Thought Leadership

Integrating Renewable PPAs Into Green Hydrogen Projects

Client Updates

For many observers of the energy industry, low-carbon hydrogen is the key to a low-carbon energy future. Hydrogen has many potential uses, including as a carrier of energy and a source of heat, and it shows promise as a pathway for the reduction of emissions in hard-to-decarbonise industries. As a means of energy storage, hydrogen has an advantage over lithium ion batteries in that it is able to store energy for a much longer duration. These characteristics make hydrogen complementary to the renewable energy industry, rather than a direct competitor.

In addition, as renewable generation increases as a portion of the grid, “excess” power produced by renewable sources such as wind and solar can be used to electrolyse water to produce “green” hydrogen. The requirement that green hydrogen is produced solely using renewable power presents a conundrum for proponents of hydrogen projects. While some green hydrogen projects might manage the intermittency issues associated with renewable power by producing hydrogen only when such power is available and cheap, other green hydrogen projects might require predictable, consistent power supplies to support stable and consistent production profiles. As with any project involving high infrastructure costs, developers want the cost of service to be as low as possible, meaning that the capacity factor of the facility should be high (i.e., the facility should operate as close to full capacity as possible). Yet, sometimes the sun does not shine and the wind does not blow. To manage intermittency issues associated with renewable energy and ensure a supply of reliable and stable renewable power to support round-the-clock hydrogen generation, hydrogen producers and their suppliers of renewable energy must be innovative.

The standard arrangement for the supply of renewable energy is the power purchase agreement (PPA), under which a buyer contracts for the delivery of physical power and the applicable form of renewable energy credit, certificate, or guarantee of origin (depending upon the relevant jurisdiction) (“renewable certificates”) on an as-generated basis from the renewable facility. Therefore, a traditional renewable PPA, on its own, is not likely to satisfy the run-time requirements of a green hydrogen project. Even if the PPA contains a production or availability guarantee, such guarantees typically take into consideration insolation and/or wind speed intermittency and are not therefore absolute guarantees. The specific operational requirements of a green hydrogen project will therefore likely require departures from traditional contractual structures.

Luckily, the market contains both existing and novel strategies to help developers manage the limitations posed by renewable power. Such strategies include: (1) the use of bundled supply agreements where the offtaker takes power from a mix of facilities, (2) the utilisation of virtual or synthetic power purchase agreements (VPPAs), (3) the purchase of renewable certificates, and (4) the employment of storage capacity.

1. A PPA that includes supply from multiple generating resources may be referred to as a retail supply agreement, a “sleeve,” or simply a supply agreement. Under this agreement, the supplier provides renewable energy from a portfolio of different generating facilities and technologies, which may also include a certain level of geographic diversity, depending on the reach of the grid.  Such an agreement may also include storage facilities.

2. Another strategy available to project developers is the entry in to a VPPA.  These agreements may be particularly attractive where it is expensive or difficult to co-locate renewable generation with the hydrogen production facility.  Unlike a traditional PPA, a VPPA is not an agreement for the physical delivery power.  Instead, it is a financial settlement with respect to the power, that also includes the delivery of the applicable form of renewable energy credits.

3. A renewable certificates is issued when electricity is generated from a renewable energy resource. A certificate is considered the “environmental attribute” of the renewable generation; however, the renewable certificate is created and tracked separately from the electrons associated with the generation.  Therefore, producers of renewable energy can hold on to or sell the renewable certificates separately from the physical power.  There are various market places for such renewable certificates, depending on the location of the renewable facility.  Depending on the verification and certification regime which applies to the relevant green hydrogen project, a hydrogen producer may consider buying a certain amount of renewable energy through a PPA and back-filling any additional requirements through the purchase of renewable certificates on the market.  Although this practice of purchasing renewable certificates to offset non-renewable grid power may become problematic as governments increase their regulation of green hydrogen.

 4. Finally, as battery technology continues to develop and prices become lower, project developers may be able to rely on battery storage to store renewable energy and to maintain an adequate level of electricity for the operation of the hydrogen facility.

Each of the above strategies is informed by geography, governmental regulation and, in the absence of governmental regulation, the standards of the relevant certification organisations.  For instance, a retail supply agreement for a diversity of generation and storage resources works well where there is a competitive grid that includes operating dams for hydropower facilities, sunlight for solar panels, and wind for turbines. A VPPA works best where there is a competitive and sophisticated grid operator. The purchase of renewable certificates is most prudent in markets that include trusted third-party tracking systems. Finally, battery storage works best where the cost to deploy such technology (both with respect to procurement and installation) is lowest. 

As governments and industry seek to decarbonise the grid, some policy makers have supported the concept of “overbuilding” renewable generation. This means that the total megawatt hour capacity of renewable generation would actually far exceed load requirements. The idea is that this abundance of capacity, when spread across different technologies (i.e., wind, solar, hydroelectric, battery storage, etc.) could smooth out intermittency issues associated with any one technology or any one geography. This overbuild approach becomes more attractive as the cost to deploy renewable generation declines.  Therefore, a market for “excess” renewable power may become very liquid and attractive to hydrogen producers in the coming years.

Renewable power is a critical input for a green hydrogen projects, so creative thinking on the part of both hydrogen project developers and power suppliers will be needed to ensure that green hydrogen projects are bankable.

If you have any questions on the update please contact our lawyers below. 

 

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