Interview: Managing evolving or unknown risks in hydrogen mine projects

Interview by MELODIE MICHEL,Energy and Mines

Increasing numbers of miners are exploring green hydrogen applications to decarbonise parts of their operations. But in this immature, fast-evolving market, it is important to consider and mitigate risks when structuring projects and contracts. In this interview, Jo Garland, Partner at law firm HFW, shares her insights on what those risks are, and how to manage them from a legal standpoint.

Energy and Mines: Western Australia has become an international hub for green hydrogen, and miners are very interested in hydrogen’s potential for decarbonizing mining. As it’s still in its infancy and evolving rapidly, what are some of the challenges with structuring contracts for hydrogen projects?

Jo Garland: Structuring contract documents so the project is bankable can be challenging, especially given the untested level of technology and integration risk. Lenders can be reluctant to get on board. Because of that, if your project needs external (non- Government) financing, be mindful when you’re setting up your offtake and project contracts. Risk needs to be allocated with the party best placed to manage it, you need to watch out for easy termination rights and payments for delays in commissioning or teething issues (such as liquidated damages). As a mine project proponent, you need to get your OEMs and contractors on the hook in terms of warranties and guarantees, so that the lender has someone to fall back on.

Another thing when looking at hydrogen projects is that because it’s very early days, a lot of companies are potentially proceeding on memoranda of understanding or letters of intent, and these are not really full-form (and often are not legally binding) documents. Don’t stay operating on these types of documents for too long. The purpose of this type of document is to make sure that you have a deal, and then you need to get into the proper legal documentation that allocates risk.

And finally, when you do look at risk, it can be challenging to assign risk to particular parties when the project and technology issues are not well understood at the outset. Start off by working out what the known and unknowns are, deal with the risks you’re aware of but also leave some flexibility in your contract to deal with unknown risks. Don’t be afraid to let the document evolve: we’re all quite guilty of entering into a document, signing it, and that being the end of it. But for very new projects with new technologies, you might want to have supplementary arrangements, or agree on principles now that you can develop into more full-form obligations when you get to the next stage of the project.

E&M: What are some of the options for structuring hydrogen project contracts with mine offtakers?

JG: The options for structuring a hydrogen project are probably very similar to the options for structuring a renewable power or hybrid power contract. If you’re a miner, you might think about, am I going to build, own and operate my own project? Have I got enough technology in-house? Is there a contractor that can do this for me at a price I’m happy accepting because of the level of risk?

Another option is to contract it out so someone else builds, owns and operates the project and then you just get the offtake from that so it’s completely external. You might also look at breaking your project up into phases and having different contracts and providers for the various phases. So you might have a purely renewable power offtake contract that feeds into the electrolyser and a different contractual arrangement for the hydrogen production, depending on the parties involved and how you want to split up the risk.

E&M: What are the key areas of risk for these green hydrogen projects and how can they be addressed in financial agreements and contract structures?

JG: The main risk is the technology and integration risk. To address that you need to allow for reasonable commissioning periods and have a small-scale trial rather than going into full scale right away. Another option would be to partner closely with a technology provider so that if anything goes wrong they’re invested in working through any issues with you. In financial terms, if there is a technology risk that delays or impedes the project, you might want to look at a liquidated damage regime, where you can get compensated for the delay (but be mindful of appropriate risk sharing).

Projects are happening in a regulatory context that’s not purposebuilt for hydrogen, so there’s a risk within the project that there’ll be an inadvertent breach of a regulation, which might have an impact on the project or on one of the partners. To manage that, have a ‘change in law’ or ‘change in regulation’ provision in your contract where, as the regulatory regime evolves, the parties sit down and work out together what that means for the project (including cost and value flows).

Finally, because hydrogen projects require the right sizing of renewable energy and storage facilities, you can potentially include an optimisation clause so that, as you know more about the project you can look to optimise the level of the renewable input, the size of your storage, etc. The rate of change in the technology is huge, and miners know that by the time they hit their bigger decarbonisation goals, they may be operating on second or third-generation technology, so you also need to allow for that to happen in your contracts.

E&M: What will assist to simplify and de-risk these contractual arrangements — i.e. improvements in safety and regulatory standards for hydrogen applications?

JG: We need more clarity around how existing electricity, wind, water, emissions and safety regulations will apply to a hydrogen project. There are about 730 relevant pieces of legislation and standards, so that’s difficult to navigate. We need to see some consolidation and guidance around what the regulations mean but also where to find them.

E&M: What types of green hydrogen projects do you see as having the biggest potential in the near term for Australian miners?

JG: Replacing diesel-fuelled heavy vehicles with hydrogen power does seem to have the biggest potential in the near term. I like to think hydrogen in a microgrid scenario is next, and it’s certainly being explored.

E&M: What advice would you offer a miner or project developer who is beginning to assess the potential for a green hydrogen project?

JG: First of all, think about who you want to work with on your project. It’s important to choose your project partners well and make sure they have the same mindset and goals. Then, think about the resources or expertise you don’t have and what you need to bring in. Third, think about the structuring: do you want the project to be yours? Or do you want to derisk it a bit, and make it someone else’s project that you’re buying the offtake from? Finally, think about funding early, because it will influence your contract structure and some of the key terms in the contract.