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Interview: Vinson & Elkins’ Alan Alexander on the emerging hydrogen project development landscape

Vinson & Elkins Partner Alan Alexander, whose clients include OCI and Lotus Infrastructure, has watched the hydrogen project development space evolve from a fledgling idea to one that is ready for actionable projects.

Vinson & Elkins Partner Alan Alexander, whose clients include OCI and Lotus Infrastructure, has watched the hydrogen project development space evolve from a fledgling idea to one that is ready for actionable projects.

In the meantime, a number of novel legal and commercial issues facing hydrogen project developers have come to the forefront, as outlined in a paper from the law firm this week, which serves as a guide for thinking through major development questions that can snag projects.

In an interview, Alexander, a Houston-based project development and finance lawyer, says that, although some of the issues are unique – like the potential for a clean fuels pricing premium, ownership of environmental attributes, or carbon leaking from a sequestration site – addressing them is built on decades of practice.

“The way I like to put it is, yes, there are new issues being addressed using traditional tools, but there’s not yet a consensus around what constitutes ‘market terms’ for a number of them, so we are having to figure that out as we go,” he says.

Green hydrogen projects, for example, are “quite possibly” the most complex project type he has seen, given that they sit at the nexus between renewable electricity and downstream fuels applications, subjecting them to the commercial and permitting issues inherent in both verticals.

But even given the challenges, Alexander believes the market has reached commercial take-off for certain types of projects.

“When the hydrogen rush started, first it was renewables developers who knew a lot about how to develop renewables but nothing about how to market and sell hydrogen,” he says. “Then you got the people who were very enthusiastic about developing hydrogen projects but didn’t know exactly what to do with it. And now we’re beginning to see end-use cases develop and actionable projects that are very exciting, in some cases where renewables developers and hydrogen developers have teamed up to focus on their core competencies.”

A pricing premium?

In the article, Vinson & Elkins lawyers note that commodities pricing indices are not yet distinguishing between low-carbon and traditional fuels, even though a clean fuel has more value due to its low-carbon attributes. The observation echoes the conclusion of a group of offtakers who viewed the prospect of paying a premium for clean fuels as unrealistic, as they would need to pass on the higher costs to customers.

Eventually, Alexander says, the offtake market should price in a premium for clean products, but that might depend in the near term on incentives for clean fuels demand, such as carbon offsets and levies, like the EU’s Carbon Border Adjustment Mechanism.

“Ultimately what we need is for the market to say, ‘I will pay more for low-carbon products,’” he says. “The mindset of being willing to pay more for low-carbon products is going to need to begin to permeate into other sectors. 30 or 40 years ago the notion of paying a premium for an organic food didn’t exist. But today there are whole grocery store chains built around the idea. When the consumer is willing to pay a premium for low-carbon food, that will incentivize a farmer to pay a premium for low carbon fertilizer and ammonia, which will ultimately incentivize the payment of a premium for low-carbon hydrogen. The same needs to repeat itself across other sectors, such as fuels and anything made from steel.”

The law firm writes that US projects seeking to export to Europe or Asia need to take into account the greenhouse gas emissions and other requirements of the destination market when designing projects.

In the agreements that V&E is working on, for example, clients were first focused on structuring to make sure they met requirements for IRA tax credits and other domestic incentives, Alexander says. Meanwhile, as those clean fuels made their way to export markets, customers were coming back with a long list of requirements, “so what we’re seeing is this very interesting influx” of sustainability considerations into the hydrogen space, many of which are driven by requirements of the end-use market, such as the EU or Japan.

The more stringent requirements have existed for products like biofuels for some time, he adds, “but we’re beginning to see it in hydrogen and non-biogenic fuels.”

Sharing risk

Hydrogen projects are encountering other novel commercial and legal issues for which a “market” has not yet been developed, the law firm says, especially given the entry of a raft of new players and the recent passage of the Inflation Reduction Act.

In the case of a blue hydrogen or ammonia project where carbon is captured and sequestered but eventually leaks from a geological formation, for example, no one knows what the risk truly is, and the market is waiting for an insurance product to provide protection, Alexander says. But until it does, project parties can implement a risk-sharing mechanism in the form of a cap on liabilities – a traditional project development tool.

“If you’re a sequestration party you say, ‘Yeah, I get it, there is a risk of recapture and you’re relying on me to make sure that it doesn’t happen. But if something catastrophic does happen and the government were to reclaim your tax credits, it would bankrupt me if I were to fully indemnify you. So I simply can’t take the full amount of that risk.’”

What ends up getting negotiated is a cap on the liability, Alexander says, or the limit up to which the sequestration party is willing to absorb the liability through an indemnity.

The market is also evolving to take into account project-on-project risk for hydrogen, where an electrolyzer facility depends on the availability of, for example, clean electricity from a newly built wind farm.

“For most of my career, having a project up and reaching commercial operations by a certain date is addressed through no-fault termination rights,” he says. “But given the number of players in the hydrogen space and the amount of dollars involved, you’re beginning to see delay liquidated damages – which are typically an EPC concept – creep into supply and offtake agreements.”

If a developer is building an electrolyzer facility, and the renewables partner doesn’t have the wind farm up and running on time, it’s not in the hydrogen developer’s interest to terminate through a no-fault clause, given that they would then have a stranded asset and need to start over with another renewable power provider. Instead, Alexander says, the renewables partner can offset the losses by paying liquidated damages.

Commercial watch list

In terms of interesting commercial models for hydrogen, Alexander says he is watching the onsite modular hydrogen development space as well as power-to-fuels (natural gas, diesel, SAF), ammonia and methanol, given the challenges of transporting hydrogen.

“If you’re going to produce hydrogen, you need to produce it close to the place where it’s going to be consumed, because transporting it is hard. Or you need to turn it into something else that we already know how to transport – natural gas, renewable diesel, naphtha, ammonia.”

Alexander believes power-to-fuels projects and developers that are focused on smaller, on-site modular low-carbon hydrogen production are some of the most interesting to watch right now. Emitters are starting to realize they can lower their overall carbon footprint, he says, with a relatively small amount of low-carbon fuels and inputs.

“The argument there is to not completely replace an industrial gas supplier but to displace a little bit of it.”

At the same time, the mobility market may take off with help from US government incentives for hydrogen production and the growing realization that EVs might not provide a silver-bullet solution for decarbonizing transport, Alexander adds. However, hydrogen project developers targeting the mobility market are still competing with the cost of diesel, the current “bogey” for the hydrogen heavy mobility space, Alexander says.

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EnLink inks CO2 transport and storage agreement with ExxonMobil

EnLink will use its existing pipelines and new facilities to deliver CO2 to ExxonMobil’s CO2 storage location under development in Louisiana.

EnLink Midstream has entered into a transportation service agreement with a subsidiary of ExxonMobil Corporation, according to a press release.

EnLink will use portions of its existing pipeline network, as well as new facilities, to deliver CO2 from the Mississippi River corridor in southeastern Louisiana to ExxonMobil’s 125,000-acre CO2 storage location under development in Vermilion Parish.

The TSA includes industry-standard terms and conditions for the provision of transportation services. Ultimate available reserved capacity under the agreement is up to 10 million metric tonnes per year, with initial reserved capacity of 3.2 million metric tonnes per year, beginning early 2025.

“EnLink is uniquely positioned to serve customers in the region given our extensive pipeline infrastructure already in the ground,” EnLink CEO Jesse Arenivas said in the release. “The Mississippi River corridor emits approximately 80 million metric tonnes of CO2 per year and has one of the highest concentrations of industrial CO2 emissions in the United States.”

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French e-fuels developer takes investment from private equity pair

A French developer of low-carbon molecules has taken a convertible bond investment for its most advanced e-methanol and SAF projects in France and Spain.

Hy24 and Mirova are co-investing in Elyse Energy’s most advanced e-methanol projects in France and Spain, with industrial commissioning scheduled for 2027 and 2028.

Nomura Greentech acted as exclusive financial advisor to Elyse Energy. Legal advisors included CLP – Cliperton Avocats for Elyse Energy and Gide for Hy24 and Mirova, the companies said in a news release.

Hy24 is the hydrogen-focused wing of French private equity firm Ardian and Mirova is an affiliate of Natixis Investment Managers. The firms have undertaken the equity investment through their respective funds – the Hy24 Clean Infrastructure Fund and the Mirova Energy Transition 5 fund.

The transaction was carried out through convertible bonds, and Mirova and Hy24 are not shareholders of Elyse Energy, a spokesperson said in response to follow-up questions.

Additional terms of the transaction were not disclosed.

The money will allow Elyse Energy to recruit new employees and to continue development through feasibility studies, the industrialisation phase, and beyond. 

Elyse’s eM-Rhône project, awarded by the European Innovation Fund, is targeting production of 150,000 mtpy of green e-methanol annually for the maritime sector and industry. The BioTJet project in Pyrénées Atlantiques, France is in advanced stages with annual production set at 75,000 mtpy of e-biokerosene and 3,000 mtpy of naphtha..  

The company will deploy some 2.5 GW of installed capacity (1m mtpy) of e-methanol and 200,000 mtpy of SAF. The fuels will go to offtakers in aviation, maritime transport, and industrial processes in sectors such as chemicals.

Hy24 recently closed on a €1.5bn equity private placement in North America’s H2 Green Steel, together with existing investors Altor, GIC and Just Climate.
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TPG Rise acquires fuels testing and certification company

The target firm, AmSpec, increasingly facilitates the penetration of biofuels, hydrogen, sustainable aviation fuel, and other alternatives throughout the global fuel system.

TPG Rise Climate, the dedicated climate investing strategy of TPG’s global impact investing platform TPG Rise, has signed a definitive agreement to acquire AmSpec Group, Inc., one of the fastest growing Testing, Inspection, and Certification (TIC) companies specializing in energy, commodities, and fuels.

AmSpec’s existing majority shareholder, Olympus Partners, will retain a minority interest in the company. Additional terms of the investment were not disclosed.

Goldman Sachs and Baird served as financial advisors and Morgan Lewis served as legal counsel to AmSpec in relation to the transaction.

Founded in 1986, AmSpec operates an extensive global footprint of over 300 inspection sites and laboratories throughout 61 countries, many of which are located at key industrial centers, ports, or trade hubs. AmSpec’s core service involves testing and certifying the performance and emission qualities of fuels or commodities at each stage along the value chain.

By monitoring and reporting to regulators and independent certification bodies, AmSpec plays a key role in emissions controls and enforcement on conventional fuels, while also increasingly facilitating the penetration of biofuels, hydrogen, sustainable aviation fuel, and other alternatives throughout the global fuel system.

“As part of its broad set of services, AmSpec has developed deep expertise in the control of pollutants and emissions factors in legacy fuels, and they will play a critical role in processing, testing, and certifying the growing volume of increasingly complex renewable fuels that we see coming online,” said Marc Mezvinsky, Partner at TPG and senior member of its climate investing team. “We are thrilled to be investing in AmSpec’s best-in-class lab network at this inflection point in the global fuels mix, and we look forward to working closely with the management team to enter new markets and accelerate the global energy transition.”

As part of the transaction, Mezvinsky will join AmSpec’s Board of Directors along with TPG Rise Climate’s Roger Stone and Tracy Wolstencroft, a TPG Senior Advisor who served as former president and CEO of both the National Geographic Society and executive search and management consulting company Heidrick & Struggles. He also served as former chair of Goldman Sachs’ clean energy technology practice.

“Our commitment to innovation and service has made us a leader in the industry, and we are excited about what we will be able to accomplish with this new partnership. TPG Rise Climate has the resources, network, and vision to drive our next phase of growth, particularly as global supply chains rapidly change and the flows of critical molecules begin to transition,” said Matt Corr, CEO of AmSpec. “Our team is fully aligned with TPG on capturing the opportunity set in front of us and we are grateful to have Olympus’s continued partnership and support.”

The transaction is subject to regulatory review and customary closing conditions and is expected to close in the fourth quarter of 2023.

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Carbon capture OEM eyeing US for manufacturing plant

A Vancouver-based maker of carbon capture equipment is considering building a manufacturing plant in the US. Its number one target market: gray hydrogen producers.

Svante, a carbon capture original equipment manufacturer based in Vancouver, is eyeing the US as it seeks to expand its market presence across North America.

The company has raised sufficient capital to construct its first plant in Vancouver, where it will make specialized filters and contactor machines used in the carbon capture and removal processes, Svante CEO Claude Letourneau said in an interview.

Within several years, Svante is planning to build a second manufacturing facility in the United States, closer to where its customers are located and where CO2 can be monetized, Letourneau said.

Svante raised $318m last year in a series E fundraising round led by Chevron New Energies. It will spend approximately $100m to build the Vancouver facility.

Letourneau says the company’s principal target market in North America is existing gray hydrogen facilities that use steam methane reforming, of which there are around 1,000. The cost of adding carbon capture to existing SMR plants brings the cost of blue hydrogen from $1.50 per kilogram to around $2 per kilogram, according to Letourneau, compared to green hydrogen that will cost between $3 – $6 per kilogram with a similar carbon footprint.

“It’s a good solution,” he said.

Optimizing costs

As an original equipment manufacturer, Svante has partnerships with some of the largest EPC companies in the world for carbon capture projects: Kiewit in North America, Technip in Europe, and Samsung in Asia.

“When you have a technology that you want to take to market, you need to get the benefit of a close relationship with these EPC contractors if you want to deploy quickly and reduce costs,” he said.

He noted that the filters and contactors typically make up between 10% – 15% of the cost of a carbon capture plant, while the rest is in the balance of plant. Filters typically have a lifespan of three to five years, he said, allowing for additional recurring revenues for Svante after the initial installation.

Svante is working on five to six projects with Kiewit in North America that are in the pre-FEED and FEED stages, with FIDs expected by the end of next year. It is also working with Linde on a Department of Energy-sponsored pre-FEED carbon capture project for Linde’s Port Arthur gray hydrogen facility.

Additionally, Svante has a partnership with Swiss-based Climeworks for direct air carbon capture technologies.

“We want to be for carbon capture what GE Aerospace is for the jet engine industry,” he said, using an analogy to a market in which there are only several OEMs in a large, consolidated industry.

Target market

There are around 10,000 emitting plants globally that need carbon capture in order to decarbonize; meanwhile there are only 40 carbon capture facilities in operation, according to Letourneau. Svante’s Vancouver plant will be able to make equipment for around 10 plants per year, but eventually the company would like to scale up to between 50 – 100 plants per year with additional manufacturing capacity.

“This is a big problem we’re trying to solve here,” he said.

To build the second plant in the US, the company will explore using project finance debt and seek to take advantage of US government incentives for clean energy manufacturing. The recently enhanced carbon capture tax incentives – of $85 per ton of CO2 captured versus $50 previously – will also benefit Svante’s carbon-emitting customers.

In addition to gray hydrogen, the company is targeting carbon emissions from oil and gas refining as well as pulp and paper mills.

Use cases

Svante’s modular solid sorbent technology can be inserted to capture flue gas at the end of the refining process instead of inside the plant, offering fewer disruptions to existing systems. Svante then concentrates the CO2 into a pipeline grade for storage or industrial use.

“Nobody makes these filters in the world,” Letourneau continued, “so if I want to convince somebody to give Kiewit and ourselves a purchase order for $300m to build a 1 million-ton-per-year plant, they need to see that we have a manufacturing plant to make the filters, they need to see that we have the size of the contactor done at commercial size, and they need to see that we’ve done all the engineering studies to justify that this project can be monetized, economical, and the like.”

The company is sufficiently capitalized to advance the projects in its pipeline, and is focused on completing the Vancouver plant and garnering purchase orders in order to become profitable. A potential future exit could come in the form of an IPO or sale to a larger player, Letourneau said.

“We understand the market is quite buoyant and probably a few large companies are going to try to dominate, and they may decide they want to acquire a company like us, so an M&A is a possible exit in the next five years, depending on the conditions,” he said.

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Exclusive: Riverstone Credit spinout preparing $500m fundraise

Breakwall Capital, a new fund put together by former Riverstone Credit fund managers, is preparing to raise $500m to make project loans in decarbonization as well as the traditional energy sector. We spoke to founders Christopher Abbate and Daniel Flannery.

Breakwall Capital is preparing to launch a $500m fundraising effort for a new fund – called Breakwall Energy Credit I – that will focus on investments in decarbonization as well as the traditional energy sector.

The founders of the new fund, Christopher Abbate, Daniel Flannery, and Jamie Brodsky, have spent the last 10 years making oil and gas credit investments at Riverstone Credit, while pivoting in recent years to investments in sustainability and decarbonization.

In addition to bringing in fresh capital, Breakwall will manage funds raised from Dutch trading firm Vitol, for a fund called Valor Upstream Credit Partners; and the partners will help wind down the remaining roughly $1bn of investments held in two Riverstone funds.

Drawing on their experience at Riverstone, Breakwall will continue to make investments through sustainability-linked loans across the energy value chain, but will also invest in the upstream oil and gas sector through Valor and the new Breakwall fund.

“We’re not abandoning the conventional hydrocarbon economy,” Flannery said in an interview. “We’re embracing the energy transition economy and we’re doing it all with the same sort of mindset that everything we do is encouraging our borrowers to be more sustainable.”

In splitting from Riverstone Credit, where they made nearly $6bn of investments, the founders of Breakwall said they have maintained cordial relations, such that Breakwall will seek to tap some of the same LPs that invested in Riverstone. The partners have also lined up a revenue sharing arrangement with Riverstone so that interests are aligned on fund management.

The primary reason for the spinout, according to Abbate, “was really to give both sides more resources to work with: on their side, less headcount relative to AUM, and on our side, more equity capital to reward people with and incent people with and recruit people with, because Riverstone was not a firm that broadly distributed equity to the team.”

Investment thesis

A typical Breakwall loan deal will involve a small or mid-sized energy company that either can’t get a bank loan or can’t get enough of a bank loan to finance a capital-intensive project. Usually, a considerable amount of equity has already been invested to get the project to a certain maturity level, and it needs a bridge to completion.

“We designed our entire investment philosophy around being a transitional credit capital provider to these companies who only needed our cost of capital for a very specific period of time,” Flannery said.

Breakwall provides repayable short-duration bridge-like solutions to these growing energy companies that will eventually take out the loan with a lower cost of capital or an asset sale, or in the case of an upstream business, pay them off with cash flow.

“We’re solving a need that exists because there’s been a flock of capital away from the upstream universe,” he added.

Often, Breakwall loan deals, which come at pricing in the SOFR+ 850bps range, will be taken out by the leveraged loan or high yield market at lower pricing in the SOFR+ 350bps range, once a project comes online, Abbate said. 

Breakwall’s underwriting strategy, as such, evaluates a project’s chances of success and the obstacles to getting built. 

The partners point to a recent loan to publicly listed renewable natural gas producer Clean Energy – a four-year $150m sustainability-linked senior secured term loan – as one of their most successful, where most of the proceeds were used to build RNG facilities. Sustainability-linked loans tie loan economics to key performance indicators (KPIs) aimed at incentivizing cleaner practices.

In fact, in clean fuels, their investment thesis centers on the potential of RNG as a viable solution for sectors like long-haul trucking, where electrification may present challenges. 

“We are big believers in RNG,” Flannery said. “We believe that the combination of the demand and the credit regimes in certain jurisdictions make that a very compelling investment thesis.”

EPIC loan

In another loan deal, the Breakwall partners previously financed the construction of EPIC Midstream’s propane pipeline from Corpus Christi east to Sweeny, Texas.

Originally a $150m project, Riverstone provided $75m of debt, while EPIC committed the remaining capital, with COVID-induced cost overruns leading to a total of $95m of equity provided by the midstream company. 

The only contract the propane project had was a minimum volume commitment with EPIC’s Y-Grade pipeline, because the Y-Grade pipeline, which ran to the Robstown fractionator near Corpus Christi, needed an outlet to the Houston petrochemical market, as there wasn’t enough export demand out of Corpus Christi.

“So critical infrastructure: perfect example of what we do, because if your only credit is Y-Grade, you’re just a derivative to the Y-Grade cost of capital,” Abbate said.

Asked if Breakwall would look at financing the construction of a 500-mile hydrogen pipeline that EPIC is evaluating, Abbate answered affirmatively.

“If those guys called me and said, ‘Hey, we want to build this 500-mile pipeline,’ I’d look at it,” he said. “I have to see what the contracts look like, but that’s exactly what type of project we would like to look at.”

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California renewables firm in talks for green fuel co-development

A utility-scale solar and storage developer based in California has started outreach and discussions to have green fuels projects co-developed at some of its larger sites in the western US.

RAI Energy, the California-based solar and storage developer, has started to engage with other companies about developing green fuels along with its utility-scale projects, CEO and owner Mohammed S. Alrai said in an interview.

RAI recently took a development loan from Leyline Renewable Capital. That transaction ends a process launched by Keybanc first reported by The Hydrogen Source.

Alrai remains the 100% equity owner, he said. The liquidity from Leyline will last about two years.

The company’s most impending projects are in Colorado and California, Alrai said. Discussions around green fuels envision a partner coming in as a co-developer and customer for RAI’s renewable power.

“We’re definitely open to entering into conversations with all stakeholders,” Alrai said, adding that the effort could require capital raising. “We will be coming to the market to potentially raise equity.”

RAI is moving toward long-term ownership and operation of projects, he said. The company could also sell projects to raise capital.

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