The importance of good green hydrogen contracting
Governments are setting green hydrogen targets, developing strategies and starting to implement policies to ensure they can benefit from the increasing demand for green hydrogen. However, few countries have established comprehensive legal and fiscal frameworks that will govern green hydrogen projects, and in less regulated markets, contracts signed between governments and project developers are likely to set key project terms.
While it is important to move fast, it is equally important that contracting practices reflect good practices, create conditions for long-term stable investments. These contracts must strike a balance between the needs for returns on risk-taking and investments by the private sector, and the hosting government’s legitimate right and ability to raise revenue. Contracts must also provide the foundations for long-term good relations with local communities.
If done well, many countries rich with renewable energy opportunities have the opportunity to build industrial clusters around renewable energy and green hydrogen production facilities and infrastructure. There may also be opportunities for green hydrogen project to secure domestic energy supply and local industry. Citizens and communities have expectations that large-scale investments will contribute to increased government revenues, employment opportunities and sustainable development at the local level.
There are risks that expectations will not be met, as it may take some time for these long-term investments to yield tangible development and climate impacts. Lessons learned from the oil, gas and mining industry show how important it is to get these agreements right from the outset to avoid lengthy and costly renegotiation processes.
It is essential that contractual agreements between governments and private companies are transparent and distribute risks as efficiently as possible to build trust and bring down costs. The agreements will also need to give investors and project developers assurances that the projects will get the government support needed to make them profitable.
Guidance and principles for good green hydrogen contracting
Due to speed of industry developments and high potential for projects to generate development benefits, there is high demand for guidance to support decision makers, communities and companies in developing contracting practices for green hydrogen projects that ensure rapid expansion to everyone's benefit.
This guidance has been developed by a group of legal experts as well as government, industry, development finance and civil society representatives to draw on lessons learned from other sectors and emerging practices in the green hydrogen industry. It highlights existing international standards and good practice and provides recommendations and model clauses for contracts where possible.
The guidance initially covers eight separate briefs identified as important for decision makers in the early stages of policy and project development and contract negotiations:
1. Policy and regulatory developments (consultation paper available here)
2. Financing of green hydrogen projects (consultation paper available here)
3. Fiscal terms and incentives (consultation paper available here)
4. Community engagement and transparency practices (consultation paper available here)
5. Land acquisition and use (consultation paper available here)
6. Infrastructure access and common use (June 2022)
7. Sustainable development contribution (June 2022)
8. Dispute resolution (consultation paper available here)
GH2 welcomes feedback on any of these papers. Please share your comments with Ines Marques (firstname.lastname@example.org).
Consultation and forthcoming guidance
GH2 welcomes comments and feedback on the guidance to ensure it is as useful as possible to government, project developers, lenders, civil society and local communities.
As next steps for the project on Green Hydrogen Contracting – for People and Planet, GH2 will continue working with support from its expert group to:
- Deliver capacity building and awareness raising in regions and countries on the topics covered in the guidance.
- Complete and deepen the existing topic notes to include further practical examples and model clauses.
- Cover additional topics subject to demand from governments, communities and project developers.
- Explore possibility of developing guidance covering other types of agreements involving government and private sector, including offtake email@example.com
- Collaborate with the working group and partners to provide tailored guidance on policy questions covered by the guidance in partner countries.
GH2 welcomes any parties with interest to be involved in the next phase of the project to contact Ines Marques (firstname.lastname@example.org).