A crucial part of Sweden's transition to achieve net zero emissions by 2045 is to increase the production of fossil-free energy sources. Part of this will be the development and increased production of hydrogen. As hydrogen production is a new area, the opportunity exists to get in early and thereby get a head start in the market. The legislation is in a developmental stage at both EU level and in Sweden, which means that identifying which rules are applicable for a hydrogen project is complex. It is consequently not sufficient to follow current legislation, to future-proof their operations, companies and other actors involved must also be proactive and make judgements regarding future regulatory developments. The development of hydrogen projects and the need for rapid transition is also increasing the need for collaboration between different private and public actors.
Hydrogen is taking on an increasingly major role in the EU's and Sweden's climate and energy transition. This is because hydrogen has great potential when it comes to reducing carbon dioxide emissions within different industries and sectors. Hydrogen is not a type of energy in itself, but it can be used as an energy carrier when it replaces fossil fuels such as gas or oil. Fossil-free hydrogen can also be used within the transport sector and industry in order to phase out fossil fuels and raw material. Hydrogen also has an important role in manufacture of various fuels for air, shipping and other long and heavy means of transport, as well as production of ammonia and chemical fertiliser. What is regarded as the principal opportunity with hydrogen is reduced carbon dioxide emissions, but also system flexibility, thanks to hydrogen's energy storage capacity.
Hydrogen can be produced through electrolysis from renewable electricity which cleaves water, from reformation of fossil fuels (natural gas, coal), biomass (solid biofuel, organic waste, biogas) within gasification.
There are currently several large hydrogen projects in progress. One of the largest is the HYBRIT project, the world's first pilot plant for production of fossil-free steel – which is a collaboration between the steel company SSAB, the mining company LKAB and Vattenfall.
As the development of hydrogen production is at an early stage, there are a number of obstacles impeding the rapid emergence of hydrogen. These obstacles include the fact that the current regulation of licence authorisation is not adapted to hydrogen projects. Licensing in accordance with the Environmental Code also takes a long time, particularly when it is a question of new technology. Other obstacles are lack of knowledge at authorities and competition with other types of energy for financing.
Within both the EU and Sweden, there is a major focus on enabling the development of hydrogen and identifying and implementing the rule changes that are required to promote the expansion. As an element in this task, in March 2023 the government assigned the Swedish Energy Agency to coordinate the work on hydrogen in Sweden, read more here (in Swedish).
Even though the development of the legal regulation of financing, production and handling of hydrogen is in an early phase, planning and execution of hydrogen projects is now underway. For these projects, it is the current legislation that must be complied with, but it is also important that companies and financiers take into account forthcoming rule changes. In this article, we describe the legal issues that are encountered in a hydrogen project, linked to financing, access to land and environmental permits, as well as which types of agreement can be implemented for companies and public actors prior and during such a project.
FINANCING AND THE EU'S TAXONOMY
One of the obstacles to the advance of hydrogen is the uncertainty in relation to financing. A step in the right direction to increase the public financing is that in April 2022 the European Parliament and Council entered into an agreement to phase out EU-financing for natural gas projects and to instead redirect the money to hydrogen infrastructure, and carbon capture and storage.
Public funds have also been released in Sweden for hydrogen initiatives, including through ”klimatklivet” a support for investments that reduce emissions of carbon dioxide and other greenhouse gases. The support can be applied for from Naturvårdsverket (the Swedish Environmental Protection Agency) by companies, municipalities, regions and organisations throughout Sweden.
On 8 July 2020, the European Commission presented two announcements on EU strategies for energy system integration and hydrogen respectively. The strategies complement each other and have the aim of laying the foundation for an energy system that contributes to a climate-neutral and competitive economy. In the hydrogen strategy, the European Commission presents a roadmap towards 40 GW production capacity of hydrogen from renewable electricity by 2030. The strategy also contains an investment agenda and draft proposals to achieve increased production and demand for hydrogen, as well as a plan for design of a framework for infrastructure and market rules. The strategy announces a number of revisions of existing EU legislation to adapt it to hydrogen.
For financing or promotion of hydrogen-related projects, there are currently a number of national and EU grants as a complement to private capital. The opportunities available to provide support are governed by EU and Swedish legal rules. If a hydrogen project does not satisfy the rules, it cannot receive state aid, something which many of these projects are counting on in their economic calculations as it often entails large-scale initiatives with new applications.
Even though state aid is welcome from the companies' and investors' perspective, it is important to ensure that it does not constitute what is called unlawful state aid. If it subsequently transpires that it was not permissible, the recipient risks repayment liability. It is therefore important that both the provider of aid – the government, the municipality or another public body – and the recipient of aid ensures that the co-financing has support in laws and regulations.
PROPERTY LAW ISSUES
Other issues can also arise as a result of the construction of new hydrogen production. For example, it might be that land needs to be utilised or that a dispensation from shoreline protection is necessary.
Establishment of new operations normally requires the municipality to adopt a new local plan. An essential part of the work on the hydrogen project will then be ensuring that the detailed planning and the forthcoming assessment are coordinated. This can take place, for example, through the plan taking planned transport routes into consideration. Noise surveys, inventories of natural values and geotechnical surveys can also be used within the framework of both the planning work and licensing in accordance with the Environmental Code.
It can also involve a municipality leasing land or a company commencing construction within a certain period. It is then important to use agreements to ensure that each party fulfils its obligations.
LICENSING AUTHORISATION IN ACCORDANCE WITH THE ENVIRONMENTAL CODE AND DEALING WITH ACCIDENT RISKS
Existing environmental law regulations do not cover production, storage or distribution of hydrogen. Neither are the regulations that are currently in place up-to-date from a safety perspective. Risk must be taken into account in assessment of environmentally hazardous operations, as well as in assessment pursuant to the Flammable and Explosive Goods Act. These risks are largely convergent for hydrogen.
A plant for hydrogen production is covered by the definition of environmentally hazardous activity. This means that there can be licensing requirements directly in the Environmental Assessment Ordinance. At present, there are a number of assessment items, primarily in chapters 12 and 21 of the Environmental Assessment Ordinance, which could be updated for hydrogen plants. Which ones are relevant always needs to be determined from case to case, as it is the production technique that is crucial. As hydrogen production per se is covered by the definition of environmentally hazardous activity, an operator can apply for a voluntary licence or alternatively be prohibited from carrying out the activity before applying for a licence.
It can also be the case that hydrogen production is planned within the framework of an existing industrial operation. In such a case, an investigation is required regarding whether the changes to the operation that the planned hydrogen production entails require changes to the existing licence, a new licence application, or whether a change notification is sufficient.
Hydrogen production and storage are essentially always covered by the Seveso Act. This Act regulates measures to prevent and limit the consequences of serious chemical accidents. As the activity is covered by this legislation, a consultation according to the Environmental Code also needs to include the issue of how it shall be possible to prevent and limit serious chemical accidents as a result of the activity.
As soon as there are requirements for licensing authorisation, provisions in the Environmental Code regarding environmental assessment must be observed. This means that consultation must be conducted with authorities and individuals. The consultation process and the subsequent work of producing an environmental impact assessment and then the licence application and assessment in the Environmental Permit Office or the Land and Environment Court is time consuming. It is therefore important to have a time schedule for financing and other parallel assessments that ensures long-term financing at an early stage in the project. This is in order to have the financial prerequisites to perform the the investigations needed and be able to put resources into environmental and technological consultants.
WHICH CONTRACT LAW ISSUES CAN BE RELEVANT?
Issues that can arise when individual actors enter into agreements with the public – for example a municipality – are, for example, who has the authority to bind the public, whether it is even within the public's authority to enter into the agreement, as well as which legal consequences result from exceeding that authority. Consideration must also be taken to the fact that the public has specific powers as a contracting party, for example, its authority to exercise force, as well as the possibility of changing conditions for agreements through legislation or specific decisions. This impacts on both the space in which to enter into agreements and the agreement's legal effects, and can have the consequence that an agreement that would have been binding between two individual parties has other legal effects when the public is the individual's counterparty. As a general rule, agreements entered into with the public also constitute public documents, which means that the content of the agreement is public.
Further, the boundaries can often be fluid in terms of whether it concerns a legally binding agreement or it actually concerns an administrative law regulation. Agreements with more or less public law elements must therefore be assessed according to the public law rules that affect the dealings between the parties.
COLLABORATIONS AND FINANCING
Hydrogen establishments are extensive, complex and challenging projects that often require financing, expert knowledge and project management from several parties. Hydrogen establishment projects are therefore particularly suitable for collaboration through limited companies, so-called joint ventures.
In such a collaboration structure, the parties involved own shares in a joint limited company and regulate their collaboration in a joint venture agreement. The agreement includes how the company and the project shall be financed, how the collaboration shall be conducted and which roles the respective parties shall have in the company and the establishment project, as well as how the parties ensure that the project can be moved forward if disagreements arise between the parties (so-called deadlock situations). Depending on the conditions for the relevant project, it is of particular importance to investigate competition law aspects of the collaboration, as well as to ensure that all collaborative partners share fundamental values in relation to, for example, anti-corruption and business ethics.
WHAT CAN LINDAHL ASSIST WITH IN A HYDROGEN PROJECT?
Operating within an area that is in a start-up phase is always a challenge, but also an opportunity. What we can contribute through our legal expertise includes providing advice on which licence to apply for in accordance with the Environmental Code and other legislation, drafting right-of-use agreements and other land access agreements, as well as agreements for financing and planning so that the financing covers all steps that the hydrogen project requires to be able to commence. In addition, we have extensive experience over many years of complex collaborations and projects within the energy sector and know both which issues can lead to really problematic situations and how they can be resolved.
Our legal advice can also entail providing advice on the EU's Taxonomy Climate Delegated Act, ensuring that the conditions are in place for state aid, and minimising the risk of repayment liability. We also have extensive experience of licensing assessments for environmentally hazardous activities, water operations and Seveso operations. This means that even though up to now licences for hydrogen projects are unregulated, we have the right knowledge and experience to be able to tackle large and complex assessments.