6 Mar 2024
Insight
3m read
While hydrogen power is already a significant part of industrial and chemical production, the green hydrogen market as a power source is nascent. In both the UK and Australia, there are no specific regimes regulating hydrogen. Instead, existing legislation is being used ad-hoc alongside emerging standards and guidance. Herbert Smith Freehills (HSF) Global Co-Head of Energy Lewis McDonald comments: "If you look at the physical side of producing, transporting, storing and using hydrogen, it kicks up a bunch of issues. There's a lot to analyse as regulations need to be developed and standards need to emerge."
There are a plethora of regulations a large hydrogen project would be subject to and they will vary by jurisdiction. However, common regulatory and logistics issues include:
HSF partner Alison Dodd outlines other considerations. "What we see on the big projects is they are in areas which are not as developed. The tenure and permitting is complex. These are massive undertakings so a thought-through strategy on land acquisition and making sure you have the relevant approvals is important."
When structuring projects for financing, it's about looking at the risks throughout the value chain, where they sit, and who takes them.
Lewis McDonald
Global Co-Head of Energy, Herbert Smith Freehills
Project playbooks for success
Beyond breaking down the complex legal issues, well-honed strategies for project development and finance are crucial in a developing sector where precedents may not be readily apparent. For one, ensuring contracts provide certainty could be the key to attracting finance, says McDonald: "When structuring projects for financing, it's about looking at the risks throughout the value chain, where they sit, and who takes them. In some other industries, like liquefied natural gas (LNG), all of that is understood, so there's existing contractual and project models for these types of [hydrogen] projects. It's about these skillsets being rolled out to see how a hydrogen value chain can work."
Alicia Eastman, podcast host of ‘Everything About Hydrogen’ and co-founder and board member of InterContinental Energy, says understanding the dynamics at play will pay dividends. "The main problem is people don't understand how long projects take. If you are going to build a facility to just create hydrogen, you need permitting, environmental and socioeconomic studies, resource collection and evaluation. You also need several years of data to model for what you are building, and most of this has to be done or checked by a third party. Then, once you get to the FID [final investment decision] and it’s the project financing, to make it bankable the lenders require copious third-party analysis through pre-FEED and FEED studies, market and risk analysis, as well as financial projections. Ideally, an offtake agreement is ready for signatures. Not all can be concurrent, but consecutive and it takes quite a bit of time."
Everyone is waiting for FID when projects are completely de-risked. Very few investors fund the middle, and that's when you start to expend more serious financial resources.
Alicia Eastman
Co-founder and board member of InterContinental Energy
Given plentiful capital available currently for early-stage funding, Eastman also warns not to neglect key intermediate stages down the line. "Everyone is waiting for FID when projects are completely de-risked. Despite acknowledging the 'Development Desert' or 'Dunes of Death', very few investors fund the middle, and that's when you start to expend more serious financial resources.”
If many of these issues appear to be uncharted territory, HSF Co-Head of Energy Nick Baker stresses that many lessons can be applied from the energy industry's long history of pioneering new sectors. "There are age-old problems in creating new energy markets: issues like first-mover disadvantage where you have to pay to get the project going and the cost curve gets smashed. There's lived experience from the LNG boom which we can help people navigate. It's also about mapping projects to regulatory processes that are evolving and emerging."
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The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024
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