Availability warranties and what they could look like for hydrogen plants

What is an availability warranty?

An availability warranty is a performance commitment that can be provided for a machine (or any other technical solution) and is expressed as a percentage. Usually, available means that the machine operates or is able to operate safely without failure or breakdown. In an ideal world, a machine that operates all year long without interruption would achieve an annual availability of 100 percent for that year. However, no machine operates all the time. A machine will require certain ambient conditions, planned maintenance and more.

If the machine becomes unavailable, there is a compensation mechanism that captures the expected output that the machine would have produced during the time that it was unavailable.

An availability warranty tends to compensate for lack of timely performance of warranty and maintenance activities expressed as percentage of the measurement period. After all, if all uncontrollable risks are excluded, the machine has no defects at all and the machine is properly maintained, it should run. Compared to other performance warranties, the availability warranty specifically deals with downtimes rather than specific quality issues.

Especially in renewable energy projects, the availability warranty can be key for the project including its financing.

The market for equipment and services needed to operate hydrogen plants is not mature and so the same applies to the market for related availability warranties. Below are some key aspects to consider. We will refer to the “Contractor” as the person committing to the availability warranty and the Owner as the person receiving it.

Does an availability warranty make sense for hydrogen plants?

Most Owners operating a large hydrogen plant need to have sufficient comfort that hydrogen will be produced reliably, generating income. An availability warranty can serve this purpose. However: what kind of Contractor is in the position to make such a commitment? For Contractors that are turnkey contractors, have lots of data available and a strong balance sheet, this may work. For those who only supply certain components and who therefore will look at plenty of dependencies, an availability warranty would have to reflect their role by making a lot of exclusions. Similarly, Contractors whose scope represents only part of the value of the overall hydrogen plant will be unable and unwilling to compensate for the actual losses of the entire hydrogen plant.

What operational clauses (outside of the availability warranty) should be considered when agreeing an availability warranty for hydrogen plants?

The Contractor needs the freedom to operate to make good on its promise. It starts with simple things. To perform repairs and replacements on the plant, the Contractor will require physical access. To monitor the plant, it may need access via a data connection. This seems simple, but in practice it is likely that access to the plant is controlled for safety reasons, and that other contractors need access at the same time. Certain risks may not be in the Owner’s full and absolute control but need to be reflected for risk allocation purposes. Depending on the restriction, a solution can be to temporarily restrict access, if the restriction is then considered as an exclusion from the availability warranty or deemed as being available (time that is carved out).

More fundamentally: Does it even make sense to offer an availability warranty at all without offering a (full scope) service agreement? For hydrogen, we have observed that service and maintenance is often performed by the Owner itself. That may not be sustainable if robust availability warranties are expected. Experience from other equipment suggests that as matter of fact availability is closely linked to sufficient monitoring, preventive maintenance, and corrective maintenance programs. It may be possible to agree on broad exclusions where maintenance is performed by someone other than the Contractor, but that may satisfy neither party. In that scenario, an insurance product may be a better place to look for revenue protection.

How should exclusions and carve outs be approached?

An important part of that the availability “formula” is how certain identified risks are allocated. Usually, there is a list of events that are beyond the control of the Contractor. As a first step, it may be a good idea to go through events agreed for other types of plant or equipment. Ultimately, such a list of events is based on technical expertise and experience. While lawyers will happily discuss abstract criteria such as what is “attributable” to somebody, such criteria are hard to operationalize if you intend to calculate and report the availability on a regular basis. Therefore, the objective is to automate as much as possible. Things such as ambient conditions, grid events or issues in other parts of the infrastructure can be measured and recorded. Ideally, the list of exclusions should be aligned with events registered by the monitoring and control systems that are used, even though you will still need more open-ended legal terms for some types of events.

As an alternative to exclusions, e.g. instead of putting down hours needed for a specific preventive maintenance action, that time can be allocated to the Contractor who may then have to offer a lower percentage. From an Owner perspective, one of the advantages to having such time “baked in” is that it creates an incentive to organize the planned activity effectively, e.g. by combining it with unplanned activities that are conducted in parallel while equipment is shut down anyway.

What should be the basis to calculate losses (liquidated damages)?

Primarily, one looks at actual market prices for what should have been produced, had the equipment been available. The economics of hydrogen looks is quite nuanced: you have market prices for the actual price of hydrogen and potentially for oxygen, for heat, for renewable energy where the hydrogen is used to store green energy, there are prices for (green) certificates, prices for CfDs. In Germany, there may be additional incentives for those who simply take advantage of times of low demand, to avoid curtailment. The complex picture does not need to make its way into the compensation formula necessarily. In principle, the parties can agree on a number.