fivehundred magazine > Energy Yearbook 2024 > Stepping on the gas – the factors behind the rise of green hydrogen

Stepping on the gas – the factors behind the rise of green hydrogen

Green hydrogen projects are set to play a huge part in the energy transition. Harry Hyde talks to the lawyers on the front lines of a fast-developing market

At COP28 last year, all parties acknowledged that renewable and low-carbon hydrogen will be an essential factor in meeting global energy needs while decarbonising industry. With law firms advising clients on green hydrogen projects which seek to replace conventional fuels within heavy transport, thermal power stations, domestic heat grids, and industrial activity, hydrogen has the potential to make a vital contribution toward decarbonising hard-to-electrify processes.

Various factors have combined to drive the growth of green hydrogen projects, including: the ongoing elaboration of a regulatory framework which provides clarity on structure and revenue availability; the constant need within energy-intensive industries to decarbonise; the business case for diversification among fossil-fuel companies; and a growing geopolitical concern for renewable energy security.

However, the pace of growth differs between jurisdictions, impacted by government appetite and frameworks, the available renewable energy capacity, the strength of the investment climate, and the suitability of pre-existing infrastructure.

Accordingly, to be best equipped to confront technical obstacles, regulatory restrictions, and legal and commercial hurdles as they arise, firms must be well-equipped across multiple disciplines and bring together diverse and agile legal teams.

All pieces of the puzzle

The ongoing development to create and scale up all aspects of the green hydrogen economy is providing work for lawyers of diverse specialisms. Funds teams are advising on the formation and capitalisation of dedicated investment funds; private equity and M&A specialists are representing clients in investments and transactions concerning emerging technologies and project developers; projects practices are assisting in the financing and development of green hydrogen facilities; and regulatory experts are vital in helping draft the essential new standards, business models, and contractual frameworks.

Opportunity in this sector is afforded to firms of varying sizes. While large-cap investors and multi-national developers and energy companies are active in the green hydrogen sector to help decarbonise their portfolios, the high level of activity among small, purpose-driven investors, local industrial and energy players, and municipal authorities provides a ready client base for firms specialised within their region or sector.

Legal teams must be able to pair a solid grounding in the market context with an acute adaptability under fast-paced developments. ‘Regulatory skills are vital’, argues Richard Goodfellow, head of infrastructure, projects and energy at Addleshaw Goddard. ‘The legislation, licences and secondary legislation will all be changing, so you must be sure-footed’. To best adapt and provide clients with optimal solutions amid this changing context, a long track record at the cutting-edge of the energy transition and a nuanced understanding of industrial decarbonisation paths becomes invaluable.

Such adaptability is vital given the diversity of current opportunities in the sector. With green hydrogen applications remaining immature and unproven at scale, and while end-users often lack a suitable incentive structure, novel projects continue to pilot utilising green hydrogen across a variety of end-uses without the assurance of future widespread adoption within the targeted industry.

Moreover, amid global supply chain shortages and inflationary pressures, green hydrogen projects are struggling to attract capital: borrowing conditions are unfavourable for developers, bottlenecks in the supply-chain are causing long lead times, and investors – following lower-risk near-term strategies – are instead injecting capital in more-established energy sectors with an existing market and long-proven revenue streams.

The international perspective

Before green hydrogen production projects become more domestic, as traditional fossil fuel power plants are decommissioned and either repurposed or replaced, Gowling WLG principal associate Sian Dewing believes clients will continue to look for overseas investment opportunities. This presents significant advantages for firms who can draw from overseas offices or a network of local law firms.

With UK-based legal teams representing state and non-state investors, infrastructure developers, and energy companies – often coming from distinct geographies – in the development of landmark green hydrogen projects, David Lee, who chairs the global projects, energy, natural resources and infrastructure board at Allen & Overy, points to the value offered by global law firms which ‘understand the investor’s particular context, have experience with both local development and multinational energy players, and have an eye on the global patterns and pressures which impact the entire value chain’.

Such global connections are vital for law firms to capitalise on the projects emerging from countries which combine a strong sovereign investment base, a diversified conventional and renewable energy landscape, and a modernising infrastructure programme. Goodfellow notes how Middle Eastern economies such as Oman are ‘moving at a very rapid pace with projects so large, they can take the focus off more mature and cautious Western countries’. Those UK-based legal teams which can combine knowledge of the oil and gas sector – and its decarbonisation paths – with experience advising clients on local infrastructure projects have a ready foundation from which to maximise opportunities arising in the green hydrogen economy. As Lee suggests, ‘with many conventional energy companies being more interested in molecule-based green energy solutions which align with their traditional expertise, large-scale industrial facilities, and midstream infrastructure, prior oil and gas experience will prove a useful synergy between clients and their external counsel’.

Through exploring these global opportunities, lawyers are gaining vital experience with the green hydrogen economy and its legal processes. Having built a deeper understanding of the hydrogen sector’s political, economic, and environmental drivers, law firms are ideally placed to support potential clients in navigating legal risks and regulations and helping position them to exploit market opportunities without being tied down to a project which is not green or which has no viable end-use.

Zeroing in on net zero

To Lee, the crucial driver is that ‘the need to invest to achieve net zero is enormous’. While investment trends suggest energy systems are on-course to be net-zero emissions by 2050, Lee identifies that investments to achieve net-zero in harder-to-abate sectors like industrial processes – particularly steel- and cement-making – must still grow massively in scale. However, the legal sector is seeing a crucial challenge wherein investors will not inject capital at the necessary pace without clarity on the entire value chain and the most viable end-use for the green hydrogen produced.

Importantly, the legal sector is optimistic on the potential use of green hydrogen to decarbonise industrial processes. An increasingly important role for the legal sector in this space, as Goodfellow explains, will be how lawyers link together those clients already active in the development of green hydrogen plants with industrial end-users who are looking to decarbonise.

Indeed, Womble Bond Dickinson energy head Richard Cockburn, who is Edinburgh-based, notes an interest among hydrogen facility developers to co-locate projects alongside anchor offtakers or existing renewable energy sources in order to utilise available grid connections and ‘smooth’ the demand of renewable generation. Cockburn identifies that ‘there is much enthusiasm for green hydrogen due to the cluster of heavy industries’ in northeast England, ‘not least in chemicals and manufacturing’, to which he expects firms with a local presence to be advantaged in providing efficient services to clients.

As such, the legal sector can utilise its vantage point as a conduit of private sector activity to help shape policy which best strengthens the nascent market. Goodfellow draws on the example of the waste industry and the introduction of the landfill tax to suggest that end-users will more widely convert to low-carbon hydrogen should they be sufficiently incentivised to do so.

Blending in

The legal sector is keeping a watchful eye over potential solutions to a lack of offtaker appetite. To Cockburn, the necessity of securing long-term and reliable offtakers for green hydrogen is ‘a challenge at the nascent stage of the industry in the UK’ and ‘underpins the debate about blending hydrogen into the UK’s gas supply, as such could provide quickly an anchor offtake’.

However, blending may bring its own legal risks amid the wider rise within the sector of green claims litigation, emerging as consumers and investors increasingly demand that companies faithfully reduce their carbon footprint. Indeed, there are fears that setting a precedent for blending green hydrogen into the gas network – offering a 7% maximum emission reduction for a 20% blend – could lock in hydrogen as a fuel for domestic heating and consequentially lower the appetite for zero-carbon alternatives.

As a result, there emerges an interesting possibility whereby climate-conscious stakeholders challenge a policy which consciously deploys hydrogen to less efficient uses.

There are also fears that blending could potentially mislead consumers on the climate-friendliness of their domestic heat; providers’ claims that blended hydrogen offers ‘cleaner gas’ could conflict with the slight emission reduction and the fact that not all household boilers are hydrogen-ready.

Firms must therefore prepare dispute resolution expertise to be ready to navigate emerging contentious areas within the green hydrogen landscape, ideally working with industry players and stakeholders to help ensure end-uses for low-carbon hydrogen retain their ‘green’ ambitions.

As a whole, the legal sector must be part of the conversation which navigates the present multiplicity of end-uses and clarifies a future for green hydrogen which is simultaneously both commercially viable and logical toward achieving net-zero targets.

Law firms are optimistic that current UK policy will prove an effective aid to the growth of the green hydrogen economy. Recent government grants have provided subsidy for projects which have already secured industrial offtakers and thus will help decarbonise British manufacturing. To contribute toward founding the green hydrogen economy, lawyers have a vital role in ensuring that successful bidders are connected to the right infrastructure and viable end-uses in order to mitigate the risk that green hydrogen plants become stranded assets.

As Dewing notes, ‘collaborations between the public and private sectors are key to ensuring proposals reach the production stage’ and lawyers ‘play a key role in enabling the deployment of [private sector] capital’. There is thus a massive responsibility for the legal sector to continue to support best available near-zero-carbon technologies like green hydrogen in order to maintain the necessary pace of global decarbonisation.