A growing number of green hydrogen and power-to-X project developers are expected to explore power-purchase agreements (PPAs) in the wake of the EU’s softened position on sources of renewable electricity for electrolysers, according to software and PPA advisory firm Pexapark.

MEPs recently passed an amendment for a delegated act that will loosen the criteria for ‘green’ hydrogen. While a previous delegated act required hydrogen to be produced either using a dedicated renewable energy asset or with one-hour matching with renewables in the same or adjacent geographical bidding zone on the grid, green hydrogen can now be produced from grid-sourced electricity as long as the producer has signed a PPA with a renewable energy installation for the equivalent amount of electricity.

This “gives a lot more regulatory certainty—that is key these days” for companies to kickstart project development, says Rommero Carrillo, business development director at Pexapark.

While the previous delegated act aimed to spur additional renewable energy development, “the truth is, Europe is short of renewable energy, with the scale of electrification that corporates and large industrials are talking about”, Carrillo says. He adds that, even without the war in Ukraine, the pace of power demand would outstrip the rate of new renewables development.

“Everyone is waiting to see where [the price] goes” Carrillo, Pexapark

“From a renewables developer’s point of view, the ideal contract they want to sell is pay-as-produced, because they do not have any shape risk, volume risk. These are the risks that comes with selling a ‘synthetic’ product, for example a baseload monthly,” Carrillo says.

However, utilities and other offtakers are likely to put a ‘risk premium’ on pay-as-produced contracts, driving many developers towards monthly baseload deals, where the renewable power generator supplements its own output with other sources to provide round-the-clock power.

“For a hydrogen producer, they have a flexible asset—the electrolyser—and so there is a lot of value they can capture by engaging in pay-as-produced contracts,” he adds. “They are actually the perfect offtaker for a renewables player.”

Carrillo warns against running electrolysers at full capacity, noting that in circumstances where hourly matching is needed, it would require developers to oversize wind and solar PPAs to ensure as flat a profile as possible. “Sometimes, by reducing capacity utilisation and having a lot more flexibility, you can capture a lot more value to the electrolyser,” he says.

Holding off on closing

However, volatility in the wholesale power market is making it difficult for developers to close PPAs, and surging prices have thrown the viability of some green hydrogen projects into question. Even before the war, power was set to be 60-70pc of the input costs for an electrolyser, according to Carrillo. High electricity prices also give renewable energy developers greater incentives to secure PPAs at the highest possible price—putting them at odds with green hydrogen project developers seeking lower prices.

High prices and volatility have also made PPAs more relevant for large corporates, industrials and utilities as a hedging mechanism, since they have become more competitive relative to buying power on exchanges, where margin requirements have soared because of price volatility.

“Everyone is waiting to see where it goes, if the price is going to stay high. Some might choose to sign a PPA now, and some might say it is too high now and wait it out… Volatility has created a lot of uncertainty,” Carrillo says.

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Author: Polly Martin