Important steps when developing hydrogen projects
Hydrogen will play a key role in decarbonising the global economy. But how do you successfully develop your business to reach your projected target?
The development of a hydrogen project remains complex. In this article we discuss some key steps from a legal perspective to guide you on the way.
Identify significant risks and dependencies
Hydrogen is on the verge of becoming scalable. The product will generate business opportunities similar to those we experienced for onshore wind 10-15 years ago, and what we are currently witnessing for offshore wind. As in on- and offshore wind markets, early movers within the hydrogen industry need to expect and handle high risk. However, they may also receive high rewards.
While all businesses are exposed to a variety of risks, many risk factors may be reduced or mitigated. Evident risks include technical risks, and risks of not obtaining required input (such as grid capacity, power or gas). Meanwhile others, such as future regulatory risks, remain more uncertain as regulations can develop and change over time. Identifying relevant risk factors for your project at an early stage will enable you to implement mitigating measures, which may for instance include contractual measures, knowledge, security measures or insurance coverage.
A clear contractual allocation of risk factors will reduce the likelihood of unexpected consequences for your project, and as a starting point, one should seek to allocate risks to the party best placed to manage them. Furthermore, regulatory risks can to some extent be mitigated through close dialogue with public authorities.
The complexity behind hydrogen projects implies a risk per se, since several steps during project development are closely connected and dependent on one another. Identifying significant dependencies at an early stage is therefore also key to developing a project, and reducing the risk of, among others, unnecessary delays and cost overruns. We will elaborate further on some main dependencies below.
Assess your own strengths and consider strategic partnerships
Handling the whole value chain of a hydrogen project alone is difficult – you must therefore understand your business’ area of expertise. Identifying your own strengths consequently brings up the question of which areas you need to partner up with third parties, as well as how and when to lock in your preferred strategic partners. Whether to engage in partnerships through non-binding memorandums of understanding or by legally binding agreements should be decided on a case-by-case basis. You may also consider whether it is possible to obtain some level of exclusivity for the crucial stages of the project development.
Set your ambition level regarding technology
Technology will play a part regardless of your place in the hydrogen value chain, and clarifying your technological ambition level is therefore important. If you plan on developing and owning technology, then securing the rights and ownership to such technology is essential and should be planned for at an early stage. Make sure agreements are in place to ensure that technology and intellectual property developed as part of the project belong to your company.
A less time consuming approach could include buying equipment or licensing existing technology from third parties and partners.
Identify key project agreements and required public permits
Key agreements to develop hydrogen projects are not limited to strategic partnership- and technology agreements. Agreements for securing the right location, a stable supply of power and water, as well as an offtake agreement at attractive pricing terms and quantities levels, will also be essential for the successful production of, for example, green hydrogen.
Some key agreements may be difficult to complete, and contract negotiations are often time consuming. Identifying such key agreements and initiating the process towards relevant counterparties at an early stage may therefore help avoid unnecessary delays. Having finalised several key agreements will also help make your project look attractive to other third parties, including potential investors, suppliers and customers. In order to avoid binding commitments in the project’s initial phase, agreements may be made contingent upon, for example, conditions precedent or notification letters (“notice to proceed”).
The need for public permits will also impact a project’s timeline – the expected time for completing application processes should be clarified early to avoid putting other processes on hold until the required permits have been obtained.
Decide how to finance your project
Financing is an important work stream for all successful hydrogen projects. However, the required type of project financing may have a material impact on the project’s timeline and other criteria which must be met to fund your project.
Bringing in strategic investors may be useful to obtain both the funding and competence required for a project. Prior to investing, investors will look into and have an opinion on your business plan, project agreements, expansion model, etc. A joint venture agreement should reflect your final agreement with investors concerning these topics. The JV agreement should also govern the general relationship between yourself and the investors, and protect your rights and control over the project.
Applying for bank loans or other debt financing is also possible, but how do you make your project “bankable”? Most lenders provide a list of conditions, terms and covenants which the borrower must adhere to in order to borrow sufficient funds. For example, a lender will usually require that public permits and key project agreements are in place, and that rights to required property are secured and registered in the land registry, before disbursement of funds.
Finally, your project may be eligible for public funding or similar support schemes. Identifying such support schemes, and the criteria and timeline to apply, could potentially provide your project with helpful capital. The earlier you identify the criteria for receiving funding from such support schemes, the more time you will have to adapt your project to these criteria, avoiding unnecessary amendments with resulting delays and costs.
Planning is key
As outlined above, development of successful hydrogen projects requires the balance and coordination of several work streams. Detailed planning and preparation are therefore key to reach your projected target.