Long-term power purchase agreements (PPAs) between corporations and developers of new build renewable electricity facilities have been an important development in the renewable energy sector over the last ten years. And the role of such corporate PPAs has expanded in recent years, particularly in markets where subsidies and other forms of government support for new build renewables is decreasing.
Corporate PPAs can provide a long-term revenue solution and thereby enable the cost-efficient, long-term financing of a new build project. However, the energy demands of significant corporations are not just electrical. Many production processes rely heavily on natural gas as a key energy input, such as for process heat or as feedstock for chemical manufacturing.
In any substantive net-zero solution, the decarbonising of gas is key—whether by way of alternative renewable sources or the capture and storage of emissions associated with the use of natural gas. Compared to the great strides made in renewable electricity, renewable gas solutions have lagged. As a client recently said: “renewable electricity is easy, gas is hard”.
Green hydrogen application
Can the procurement model for corporate renewable electricity be applied to renewable gas solutions such as green hydrogen? In theory, yes. A corporate end-user could deliver a long-term revenue solution for such a project. That could be structured as a long-term purchase commitment for a firm volume of green hydrogen. It would also be possible to use a tolling structure whereby the corporate accesses a long-term source of renewable electricity and then agrees with the green hydrogen producer to toll that into green hydrogen.
There are also means to recognise the renewable nature of such green hydrogen through emerging certification systems. In practice, this means pilot projects could be supported by off-site green hydrogen offtake arrangements. For example, where the green hydrogen is injected into the gas grid but the corporate accesses recognition for their support of the technology by acquiring and retiring the green gas certificates associated with those injected volumes.
Put simply, the key challenge for that procurement model at present is cost. Among other reasons, corporate PPAs for renewable electricity work because the long-term price that can be accessed demonstrates cost savings against projected electricity costs.
For emerging technologies such as green hydrogen, it is difficult for the same to be said. Whether that is feasible is often a question of end use. For example, a bus operator where the comparative fuel costs is with diesel may be able to justify a long-term commitment to green hydrogen as part of a fleet shift to zero-emission buses, although government support for the cost of such buses also remains key for financial models.
Similar dynamics may apply for corporates in other sub-sectors, such as forklift fleet replacement. With appropriate capital grants for up-front costs, this could also apply in the heavy vehicle sector, although more work is needed in driving this.
However, once other comparative input costs are considered, this calculation becomes a lot more challenging. For example, corporates using natural gas for process heat face relatively low costs for natural gas. The cost comparison between natural gas and green hydrogen is currently daunting, with the increased cost per energy unit of green hydrogen in European markets being in excess of five times the cost of natural gas. While that may change in time due to additional costs such as carbon pricing, the near-term cost gap is large.
Further, if a corporate is considering making a financial commitment to support the deployment of green hydrogen, it needs to consider the technology specific challenges for such a project. Unlike mature technologies such as solar and wind, green hydrogen projects are tackling various regulatory and technology barriers, which the corporate offtaker will need to understand.
Although this paints a challenging price barrier, the commitment of corporates to being at the forefront of solutions towards a carbon-neutral economy should not be underestimated. Engaged corporates can see that not only are there direct climate transition risks as governments accelerate changes in energy systems, there are wider forces at play.
The significant acceleration of ESG compliant finance and investment—driven in part by initiatives such as the EU Taxonomy—raises the risk that low-cost capital moves away from companies that are not engaged with the energy transition. Driving deep change may soon be an expectation rather than an aspiration.
One model worth further consideration is sector coupling between groups of engaged industrial corporates and one or more competitively procured electrolyser manufacturer partners. This is based on two related themes. Electrolyser manufacturers need an increasing pipeline of projects to justify capital investments such as new factories and research and development. Early movers in the corporate sector need the comfort that their early commitments are not too early—that is, locking in long-term costs that become increasingly burdensome as competition drives down costs in future.
It may be possible to develop commercial models that involve engaged groups of industrial users procuring long-term framework arrangements with a selected electrolyser manufacturer. The objective would be to agree the means by which early corporate engagement with more expensive pilot projects underpins firm rights to discounted pricing for equipment once per-unit cost drops.
Whether this is feasible is clearly an open question. What might actually drive significant cost reductions is a series of mega projects. For example, the 650t/d green hydrogen and 3000t/d green ammonia project announced by Air Products, ACWA Power and Neom in 2020 will underpin Thyssenkrupp developing a 20MW electrolyser unit for the project.
While those developments are feasible, there is a place for an increasing number of small pilot projects in industrial sectors to act as a diversified bridge to future low-carbon production models in a variety of sectors. Building on the engagement of corporations with renewable corporate PPAs is a feasible near term path for enabling this.
While targeted government support is likely needed to assist this, the early engagement with industry is likely to create better exit pathways for government support models. This author can envisage strategic partnerships with industrial sectors acting as a key bridge to a diverse body of green hydrogen solutions.
Andrew Hedges is a partner at Norton Rose Fulbright