Out-Law / Your Daily Need-To-Know
Green hydrogen power purchase agreements (PPAs) could help major manufacturers and other large fuel and energy-intensive businesses to reduce their carbon emissions, but the model could disadvantage smaller hydrogen producers, an expert has said.
Becca Aspinwall of Pinsent Masons, the law firm behind Out-Law, was commenting after a report by energy sector analysts and data provider Inspiratia highlighted the growth in the number of green hydrogen PPAs in the US market over recent years. According to the report, there were 100 green hydrogen PPAs in the US in 2020 up from just 14 such deals in 2016. A further 49 green hydrogen PPAs have been recorded in the US this year for the period up until August.
Green hydrogen is hydrogen that is produced using an electrolyser, powered by renewable energy, such as wind, solar, hydraulic or biomass plant. From an electrochemical reaction, the electrolyser will split water into dihydrogen and dioxygen and produce hydrogen. The mode of production is clean and does not produce carbon. This differs from other forms of hydrogen product, notably so-called 'blue' and 'grey' hydrogen, which are produced from natural gas or methane and emit carbon dioxide as a by-product.
Aspinwall said: “When we typically think of green hydrogen, we think of electrolysers being co-located at or near renewable energy generation, such as solar or wind farms, with a private wire bringing electricity from the renewable generation asset to the electrolyser. However, Inspiratia’s report discusses the US market where hydrogen producers buy electricity from renewable energy generators that are not in close proximity to them.”
“In those circumstances the renewable electricity is fed onto the grid at the point of generation and the hydrogen producer takes the same amount of electricity off the grid at its location, which could be at the other end of the country from the point of generation. Because the hydrogen producer can demonstrate that it is buying renewable electricity, even though the electrons it receives may not all have been produced by renewable generation, the hydrogen produced is considered ‘green’. This is very similar in approach to corporate PPAs, which allow corporates to buy renewable power from a distant solar or wind farm to meet green targets.”
A corporate PPA allows a corporate entity to contract directly with a generator to buy renewable electricity to use in its facilities and operations. CPPAs invariably contain requirements on the generator to provide evidence that the electricity is from a renewable or clean source, for example through the use of guarantees of origin. This in turn allows the business to demonstrate the sustainable purchasing choice it has made.
CPPAs are generally, but not always, based on payment of a fixed price linked to output over a fixed period of time. This provides generators with sufficient certainty of revenue over a long enough period to secure the financial viability of their project and commit to constructing it. Because the CPPA underpins the financing of the project, an assessment of the purchaser’s covenant strength and credit risk is a major part of the CPPA tender and negotiation process. Only large corporates with sufficient financial backing are likely to be accepted by a generator as the counterparty to their CPPA.
Aspinwall said that the growth in the number of green hydrogen PPAs in the US market could be repeated in the UK but warned that the requirement for creditworthy buyers could lead to a two-tier market.
She said: “Hydrogen is still a nascent market and producers do not always have good covenant strength. An increase in green hydrogen PPAs could create a bit of an unbalanced market, where the larger energy companies are able to finance and generate much more green hydrogen than the smaller players who will have to co-locate at or near renewable generation and may be limited to much smaller off-takes given their credit position.”
