In a pivotal move expected to significantly impact the US energy sector, the North American Energy Standards Board (NAESB) announced on May 29, 2024 that it plans to develop standardized contracts for the burgeoning hydrogen market. NAESB's initiative aims to streamline hydrogen transactions and spur the growth of the hydrogen market, reflecting a broader trend by NAESB to facilitate the energy transition through standardized agreements.
Background and Federal Momentum
NAESB plays a key role in the energy industry by facilitating the drafting and adoption of standardized contracts that are designed to enhance market efficiency, reliability, and transparency in transactions involving natural gas and electricity commodities. NAESB was established in the early 1990s, evolving from the Gas Industry Standards Board, which was created to develop standards for the natural gas industry in the wake of deregulation. NAESB subsequently expanded its scope to include electricity markets following the significant changes and deregulation in that sector, aiming to create a more integrated and efficient energy market across North America. Today, NAESB serves as a consensus-based organization comprising a wide range of industry participants, including utilities, marketers, pipeline companies, consumers, and other energy stakeholders.
NAESB's announcement is designed to both take advantage of, and respond to, recent efforts by the US federal government, through initiatives like the Department of Energy's (DOE) Hydrogen Hub program, to vigorously promote hydrogen as a sustainable energy vector. This DOE program, buoyed by the Infrastructure Investment and Jobs Act of 2021, envisages disbursing $7 USD billion in funding to encourage the production and utilization of hydrogen derived from renewable or low-emission power sources. In a significant move forward, the DOE in October 2023 earmarked seven project proposals for contract negotiations, anticipating the initial funding disbursements within the year. (Please refer to our article published on the Hydrogen Hub awardees for additional insight.)
The Path Forward
By creating standardized hydrogen contracts, NAESB has stated that it aims to reduce transaction costs, increase market transparency, and promote liquidity in the developing hydrogen market, consistent with its primary mission. NAESB is well-positioned to spearhead this transformative endeavor for hydrogen given its robust experience in developing standardized contracts for natural gas since 1996 and for electricity since the early 2000s.
Starting this summer, NAESB, in collaboration with industry stakeholders, will embark on the meticulous process of crafting these standardized contracts, with the entire process expected to last anywhere from nine months to a year. Jonathan Booe, NAESB's executive vice president and chief operating officer, stated in a May 30, 2024 interview that, while NAESB will “definitely use” its Base Contract for Sale and Purchase of Natural Gas as a “kind of starting point” for this hydrogen initiative, the final product here will have to address the unique characteristics of hydrogen compared to natural gas. Mr. Booe also emphasized that there will be ample opportunity for market participants to provide comments and otherwise contribute to the development of standardized hydrogen contracts.
Comparison with NAESB's Efforts in Other Energy Markets
NAESB's hydrogen initiative will be carried out as part of its broader strategy to streamline the energy transition. These efforts include standardizing distribution services contracts for distributed energy resources (DERs) in order to facilitate the integration of DERs into virtual power plants by addressing peak power demands more efficiently and sustainably. NAESB's hydrogen initiative also follows recent standardization efforts it carried out with respect to renewable and certified natural gas. That effort resulted in NAESB releasing two addendums to the NAESB Base Contract for Sale and Purchase of Natural Gas in March 2023 to facilitate those emerging markets.
Implications for Market Participants
NAESB's hydrogen initiative is poised to significantly impact the hydrogen market landscape, offering numerous opportunities and considerations for participants in the hydrogen market:
- Market Accessibility: Standardized contracts are expected to lower barriers to entry into the hydrogen market.
- Investment Attraction: A standardized contractual framework could enhance investor confidence by providing a measure of certainty and consistency, attracting capital flow into hydrogen projects.
- Regulatory Alignment: Participants should track and assess how these contracts intersect with evolving regulatory standards, in order to ensure compliance and maximize operational efficiency.
- Strategic Positioning: Companies should evaluate their strategic plans in light of these developments, considering how standardized contracts might influence market dynamics and competitive positioning.
Current and potential participants in the hydrogen market should consider taking one or more of the following actions:
- Participate in NAESB's collaborative efforts to refine and adopt these standardized contracts, to both stay up-to-date with and provide input to these efforts.
- Evaluate your strategic positioning and readiness to engage with a potentially more accessible hydrogen market following implementation of these efforts.
- Ensure your team understands and is familiar with the existing NAESB contracts and standards that will serve as the basis for NAESB's standardized hydrogen contracts.
Outlook
NAESB's initiative to standardize hydrogen contracts marks a significant milestone in the energy transition journey. As the market for hydrogen and other clean energy sources evolves, staying informed and proactive will be essential for navigating the legal and regulatory landscapes effectively. Importantly, the specifics of NAESB's announcement and its implications will require close monitoring as more details emerge. We remain committed to assisting our clients in understanding these developments and navigating how they may impact their business strategies.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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