Inside Arbitration: Future fuel – How will hydrogen disputes be resolved?

With a rapidly-emerging energy market set to fuel a rise in disputes, we explore how arbitration could offer the solution

A global transformation of the energy sector is underway. Markets appear to now accept that deployment of hydrogen at scale could be the next major energy source from around 2030. For that daunting goal to be realised, hydrogen must transition from emerging technology to mainstream commodity within a matter of years. In this article, we explain how quickly developing a fledgling energy market at scale while relying upon new technology will inevitably lead to an increase in disputes best resolved by international arbitration.

Clean hydrogen’s promise

Clean hydrogen generally refers to hydrogen produced using either renewable energy or hydrocarbons with carbon capture and storage (CCS). Unlike coal or liquefied natural gas (LNG), hydrogen in its natural form is only found on earth in limited reserves. In the vast majority of cases, hydrogen must be produced. The three main ways of producing hydrogen are:

• Electrolysis: This is the process of extracting hydrogen from water using electricity. If the electricity is renewable, this produces no carbon emissions.
• Gasification: The process of using coal in a thermochemical reaction to extract hydrogen. The use of coal produces carbon emissions but when these emissions are captured and permanently stored, clean CCS hydrogen is produced.
• Steam methane reforming: The process of using LNG in a thermochemical reaction to extract hydrogen. The use of LNG also produces carbon emissions, but these can be captured and stored to produce clean CCS hydrogen.

Hydrogen’s promise is undeniable, particularly for powering heavy industry and transport. It is flexible, transportable (unlike many forms of renewable energy), storable and, when used as a fuel, hydrogen’s only emission is water. Hydrogen has the potential – depending upon the price – to permit many countries to reduce their dependence on oil and gas, including where it would otherwise be purchased from countries where geopolitical tensions are fraught. It also has the potential to reshape energy market dynamics. Countries which have not been major players in hydrocarbons but are rich in renewable energy – which is otherwise difficult to trade globally – have the potential to gain more prominence. Clean hydrogen has the potential to help deliver on lofty ambitions of achieving net zero commitments by 2050. Indeed, McKinsey estimates that hydrogen could abate seven gigatons of CO2 emissions annually – about 20% of human-driven emissions if the world remains on its current global-warming trajectory – by 2050.

Australia as a case study

Australia, historically stable and resource-rich, might provide a useful litmus test for progress in hydrogen investment. It took Australia several decades of experience and setbacks to become competitive with Qatar as the world’s largest LNG exporter, currently exporting £28 billion of LNG each year. But what took Australia several decades with LNG, it now plans to achieve in a matter of years with hydrogen.

The Australian Government states that about 11% of Australia’s landmass (872,000 square kilometres) is highly suitable for renewable hydrogen production. Indeed, Australia’s hydrogen sector has an investment pipeline of £75–103 billion, with a 43% increase in total hydrogen projects in 2021 alone, according to S&P Global. There is also significant international interest in Australia’s potential as a hydrogen producer, and the interest is leading to mounting cross-border investment and collaboration.

But Australia has also started to experience some of the problems which come with rapid progress. In 2022, for example, a six-gigawatt hydrogen facility in South Australia had to be abandoned due to a lack of water, highlighting the scope for error in manufacturing hydrogen.

As initiatives and projects around hydrogen come to fruition, there will be a significant volume of complex, high-value new projects coming to market and a broad range of commercial agreements, including between parties in different jurisdictions. The projects will rely heavily on new and emerging technologies at a scale currently untested, generating the kinds of challenges, risks and disputes covered below.

The dispute flashpoints 

1. The bankability conundrum

Despite some evidence that (at least in Europe) green hydrogen is now cheaper than LNG, considerable investment is still required to make hydrogen projects bankable. The International Energy Association’s (IEA's) recent data puts the global cost of hydrogen at 3.2-7.7 US$/kg, which is higher than coal or natural gas by comparison. The IEA also estimates that global investment of US$1.2 trillion by 2030 on low carbon hydrogen is necessary to reach net zero by 2050. While such significant investment might be unachievable, governments are increasingly incentivised to contribute capital and subsidise the price of hydrogen to reduce hydrocarbon dependence. As with any project-financed or PPP arrangement, delays in financing can give rise to significant project delays, leading to inaccurate construction costs and offtake forecasting. Coupled with inflation, the bankability of projects could give rise to substantial cross-border disputes.

2. The race to net zero

It is no secret that goals and commitments around the energy transition are considerably off-track. Hydrogen production will need to jump to 614MT per year by 2050 to have any chance of reaching net zero. This is five times more than current total hydrogen production. With urgency and compressed deadlines, disputes will invariably follow. Pressure to finance, tender, bid and close projects at breakneck pace will provide significant scope for a variety of disputes.

3. Certification and standards

Regulatory uncertainty causes and exacerbates cross-border disputes. International regulations setting criteria for clean hydrogen do not yet exist. A number of different schemes are currently developing at national levels but there is currently no way for these schemes to interact with one another. Until such ambiguity is resolved, “change in law” and government action or inaction provisions may be triggered by even relatively minor updates to the framework.

To ensure hydrogen becomes a commodity capable of being traded reliably, and transparently, there should be a scheme for tracking and certifying the origin and quality of clean hydrogen. While such schemes have been proposed around the world, there is currently no consensus on which should apply – and the consequent lack of commercial and regulatory certainty represents a significant barrier to projects getting off the ground. Hydrogen certification and global standards require clarity to avoid situations where parties engage in offtake and supply arrangements failing to articulate the production and sustainability characteristics (greenhouse gas footprint and disruption to environment) of the hydrogen.

4. Project-interface challenges

Like LNG, a supply chain of projects, each significant in its own right, must function properly to produce hydrogen. An electrolyser for hydrogen production will be redundant without a source of water, energy (whether solar or wind), a way to store the hydrogen, and a means to transport it (rail and port infrastructure, as well as purpose-built tankers). Stakeholders in this lengthy supply chain must consider how these linked elements could expose it to more risk. This is particularly so given that stakeholders are likely to consist of government entities, established energy market players (including electricity network operators and shipping companies), and new market entrants (like tech companies) associated with innovative hydrogen technologies. Civil society groups may also be engaged around the physical sites from where the hydrogen is produced where it impacts upon water or land resources.

5. New and largely untested technology

The few pilot hydrogen projects which have reached the market are a study in technological advancement. In Australia, for example, Victoria’s Latrobe Valley HESC project has begun gasifying coal with CCS to extract hydrogen. The hydrogen is then cooled to -253°C so that it changes from gas to liquid (reducing its volume to 1/800th of the size) and, in a global first, bespoke tankers then deliver the liquified hydrogen to Kobe, Japan. Until recently, much of this technology had barely been tested let alone deployed to the market. Where there is new technology, teething problems often follow as the market learns safe ways to reliably produce and deliver clean hydrogen at scale.

A unique feature of energy disputes is their cross-border nature. International arbitration remains the preferred way of resolving global energy disputes in many parts of the world. Although a lucrative hydrogen market will bring many benefits, it will inevitably also result in an increase in international arbitrations in the years to come. Herbert Smith Freehills has played a key role in providing open-source guidance for governments setting up clean hydrogen legal frameworks through its pro bono support for the Green Hydrogen Organisation. This has included drafting a guidance paper on dispute resolution mechanisms to be included in contracts throughout the clean hydrogen value chain. This work will ultimately include drafting model form clauses that can be used as a transparent industry reference point to provide much needed commercial certainty. This would be similar to the Association of International Energy Negotiators' model form contracts which have been instrumental to the development of the oil and gas sector.