The Energy of 2023?

Today's newsletter is a ~10 min read:

• 🌍 Story of the Week: Why Hydrogen is the key energy of 2023. Here's how it impacts law firms and their clients.
• ➕ Plus: Tesla reports results, smartphone sales dip, and Trump is back on Facebook.

The Energy of 2023?

In brief:

• Hydrogen is the new energy everyone wants to lead on. China is in first place at the moment, but things might change this year.

What you need to know

The next energy race is here. This time the top global powers are rushing to become the leading producers of so-called electrolysers that unlock the power of green hydrogen.

• Why does that matter? Hydrogen could replace fossil fuels in heavy industries, such as steel, and cement making. That would help reduce carbon emissions and could also boost energy security by reducing dependency on natural gas, the price of which has soared following Russia’s invasion of Ukraine.

China Leads

China is currently the biggest manufacturer of electrolysers, and its goal to scale up production will help it cut costs by 30% by 2025. Chinese electrolysers cost roughly a fourth of what Western companies charge, but they are not as effective as those built in the US and Europe.

However, Chinese firms are currently working on increasing the effectiveness of their electrolysers, eliminating any technological advantage currently held by US and European businesses.

Government Backing

The biggest force pushing hydrogen forward in 2023 will be the wave of government money in the US. The Inflation Reduction Act, which is really a climate-change law, offers a huge $3/kg in subsidy for green-hydrogen projects.

Many green-hydrogen projects, currently unable to compete against less-green forms of hydrogen (which typically cost around $2/kg), will suddenly enjoy costs below $1/kg. This will allow the US to surpass Europe in attracting hydrogen projects, with total investments possibly reaching $100bn by 2030.

• What about China? The Chinese government has provided large subsidies to the solar industry, but hydrogen has not yet received the same amount of assistance. Last year, China unveiled its first state-level plan for the development of hydrogen, but no financial support measures, like subsidies, were implemented. Some might come as global competition heats up.

How does this Impact Law Firms and their Clients?

💼 What does this mean for law firm's clients?

Electrolyser Companies

• How are they affected? These companies, primarily based in the US and Europe, will initially struggle to compete with the long-term production experience of their Chinese counterparts in the electrolyser industry. On the other hand, Chinese companies will keep pushing for their ability to produce electrolysers at a lower cost to put pressure on their competitors to lower their prices and potentially sacrifice profit margins. Chinese producers will also be investing heavily to improve the quality of their electrolytes and maintain their market share.

Governments

• Governments around the world will be looking to invest heavily in this sector to become leading electrolyser producers. The US in particular will continue to invest large sums of money via direct investment, or subsidies to companies in this area to boost its supply and limit China's dominance in electrolyser production.
• The EU will struggle to keep up with the growing investment from the US and China. The union has set a target for green hydrogen production, 10 million tons per year by 2030, but has not yet decided which methods will qualify as “green.” That makes it hard for companies to commit to the big hydrogen production projects that would drive electrolyser orders. This might lead many of its domestic producers to shift operations to the US to take advantage of generous subsidies to reduce costs, and boost profitability.

Institutional Investors

• How are they affected? As the technology continues to develop and demand increases (particularly in major industries like steel), large investors like private equity firms and investment funds will start looking for opportunities to invest. Many electrolyte producers may decide to move to the US to capitalise on subsidies and may be open to an investment, acquisition or stake sale to fund their initial production. This could create the perfect market for institutional investors to buy up promising companies, with a view of re-selling in the long term off the back of the hydrogen trend.

Heavy Industries

• How are they affected? Producers in heavy industries such as steel or cement will also be keen to in using hydrogen to replace fossil fuels. g. That would help reduce carbon emissions at a time when many of these companies are coming under increasing pressure from shareholders, and consumers to reduce their climate impact and the shift towards renewables keeps getting stronger. Hydrogen could be the key to unlocking this problem for them.

⚖ What does this mean for law firms?

Corporate

• Who would they advise: Companies in the electrolyser industry seeking to enter to boost their market share or take advantage of subsidies. Governments issuing subsidies or other supportive measures.
• Would they see an increase in work: Yes, provided the demand for electrolytes continues to grow and producers look to extend their production capabilities.
• What would they advise on: Advising companies on negotiating, and drafting documentation relating to applications for subsidies, mergers or joint ventures to allow producers to grow their market share. This may be particularly relevant in the context of setting up joint ventures to allow multiple companies to pool funds and resources to invest in production. A notable example of this was India’s Greenko, a renewables firm, which agreed to a joint venture with Belgium’s John Cockerill, an electrolyser giant, to produce the world’s lowest-cost ammonia (a fuel derived from hydrogen) by the end of 2023.

Contracts and Transactions

• Who would they advise: Companies in the electrolyser industry seeking to enter into contracts with suppliers, customers and partners
• Would they see an increase in work: Yes, as these companies will need robust contracts with suppliers, customers, and partners to profit from their production.
• What would they advise on: Advising companies on negotiating, and drafting manufacturing agreements between producers and customers, and supply agreements between producers and suppliers of key materials needed for production. These contracts are crucial in this type of industry as producers deal with large volume orders and need certainty on both materials needed for manufacturing, and on revenue to fund their operations. Specific clauses that will be heavily negotiated include pricing, liability, and any warranties as to the standard of quality for the electrolytes and their use.

Intellectual Property

• Who would they advise: Companies in the electrolyser industry seeking to protect their IP rights.
• Would they see an increase in work: Yes, as companies in the electrolyser industry work to protect their proprietary technology and ensure they are not infringing on the intellectual property rights of others.
• What would they advise on: As this is a growing area of science and technology, there will be many IP rights floating such as the patents for development and production of the electrolytes. Companies in this sector will rely on their lawyers to ensure their rights are adequately protected and they are not infringing any rights. IP lawyers will be conducting IP due diligence on competitors and potential partners and defending against any potential IP infringement claims. They will also advise on contractual clauses in commercial contracts relating to supply or manufacturing to ensure no IP rights are inadvertently transferred over.

Trade and Customs

• Who would they advise: Electrolyser companies expanding sales overseas.
• Would they see an increase in work: Yes, as Chinese electrolyser companies expand sales overseas whilst complying with trade regulations, and any potential tariffs that may be applied in future.
• What would they advise on: Advising companies on compliance with trade agreements and tariffs, navigating trade disputes and disputes related to unfair competition and helping companies to mitigate the risks of trade barriers. The US is becoming increasingly protective of its domestic production especially in key areas like renewables, and electrolytes production. Non-US producers will therefore need to be very careful when dealing with exports to ensure they don't fall foul of any laws or regulations. One thing to note is that any move by the US or EU to erect trade barriers would likely be met by Chinese firms expanding manufacturing into Southeast Asia.

Environmental

• Who would they advise: Companies in the electrolyser industry and governments.
• Would they see an increase in work: Yes, as companies and governments work to ensure that their electrolyser operations are in compliance with environmental regulations.
• What would they advise on: Environmental legal departments play a crucial role in ensuring that companies and organisations comply with environmental regulations and laws related to the production and use of hydrogen. They can advise companies on a range of issues related to electrolyser production, including obtaining permits and licenses, complying with emissions and waste disposal regulations, and addressing any potential environmental impacts of the production process. Additionally, they may advise other stakeholders such as investors and community groups that may be impacted by the production of electrolysers.

🔮 What trends does this highlight?

1. Decarbonisation: The world is shifting towards cleaner energy sources. It is driven by efforts to decarbonise and move towards cleaner energy sources, such as using hydrogen as a green fuel for decarbonising heavy industries. With the US throwing its weight behind producers, we can expect 2023 to be a year where hydrogen steps up to a new level and becomes a key asset for governments around the world.
2. Government Support and Competition: The growing importance of hydrogen and electrolytes will lead to a new wave of protectionist policies and competition between countries. Governments like the US will support domestic producers via subsidies, and the EU and China will look to keep up via their own supportive measures. Ultimately, China's lead may be cut down if the US is able to drastically reduce costs for its own producers via subsidies so that they can match Chinese output and cost-basis. It will be interesting to see who will take the lead as the year goes on!

📰 News Spotlight

🚗 Not bad, Tesla

Tesla reported a net income of $3.7bn in the final quarter of last year, up by 59% year over year, beating many analysts’ predictions. Revenues rose by 37%, to $24.3bn. Tesla’s share price rose by more than 5% as its results were reported.

🇫🇷 Time to withdraw

France recalled its ambassador to Burkina Faso a day after agreeing to withdraw troops from the country. 400 French troops were fighting an ongoing Islamist insurgency, but Burkina Faso’s government says it wants to defend itself. France has also fallen out with other African allies—after more than nine years in 2022 its soldiers left neighbouring Mali without having completed their mission.

📉 Smartphone Sales Slip

Global smartphone shipments suffered their worst quarterly drop on record in a clear sign of cooling consumer demand that signals more pain for manufacturing hubs like South Korea and Vietnam. Shipments declined 18.3% in the December quarter compared to a year earlier, to a little over 300 million units, Needham, Massachusetts-based IDC said Thursday. For the year, shipments fell 11.3% and marked the lowest total for a decade, the researchers said. Mobile gadget sales serve as a barometer of demand for chips.

📱 Trump Returns to Social Media

Meta said it would soon restore Donald Trump’s Facebook and Instagram accounts, two years after suspending him from the social media platforms for stoking the Capitol riot on January 6th 2021. Lawyers for America’s former president had lobbied for his reinstatement.

Chart of the Week

2022 was the first year when investment in decarbonising energy surpassed $1 trillion. The year-on-year increase of more than $250 billion from 2021 was the largest jump yet.

Renewable energy and electrified transport collected most of those dollars. Those sectors were supported by soaring installations of wind and solar, with more than 350 gigawatts of assets built, and sales of 10-million-plus electric vehicles globally.