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As global appetite for giga-scale green hydrogen projects grows, the business risks associated with getting this promising industry out of the starting blocks are considerable. Here's how it should be done, say Alessandra Pardini & Alexandra Cluver.
Green hydrogen is dubbed "the clean fuel of the future", which is why it is considered the darling of the energy transition by developers, financiers, investors, sellers, buyers and governments.
But, as global appetite for giga-scale green hydrogen projects develops, the business risks associated with getting this promising young industry out of the starting blocks are considerable.
Lack of expertise about how to get giga-scale hydrogen projects off the ground is a big problem in the industry. It can lead to painfully expensive mistakes, we have found in our experience project managing three of the largest green hydrogen projects in the world.
Still, we believe green hydrogen has the potential to transform many sectors, including shipping, aviation and power generation. This is thanks to its long-distance transportability from warm and windy locations like South Africa, to energy-hungry markets such as Europe who are at the forefront of exploring its potential as a climate-friendly energy source.
It’s an incredibly exciting time to be involved in the green hydrogen industry, but in order for it to reach meaningful global scale, as it should, it’s necessary to address some of its start-up challenges.
How to procure a green hydrogen project
It is absolutely vital to prepare a solid go-to-market strategy that tailors procurement processes to meet the demands of bankers, equity investors, off-takers and other key stakeholders.
The starting questions should be:
- Will it make sense to build a green hydrogen/ammonia plant under a single engineering, procurement and construction (EPC) contract or are multiple contracts required?
- How does one tailor the required procurement processes?
- What are the plant’s long lead items?
How to finance green hydrogen
Projects of this magnitude in a nascent sector will more than likely involve multi-sourced financing, combining commercial banks with development finance institutions and export credit agencies. It is necessary to put clear thought into how those parties will come together to serve the best interests of the project.
It is also necessary to put careful thought into the greater business and financial plan of the project, especially considering that most such projects take several years to become fully operational and a clear revenue strategy is critical in order to ensure that it is bankable.
How to build an advisory team
Giga-scale projects require the best global expertise as well as local depth of knowledge. It's a new industry – real expertise out there is limited and one wants to work with experts who really know what they are talking about in terms of international requirements and local nuances.
Also crucial is solid regulatory advice to ensure that the project meets global green energy standards (e.g., RedII, RedF455, RFNB01, etc), but – very importantly – also bring in advice on project development aspects such as procurement and construction, and project finance aspects such as banking, investments and funding models.
How to structure a large green hydrogen deal
The structuring of any large-scale energy project must be right from the get-go. Who is ultimately buying the product and what do they need it for? Not all hydrogen is made equal. What is the offtake strategy and who is the offtaker? What is legally possible to achieve within the budget, timeframe, business plan and available resources?
Similarly, who are the participants in a particular project, what are their drivers (eg equity players, renewable energy developers, petro-chemical companies), and how best should they be integrated into a single project?
Unlike "brown hydrogen" produced from fossil fuels, "grey hydrogen" from natural gas and fossil fuels and "blue hydrogen" from natural gas and methane, "green hydrogen" from water and renewable energy sources has the potential to help many countries and economic blocs to meet their 2050 net-zero targets – however, it is currently still too expensive for widespread use.
Well-considered infrastructure investments and increased demand from various industries are vital for bringing down the cost of clean hydrogen.
Participants in the industry must do what they can right now to help the green hydrogen industry reach global scale – we are in a critical phase of the industry’s development and every step we take now determines the future of this industry, and the world’s successful mission towards net-zero.
Alessandra Pardini is a Johannesburg-based partner of the global law firm Allen & Overy, whose global team has project managed the establishment of three of the largest green hydrogen projects in the world. Alexandra Cluver is a partner in the firm’s Johannesburg office. Views are their own.
