Hydrogen is likely to develop contracting structures that differ from the way LNG is traded today, according to industry experts.

The LNG market is often cited as a template for the development of a global hydrogen trade.

One of the hallmarks of long-term LNG contracting is a longstanding reliance on take-or-pay clauses, which have traditionally underpinned the development of multibillion-dollar export projects around the world. These contracts give sellers some guaranteed returns even if buyers do not follow through on purchasing agreed amounts of a commodity and were vital in de-risking projects in the early days of the LNG market.

But while such contracts remain common in the LNG sector, they will be difficult to implement in hydrogen trade given the current small scale of the marketplace, according to Hirofumi Taba, an energy and infrastructure partner at law firm Linklaters.

“A private company taking demand risk is very challenging when there is no real market,” said Taba in a presentation at the Asia-Pacific Hydrogen Summit on Wednesday.

“A private company taking demand risk is very challenging when there is no real market” Taba, Linklaters

Prospective buyers are likely to shun obligations to take a minimum volume from supply projects because demand for the fuel has not yet fully emerged. And demand-side risk for hydrogen is heightened by the fact that it is competing in sectors currently dominated by natural gas and LNG, such as power generation and heating.

Even if the offtaker does agree to enter a take-or-pay agreement, there will be some residual reticence from financiers.

“From a bankability and offtaker credit perspective, it [only] half solves the problem because the lenders will be looking at the downstream risk and whether the offtaker can actually credibly resell or use the hydrogen that they have bought,” Taba says.

Another differentiator is that hydrogen offtake agreements are likely to include destination flexibility from the outset. In the global LNG market, destination clauses specifying delivery ports were driven by suppliers not wanting to undercut prices in third markets. Japan has pushed hard to eliminate destination clauses in its LNG import contracts and is expected to demand the same when it comes to hydrogen procurement.

Government support needed

Speakers at the event agreed that more government support is necessary for hydrogen to overcome cost-competitiveness barriers. Authorities need to set clearer regulations and standards, and have faster and transparent permitting timelines, according to Elaine Wong, cofounder and partner at H+ Partners, a Hong Kong-based private equity fund launched this year to invest in decarbonisation.

“You want to make sure that you do not penalise early movers… because as we are driving down that cost curve, if you are the first mover, you are going to be paying more,” said Wong. “You want governments to basically help bridge that gap and not penalise, so we are looking for governments to step in with clear plans to support that framework.”

Dedicated revenue support at a national level should be explored to incentivise clean hydrogen production, says Taba.

“It is very hard for private companies to take a view on the demand—particularly in the early days—unless there is some kind of revenue support,” he notes, citing how such mechanisms proved extremely successful at driving innovation, lowering costs and creating markets for renewable energy technologies.

In the case of renewables, typical early-stage revenue support took the form of production tax credits based on output, tax relief for investors, feed-in tariffs that offered a fixed price on long-term deals and purchasing obligations.

The UK government has cited long-term revenue support to hydrogen producers as a key component of the Hydrogen Business Model, to overcome the cost challenge of producing low-carbon hydrogen compared with cheaper high-carbon alternatives.

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Author: Shi Weijun