Offtake deals are essential for project financing, but developers may have to offer concessions to secure long-term agreements, writes Stefan Krumpelmann
More and more renewable hydrogen project developers are now in the middle of what is arguably their most difficult battle yet — finalising offtake agreements. Firm offtake deals are key for securing project financing, but expected contract durations can differ widely and developers aiming for long-term agreements often have to make concessions on other contract terms for potential customers.
Many discussions at last week's Investing in Green Hydrogen conference in London centred around the design of offtake agreements and expectations from potential financiers — signalling that the industry has come a long way from merely announcing potential projects, but that there is also a lot of work left to do.
At least 50-70pc of offtake typically has to be locked in for a project to pass initial muster from financiers. If an aspiring producer does not have this in the bag, "the discussion basically ends right there", a European developer told Argus on the sidelines of the conference. A representative from a global investment bank agreed, noting that projects which fail to demonstrate such offtake commitments are typically dismissed immediately.
Offtake should ideally be locked in for at least 10-15 years to make projects bankable, many delegates agreed. But the exact requirements vary depending on the nature of each project and specific sectors they are targeting. Smaller plants with lower capital costs might be able to secure financing even with shorter offtake deals, delegates said. One producer targeting the mobility sector said it secured finance for a small project even with offtake locked in for only 3-5 years.
Risk appetite also varies greatly between lenders. A delegate from another large investment bank told Argus that his company had dismissed one project because of a lack of long-term offtake agreements, but a smaller competitor was willing to finance the venture. Other financiers are more willing to take a gamble if they are pursuing a first landmark deal for an energy transition project or are chasing ambitious targets for "green" loans, the investment banker noted.
But long-term offtake is a key requirement for most projects, especially larger ones. And while it is not easy to get companies to commit to taking supply for 15 years or more, it is possible, Indian project developer Acme's executive vice-president for green hydrogen and ammonia business development, Richard Scott, said. Acme has three "rock solid" offtake deals in place that all run for at least 20 years, Scott said. The firm will supply Norwegian fertiliser giant Yara with renewable ammonia from the first phase of a project in Oman, and has struck deals with Indian fertiliser company Iffco and Japan's IHI for two planned facilities in India.
But getting offtakers to sign contracts of such duration typically requires project developers to make some substantial concessions, especially on prices during the latter years of the contract period, delegates said.
The offtake duration is ultimately "a function of price", e-fuels project developer HIF Global's chief operating officer, Clara Bowman, said, adding that a longer contract period would usually require producers to "go down in price over time". This is not unusual as it mirrors past developments in other industries, such as for LNG, Bowman said.
Other concessions could include flexibility on specific offtake volumes in later years or price resets. But developers have to tread cautiously on these as well to avoid jeopardising their financing prospects.
