealing with multiple regulators often with overlapping requirements and concerns. Experienced consenting experts can guide you through this.
4) Review funding conditions and awards carefully
Grant funding comes with requirements and process not just on the application and qualification but on an ongoing basis. Developers need to review funding conditions and awards carefully to understand what they need to comply with and the limits imposed on their project. Care also needs to be taken that accepting funding from one source does not disqualify the project from other more lucrative support.
5) Understand green hydrogen’s price support mechanism
Green hydrogen has a price support mechanism designed around the CfD for renewable electricity so many will recognise the concepts. The hydrogen business model (HBM) (a guide on this is available here) is however more complicated a scheme and document than the electricity CfD. We need to remind ourselves that at the time of writing this it has not been published in full and it will only be judged properly once projects have been built and are using it. A proper understanding of its terms and many conditions is essential as some of those conditions will need to be stepped down into project contracts.
6) Consider how green power is sourced
The Low Carbon Hydrogen Standard (LCHS) requires electrolysers to source qualifying green electricity and developers will need to consider where and how they source the green power. The requirements in the LCHS on this are only likely to become more stringent. The LCHS conditions around matching the renewable electricity generation to the production of hydrogen every half hour, the “Temporal Correlation”, presents a challenge to developers that is easily overlooked.
7) Protect yourself from fluctuations in demand
Securing the demand for hydrogen necessitates detailed offtake contracts and allocation of risk that early stage buyers of hydrogen may not be used to. What if, for example, the customer wants to mothball plant or curtail supply? This has implications on the revenue for the project and also threatens the HBM contract itself. Where else can the hydrogen go? The HBM contains protections designed to help on volume fluctuations but there are conditions around this. The risk can be mitigated by properly thought through contracts, risk apportionment and practical back-ups.
8) Consider whether you are going to need hydrogen storage
The great beauty of hydrogen is that it can be stored, unlike electricity. How to store it, where and what conditions and consents are needed, are key factors to consider for developers and funders. We have practical experience of major gas storage and the authorities and public are likely to be concerned about safety. This is not something to be underestimated and in our recent report on consenting for green hydrogen projects we and participants in the sector recognised that there needs to be industry wide effort put in to preparing the public and regulators for the applications for hydrogen production and storage that will appear over the coming years. Open dialogue and explanation to outline what are and are not, legitimate risks to consider and guard against, is important. As part of the UK Hydrogen Fuel Cell Association, Burges Salmon is helping with this.
9) The regulation applying to green hydrogen as compared to electricity is in its infancy
There is no specific hydrogen regulatory regime in the UK (or elsewhere) and instead projects need to fit into an existing regime on gas that was never designed for mass green hydrogen deployment. At Burges Salmon we spend a significant amount of time helping clients find “work-arounds” to navigate these regulatory difficulties.
10) Green hydrogen funding
As well as the HBM there are other routes for green hydrogen to benefit from funding including the Renewable Transport Fuel Obligation. But watch out for different principles and rules applying to different incentive schemes. Currently there is no conformity. Burges Salmon’s Energy and Transport Regulatory teams have been working through these together.
And one for luck… The supply chain contracts are still being developed and the supply chain is in its early days. Our team are working on early FEED contracts and collaboration agreements. While everyone will be focussed on deployment, early consideration on structuring and consistent forms of supply chain contracts will pay dividends.
Ross Fairley heads our Renewable Energy team and is Deputy Chair of the UK Hydrogen Fuel Cell Association, as well as sitting on Renewable UK’s Green Hydrogen Working Group. On 03 May 2023, Ross spoke at RenewableUK’s Green Hydrogen conference, discussing the next steps in delivering green hydrogen projects.
This blog was originally published on the RenewableUK website.