
2 minute read
THAN 10 PER CENT OF PROJECTS REACH FINAL INVESTMENT DECISIONS
from HIL Issue 09
LNG and Hydrogen contracts to follow similar route as it stands
Over the years, LNG projects have developed two principal revenue contract models: tolling agreements and sale-andpurchase agreements.
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Through tolling models, LNG facilities provide capacity to their customers, meaning each customer is responsible for sourcing natural gas, delivering it to the facility, shipping etc. Essentially, the customer pays the liquefication to convert gas belonging to the customer into LNG.
Focussing on how this would look for green hydrogen, the customer would purchase electricity to be used at the electrolysis plant and potentially also supply the water to be used. It would supply these raw materials and pay the electricity in several ways. This could be through a third party, including a corporate PPA. Additionally, electricity can be purchased in the spot market, but the PPA is used as a means to fix the price.
Determining which is the best model to use includes multiple factors and differs from project to project. This is one of the reasons why it is difficult to establish, but the considerations include the availability and terms of a PPA or other feedstock supply agreement will be better for the entity with a higher credit rating, and different counterparties will be differently disposed to enter into a separate PPA or other energy supply arrangement or to procure the water necessary for a green hydrogen project.
Offtake contracts will be looking for reliable and predictable revenue streams to unlock the hydrogen economy. With this in mind, the sector can expect to see a mixture of take-or-pay and take-and-pay contracts appearing to secure the finances involved.
Take-or-pay contracts expected to be popular in early stages
Take-or-pay, as it sounds, would require the buyer and seller to agree on a preestablished quantity of hydrogen to be delivered, in which the buyer would have to take the quantity or pay for the amount not taken. These methods are common in the LNG sector as the buyer can make up for failure to take at periods of high demand, as long as it has been paid for in the tale-or-pay agreement.
Slightly different, the take-and-pay contract ensures the buyer must take the total delivery that was pre-agreed, with failure to take resulting in the seller qualifying for remedies for the breach. Unless the contract provides for liquidated damages, seeking recovery for the breach takes time and considerable effort, as the seller has to demonstrate efforts to reduce losses and proof of loss.
‘Bankable’ green hydrogen still a way off as supply grows
In the early stages, with varying supply and demand, the sector can expect take-or-pay contracts to be more popular, then take-andpay continuing to grow as the supply grows.
Sorting out pricing for hydrogen is one of the biggest conundrums facing the sector, especially as there are no current spot prices for hydrogen. Current sales of hydrogen are tightly linked to the price of feedstock due to the vast majority of hydrogen produced currently being derived from fossil fuels.
Addressing all these core issues will help hydrogen to be traded as a commodity, scale up production and ease current bottlenecks. Until this benchmark is reached, green and blue prices are set to follow a similar formula to grey, based on fixed costs and variable costs.
For the sector to establish whether hydrogen is ‘bankable,’ offtake contracts will most likely use these two types of contracts. Reasons being:
1 | Financiers will require a predictable revenue stream to ensure protection and profits.
2 | Because there is no merchant market for hydrogen, selling hydrogen not taken and paid for by a customer will be an extremely difficult proposition.
3 | Early projects will have constant input costs, and an unreliable purchaser of the output will reduce project final investment decisions, particularly in electricity use under PPAs.