Hydrogen is the simplest and most abundant element on Earth, typically found in compounds with water or hydrocarbons. It can be separated from these compounds by splitting water with electricity (electrolysis) or through high-temperature reactions with coal (gasification) or natural gas (steam-methane reforming).
In its pure form, hydrogen is an energy carrier with high energy content per unit of mass. Its use produces only water, causing no local pollution. Hydrogen is termed "low-carbon hydrogen" when produced with renewable electricity (green hydrogen) or from fossil fuels combined with carbon capture and storage technology (blue hydrogen).
Low-carbon hydrogen is widely regarded as a critical solution to decarbonize hard-to-abate sectors such as shipping, steel, cement, and other heavy industries, and as a key element in the race to net zero by 2050. Recognizing this potential, several countries have developed national hydrogen strategies with ambitious mid- and long-term targets. According to the Global Hydrogen Review 2024 prepared by the International Energy Agency ("IEA Review") As of October 2024, 60 countries representing 82% of global energy-related CO2 emissions had published national hydrogen strategies (IEA Review, p. 16). The European Union, for example, aims to increase low-carbon hydrogen production from one million tonnes in 2024 to ten million tonnes by 2030, plus an additional ten million tonnes from partner countries, and to increase its installed electrolyzer capacity from 6 to 40 GW in the same period (REPowerEU).
Despite its promise, the low-carbon hydrogen industry continues to face significant challenges on both the production and demand sides. Several projects have been cancelled due to difficulties in securing offtake agreements, including Ørsted's FlagshipONE project in Sweden, which was expected to produce eMethanol from renewable-based hydrogen (S&P Global). Other projects have encountered operational setbacks or scaling issues, leading to shutdowns and delays. For example, Everfuel's HySynergy 1 20 MW green hydrogen plant in Denmark experienced commissioning delays due to sub-system issues (Offshore Energy Biz).
In this entry of Construction Insights, we identify key risks and potential disputes arising out of low-carbon hydrogen projects, including
1) Construction and engineering disputes with contractors and technology suppliers;
2) Disputes arising out of power purchase and offtake agreements; and
3) Regulatory or policy disputes with host States.
We conclude with general guidelines for stakeholders to mitigate dispute risks through contract design, strategic asset planning, and robust dispute resolution mechanisms.
Risks and types of disputes in low-carbon hydrogen projects
1. Construction and engineering disputes with contractors and technology suppliers
Most low-carbon hydrogen projects announced for 2030 remain at the feasibility or development stage, with only 7% having reached Final Investment Decision (FID) or entering construction (IEA Review, p. 61). Meeting decarbonization goals requires significant investment in hydrogen-related infrastructure in the immediate future. According to the International Energy Agency, the sector must expand at "an unprecedented compound annual growth rate of over 90% from 2024 until 2030, well above the growth experienced by solar PV during its fastest expansion phases" (IEA Review, p. 9) for the full project pipeline to materialize.
The infrastructure requirements include:
- A substantial increase in electrolyzer capacity, from 1.4 GW in 2023 to 520 GW by 2030 (IEA Review, p. 67);
- Development of storage and transport infrastructure, including both new and repurposed natural gas pipelines;
- Construction of renewable energy generation facilities (wind and solar);
- Port terminals, carbon capture and storage facilities, and other related infrastructure.
The tight timelines for construction and technology scale-up pose significant risks of disputes between developers, contractors, and subcontractors. Electrolizers and carbon capture units are proven at small scales but largely untested at industrial scale. Scale-up issues can delay construction, complicate commissioning, or restrict production capacity. For example, Sinopec's 260 MW Kuqa project – the largest operational electrolysis plant at the time – experienced safety issues across all its electrolizers due to (renewable) energy fluctuations (Hydrogen Insight), forcing the plant to operate at less than a third of its installed capacity.
More broadly, large-scale low-carbon infrastructure projects face risks of delays, cost overruns, defects, scope variations, performance failures, and other technical problems, all of which may lead to complex disputes among developers, contractors, subcontractors, and suppliers.
2. Commercial disputes from power purchase and offtake agreements
Another area that creates dispute risks for large-scale low-carbon hydrogen projects relates to power purchase and offtake agreements.
Power side: Hydrogen projects need high electrolyzer utilization rates to reduce CAPEX, but renewable energy sources are inherently intermittent. If a wind- or solar-powered green hydrogen project is limited in production due to power shortages, disputes may arise over whether the PPA seller is liable for damages or excused (e.g. under force majeure provisions).
Offtake side: Securing long-term offtake agreements is challenging because hydrogen markets are immature. Pricing and indexation are contentious as there is no universally accepted hydrogen benchmark. Certification requirements to qualify the hydrogen as "green" add another layer of complexity in cross-border PPAs because of the lack of uniform criteria. For example, under the EU Renewable Energy Directive (RED III) and its Delegated Acts on Renewable Fuels of Non-Biological Origin, hydrogen must meet strict criteria of:
- renewable sourcing: hydrogen must be produced using electricity from renewable sources;
- additionality: electrolyzers must use new renewable energy capacity and not existing plants;
- temporal correlation: electricity and hydrogen production must align in time; and
- geographic correlation: the renewable electricity source must be geographically close to the hydrogen production facility.
Disputes may arise if any portion of the hydrogen fails to meet these requirements, particularly when market rules differ internationally.
3. Regulatory or policy disputes with Host States
The production of green or blue hydrogen is still more expensive than fossil fuel alternatives. According to the International Energy Agency, production costs can be up to six times higher than conventional hydrogen produced from natural gas without carbon capture (IEA Review, p. 85). Government incentives, such as carbon pricing, tax incentives, funding schemes and phasing out fossil fuel subsidies, are therefore crucial.
Examples of state support include:
- CAPEX support: the Netherlands announced EUR 1 billion in grants and subsidies covering up to 80% of the investment costs to reduce the high upfront costs of electrolysis projects (IEA Review, p. 178);
- Demand creation: Germany has pledged EUR 4 billion for a first round of Carbon Contracts for Difference CCfD, giving 15-year support for fuel switching of industrial assets (i.e. hydrogen is one of several eligible technologies) (IEA Review, p. 175).
- Tax incentives: Chile recently submitted a USD 2.8 tax credit bill to its parliament. The tax incentives will be awarded in six auctions between 2025 and 2030 to domestic users of green hydrogen (Hydrogen Insight).
Developers often rely on these state incentives to secure financing and reach final investment decision. If governments withdraw or change incentives, projects may become unbankable, leading to potential claims under bilateral or multilateral investment protection treaties, which provide foreign investors with legal protections against arbitrary or discriminatory state measures, including the possibility to claim damages in international arbitration. Spain's introduction and subsequent withdrawal of guaranteed feed-in tariffs for photovoltaic electricity triggered over fifty investor-state arbitrations, resulting in billions of USD in awards to foreign investors.
4. Guidelines to mitigate the risk of disputes through asset planning, contract design and dispute avoidance and resolution systems
While the risk of disputes in the low-carbon industry cannot be entirely eliminated, stakeholders can take proactive measures to mitigate risks. The following guidelines provide practical considerations for reducing exposure and safeguarding investments:
- Asset planning: Project developers should structure their investments to qualify for protection under bilateral or multilateral investment treaties. The requirements for recognition as a protected (foreign) investor vary across treaties, as do the substantive standards of protection. This is particularly important where project viability depends on state incentives or guarantees, which may be subject to change.
- Contract design: Contractual provisions along the low-carbon hydrogen value chain must carefully allocate business risks. For example, construction contracts should provide for realistic schedules and include sufficient float to account for technical issues that may arise during construction, commissioning, or operation. Performance targets and performance tests should be clearly defined, as well as the allocation of risks in the event of failure to achieve them. PPAs should expressly address the risk of power availability, for example by oversizing renewable power generation relative to electrolyser capacity or by combining wind and solar sources. Offtake agreements should clearly allocate pricing risks and define certification obligations, especially where hydrogen must qualify as "green" under applicable standards.
- Disputes resolution mechanism: An often overlooked way of mitigating the risk of disputes – or efficiently managing them should a dispute arise – is to establish a robust dispute resolution mechanism in the contract. For international projects, arbitration is generally the preferred option, as it provides a neutral forum chosen by the parties, with decision-makers selected for their technical and industry expertise, whose decisions are final and readily enforceable under the New York Convention. Parties are well advised to select an arbitration-friendly seat and a governing law that is neutral and commercially oriented. Geneva and Zurich are frequently chosen as seats of arbitration, with Swiss law as the governing law, precisely for these reasons.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
