When is hydrogen green?
Green electricity is now an established product on the electricity market and is often referred to as “green electricity”. Guarantees of origin (GoO/GO) can be used to prove this “green” characteristic, i.e. that the electricity was generated from a renewable energy plant (RE plant). According to current regulations, this green electricity certificate must be cancelled within one year. The next big step in the transformation of the energy industry is the production and utilisation of hydrogen.
This could be used as a substitute for natural gas in industrial processes or gas-fired power plants. Of course, this hydrogen should also be produced in the most climate-friendly way possible, i.e. “green”. In principle, green hydrogen is produced through the electrolysis of green electricity, i.e. with power from renewable energy plants. An electrolyser splits water into its components hydrogen and oxygen using electrical energy. However, according to the EU, the electricity used for this must fulfil stricter requirements than conventional green electricity.
In February 2023, the European Commission adopted the Delegated Act for Renewable Fuels of Non-Biological Origin (RFNBO). In regulatory terms, the DelVO is part of Article 27 of the European Commission’s Renewable Energy Directive II (RED II). It defines the criteria according to which hydrogen can be designated as 100 per cent renewable and can be counted towards the targets of RED II. Although this DelVO relates to hydrogen for the transport sector, it should serve as a template for hydrogen in all other sectors.
What needs to be considered for the hydrogen PPA
Delegated Act describes five use cases with regard to the purchase of electricity for the electrolyser. In three of the five use cases, it is necessary to conclude a direct power purchase agreement (PPA) between the RE plant operator and the electrolyser operator. Four criteria have been established for hydrogen PPAs (H2 PPAs). Depending on the application, these must be fulfilled in order for the hydrogen to be labelled as “renewable”.
These criteria are:
Additionality: The commissioning of the RE plant is a maximum of 36 months before the commissioning of the electrolyser. An expansion of the electrolyser is permitted 36 months after commissioning.
Additionality Plus: There is no financial support for the RE plant, neither for the investment nor for operation.
Temporal correlation: until 31 December 2029, electricity generation and electricity consumption must be identical within the same month; from 1 January 2030, generation and consumption must even match on an hourly basis. (Exceptions apply)
Geographical correlation, regionality: The renewable energy plant and the electrolyser must be located in the same bidding zone. There is no restriction on the actual distance between the plants. Germany currently (still) consists of one bidding zone. (Exceptions apply)
No rule without exception
Matching electricity generation and consumption does not have to be fulfilled under certain conditions. If the electricity price is below EUR 20/MWh in the bidding zone, or if it is lower than 0.36 times the ETS certificate price (also known as the CO2 price), the electrolyser may be operated without the renewable energy plant being in operation during the same hour.
For example, at an ETS price of 60 EUR/tCO2, this would be 21.60 EUR/MWh, whereas at 80 EUR/tCO2 it would be 28.80 EUR/MWh. The assumption here is that these prices indicate a generation surplus that is to be utilised by the electrolysers as flexible consumers.
In addition, member states may bring forward the requirement for hourly simultaneity to 2027.
For regionality, the exception applies that the renewable energy plant may also be located in a neighbouring bidding zone. This only applies if the electricity price on the day-ahead market in the relevant period is higher there than in the bidding zone of the electrolyser.
Different applications - different criteria
If the electrolyser is connected to the renewable energy system via a direct power line (no transmission through the public grid), only the “additionality” criterion needs to be fulfilled. A PPA must be concluded between the operators. Temporal matching and regionality are fulfilled anyway for technical reasons.
If the electrolyser is located in a market area in which electricity generation has an overall CO2 intensity of less than 18 gCO2-eq/MJ, the “temporal matching” and “regionality” criteria must be fulfilled. The “additionality” criterion is waived here, meaning that existing plants in such market areas can also be considered as PPA contract partners.
In all other grid areas, PPAs must fulfil all four criteria listed. This case would apply to Germany in the medium term.
When does an electrolyser not need a PPA?
If the share of generation from renewable energy plants in a bidding zone is at least 90%, a hydrogen PPA is not required at all. This 90% threshold must be exceeded for at least one of the last five years. However, the electrolyser may not exceed a maximum number of operating hours, which is calculated by multiplying the share of RE in the electricity mix by the number of hours per year.
If the electrolyser can be used to prevent measures within the meaning of Redispatch 2.0, then no PPA is required for this operating case in order to fulfil the “green” requirements. This prevention is achieved by switching on the electrolyser in the event of grid bottlenecks in order to create additional consumption before the grid bottleneck. This allows the otherwise surplus electricity from renewables to be utilised instead of the RE plant being switched off.
What does all this mean for H2 PPAs?
These criteria and use cases have numerous implications for any hydrogen PPAs. You can find out more in the Montel Masterclass Hydrogen PPAs in Germany and Europe.
