Marine liquid hydrogen value chain– considerations
A complete liquid hydrogen value chain is currently in development on the west coast of Norway. What are the key issues affecting the development of such a large scale cooperation project?
In order to achieve the international and national goals and commitments to reduce CO2-emissions, several companies within the maritime sector are now looking into alternatives to conventional fuel.
The most common alternative is electric power and use of batteries, but such technology currently has its limits due to weight, capacity and consumption, and might not be a viable alternative for all types of vessels. The maritime industry is therefore also looking into other types of low and zero-emission fuels, such as liquid hydrogen. This may in particular be necessary for large and high speed vessels, such as cruise ships and high speed ferries.
A key barrier to the potential use of liquid hydrogen as an alternative source of fuel for the maritime industry in Norway has been the lack of a sufficient number of end-users. The result has been an inefficient value chain and a corresponding high cost. End-users have therefore not had any real incentive to change from conventional fuel to liquid hydrogen. In order to seek to change this, a consortium comprising nine companies active on all levels of a potential value chain for liquid hydrogen was established late 2019 in Norway.
Establishing such a new value chain raises several legal, economic and technical questions. It involves several areas of law, and not only the participants in the consortium, but also third parties and public authorities. In this short article we will describe some of the considerations in these types of projects.
Legal framework – from letter of intent to execution
In projects where several companies cooperate, it is necessary to have a solid legal framework which clearly sets out each participant’s rights and obligations, as well as certain governance principles for the cooperation. In the early phases of a project, this may be done on a high level basis in the form of a letter of intent or similar “soft”-binding documents. However, once the project starts, it is necessary to set out these principles in more detail. This is normally done in the form of a consortium agreement.
A consortium agreement includes rules on each of the participants financial contributions, a budget, a description of what the participants shall deliver and develop, and a project schedule. Further, it will typically contain rules on governance and organisation, intellectual property rights, as well as provisions on default, liability, termination and confidentiality. Depending on the participants and the type of project, other matters such as competition law, pre-agreement on transfer or right to use intellectual property rights, exclusivity and warranties could also be relevant. If the project receives public funding, the public funding authorities may also have specific requirements that they will want built into the agreement.
It is important that the consortium agreement takes into account the particulars of the project, how it is intended to progress, and what its results are intended to be. In the event of establishment of a new value chain, the participants may for example envision that there may be sub-projects, or that it is necessary to establish new companies for the purposes of execution and commercialisation. Such matters should, to the extent possible, be addressed early and regulated in the consortium agreement. If not, there may be difficult discussions between the participants at a later stage in the project.
Execution of a project may be done by all of the participants individually, or through collaboration between all or some of the participants.
It may also be divided between the participants depending on which markets they are currently active in. For example, while it may be necessary for ship owners to be part of a project, it may not make sense that they also participate in commercialisation and execution of the production and supply of fuel.
Certain parts of the project may also require substantial investment, with the consequence that two or more participants decide to establish a jointly owned company – a joint venture. The specifics for such joint ventures are normally separately agreed in partnership or shareholders’ agreements.
Receiving state aid
In order to establish and carry out a project, funding from public authorities may be necessary. This is particularly the case for new technology or development of new value chains, which may not in itself be commercially viable without public funding.
An important aspect of such funding is that it is governed by state aid rules. The main principle in this respect, is that all state aid is forbidden, except for pre-cleared schemes or aid for pre-defined purposes. Although most of the available funding schemes have been pre-cleared, it might be worth exploring other options – still within the state aid rules – if none of the available schemes cover the project.
In Norway, it has for example not been clear whether it would be possible to receive public funding for the production of liquid hydrogen as part of the establishment of a new value chain. The reason for this is that even though the establishment of such a value chain would be innovative, the production of liquid hydrogen is in itself not innovative. However, a recently approved scheme in Germany indicates that this may also be possible to achieve within the state aid rules, at least for several parts of the project.
Competition law challenges
The participants in a research and development project may be deemed actual or potential competitors, or risk becoming so in the future. It may therefore also be important to take into account applicable competition law rules, and include provisions or mechanisms which ensures compliance.
In general, the risk of acting in breach of applicable competition law is low in the early phases of a research and development project as at this stage, cooperation may be necessary and well founded. Normally therefore, the risk increases as the project develops. Whilst due care is necessary at all stages, taking into account competition law is particularly important if two or more of the participants in the project decide to establish a joint venture for project execution and commercialisation. In the event that this is decided, a key strategic decision to make is whether the joint venture shall be “full-function” or not.
In order for the joint venture to be a full function company, it must be an autonomous economic entity which operates on a lasting basis. In addition, the company must be under the joint control of the participants. The requirement of joint control must be considered in connection with the establishment of the joint venture. In this respect, the participants should take into consideration that this requirement in principle may be met even if one of the participants are envisioned to have a majority shareholding. However, in such a case specific mechanisms in the partnership or shareholders’ agreement, such as granting the minority shareholders sufficient veto rights, are necessary in order to ensure that the requirement of joint control is met.
A full-function joint venture will need to be notified to and cleared by the relevant competition law authorities. Which competition law authority is relevant in the circumstances will depend on the relevant market and the turnover of the participants involved. It may be national competition law authorities or the EU Commission. Once cleared, there will be less need for continuous monitoring of competition law compliance for the joint venture as such. Alternative forms of co-operation may be easier to set up, but all require continuous self-assessment to ensure compliance. The costs of setting up a full-function joint venture might be small compared to the costs of continuous monitoring and potential sanctions in the event of a breach.
Use and protection of intellectual property rights
Intellectual property is key in innovative projects. Achieving success and cooperation in projects where multiple participants take part require highly tailored and clear-cut regulations on intellectual property.
In these types of projects, participants normally require protection of the intellectual property they bring into the project, commonly referred to as the “background intellectual property rights” or “project background”. In addition, the participants need to agree on ownership of any intellectual property which may be developed in the project, normally referred to as the “foreground intellectual property rights” or “project results”. There may also be other rules related to intellectual property rights, for example that a single participant is to keep certain rights which are developed.
How this is regulated will depend on the individual project. Whilst the specific regulations may vary, it is generally important to take into account the project execution and commercialisation early in order to ensure that the relevant participants are granted ownership and sufficient rights to be able to carry this out efficiently. If this is not done, there may be difficult discussions between the participants at a later stage in the project.