Flexibility in hydrogen purchase agreements may be attractive to offtakers but could have an impact on project bankability, cautioned bank representatives speaking at the recent World Hydrogen Mena conference.

“For a bankability perspective, it is very easy—long-term contracts, at a fixed price, and a high-quality offtaker would be the ideal,” says Allan Baker, global head of power at France’s Societe Generale. He acknowledges that this is difficult in a nascent market, raising the UK’s contract-for-difference support scheme for low-carbon hydrogen production as an example of the kind of “soft support from government” that can underpin projects prior to the development of a traded market.

“Long-term contracts, at a fixed price, and a high-quality offtaker would be the ideal” Baker, Societe Generale

“For international contracts, you should really be looking at—rather than a producer subsidy—a consumer subsidy. So there, we are looking for alignment of interests, we are looking for the rationale of the offtaker to purchase the volumes and we are looking for some form of subsidy for the offtaker to close that gap,” he adds.

But on the ground, developers are struggling to sign contracts with offtakers based on current prices. A potential offtaker told Hydrogen Economist on the sidelines of the conference that compared with theoretical costs of hydrogen, what is actually being quoted by producers is “magnitudes higher”.

“As developers, we want a long-term contract, but then the pricing is an issue for buyers because the price that is settled today might not be what remains and will obviously be variable,” says Naheed Memon, CEO of London-listed developer Oracle Power. The company has most recently signed a non-binding memorandum of understanding with metals firm Emirates Global Aluminium for 50,000t/yr of green hydrogen offtake from its 400MW project in Pakistan. The two firms plan to sign a binding offtake agreement at Cop28, assuming successful negotiations.

Get-out clause

Memon notes that how the price of hydrogen will be indexed and how offtake will interact with available carbon credits also present concerns for potential buyers. “There has also been discussion about spot prices—which do not really exist right now—but buyers want to have first rights of refusal to any spot market going forward,” she adds.

Some offtakers are exploring termination clauses in contracts. While such clauses “are definitely important… there has to be a mitigant in place”, says Lina Osman, regional head of sustainable finance at UK-headquartered Standard Chartered. She cautions that such workarounds in contracts “will have an impact on your ability to raise debt and then eventually your equity returns as a developer”.

“The best-case scenario from a lender’s perspective is where you have fixed price and volume and fixed offtake over a time period—and how you evolve from that is essentially going to have an impact one way or another,” she says.

Baker notes that, in his previous experience of nascent sectors and first-of-a-kind projects, such as offshore wind, “those projects are expensive, so someone has to pay that price—so the contracts you enter are expensive”. While he acknowledges that this has led offtakers to explore flexible options such as price resets during the tenor, he warns that “all those elements of variability which give [offtakers] the flexibility to take advantage of lower costs later reduce the amount of debt that [developers] can raise for the project at the beginning”.

“If you want flexibility, you can get flexibility, but it is going to cost you in terms of debt capacity for that project and probably pricing for that project,” he says.

Bankable despite rising capital cost

Standard Chartered was one of the lenders to back Saudi Arabia’s Neom green ammonia project, which reached FID at the start of March. Other financiers include HSBC, JP Morgan, BNP Paribas, Credit Agricole, Natixis, KFW, DZ Bank, MUFG, Sumitomo Mitsui Banking Corporation, Norinchukin Bank, Mizuho Bank and Korea Development Bank, as well as regional institutions Abu Dhabi Commercial Bank, Saudi British Bank, Saudi National Bank, Riyad Bank, Banque Saudi Fransi, Alinma Bank and Apicorp.

Neom’s cost rose from an initial estimate of $5bn on announcement to $8.5bn. “While the overall configuration and production of the plant is unchanged—it is still 1.2mn t/yr of ammonia—we have traded off some of the operating costs and capital costs,” David Edmondson, CEO of Neom Green Hydrogen Company, explained on a separate panel, noting that inflation was less of a factor than ensuring lower operating costs down the line.

“Land is an example. We could have paid a land-lease agreement for the full 30 years that we have got, and instead we decided to pay for the land costs all upfront. That was a conscious project decision, but clearly that inflates the capital cost somewhat.”

---

Author: Polly Martin